Inside this Issue

A1 - Economic Loss Doctrine Applied in Utah to Bar Tort Claim against Real Estate Seller. And Prevailing Party Attorneys Fees Awarded
A2 - Economic Loss Doctrine Enforced in Arizona to Bar Negligence Action by Project Owner against Engineering Subcontractor
A3 - Broad Arbitration Clause Flowed Down to Subcontractor Requiring it to Arbitrate Claim against Prime Even though not in Dispute with Owner

Article 1

Economic Loss Doctrine Applied in Utah to Bar Tort Claim against Real Estate Seller. And Prevailing Party Attorneys Fees Awarded

See similar articles: Economic Loss | prevail party attorneys fees

An individual, Mr. Charlwood, purchased a house, remodeled it, and then sold it to Mr. Thorp, the Purchaser. Ten years later The Purchaser noticed issues with the property, including a deck that was apparently structurally failing. Purchaser sued Seller for defective construction, negligent misrepresentation, and fraudulent misrepresentation. Trial court dismissed the suit based on the economic loss doctrine barring the claims, and the court awarded prevailing party attorneys fees to the Seller. The court determined that the economic loss rule barred Thorp's claims because they were “not premised upon any independent duty that exists apart from the REPC.” The court further ruled “that there is no legal or factual basis to support [Thorp's] theory that [Charlwood] assumed the role of a contractor-seller and the potentiallyheightened duties that go along with this role.”

This decision was affirmed on appeal. In doing so, the court explained, “The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.” Put differently, “[t]he economic loss rule prevents recovery of economic damages under atheory of tort liability when a contract covers the subject matter of the dispute.” “A principal reason behind the rule is that“when a party is merely suing to recover the benefit of its contractual bargain, there is no inherent unfairness in limiting that party to a breach-of-contract claim.” In this case, the court held that the negligence and fraud theories both merely raised issues that were addressed in the breach of contract claim and did not create an independent tort action. The court also enforced the prevailing party attorneys fees clause to award the Seller attorneys fees for both the trial and the appeal. Thorp v. Charlood, 501 P.3d 1166 (Utah 2021).

On appeal, Thorp argued the district court erred in ruling that the economic loss rule barred his claims for negligentmisrepresentation and fraudulent misrepresentation. Regarding his negligent misrepresentation claim, he contends that Charlwood owed common law duties that were “independent of the contracts that buyers and sellers make.” He alsocontends that the rule did not apply to his claim for fraudulent misrepresentation on the theory that this claim did not completely overlap with a breach of contract claim.

A. Negligent Misrepresentation

The court, citing several previous court decisions stated: “The economic loss rule applies where a duty exists that overlapswith those contemplated in a contract. See (“[W]here the party's tort claim is a mere duplication of its breach of contractclaim, there is no exception to the economic loss rule. The tort claim is barred.”); (“[T]ort claims ... are barred by theeconomic loss rule if those claims are grounded in the same duties that exist by virtue of the parties’ contract.”).Conversely, “when a duty exists that does not overlap with those contemplated in a contract, the economic loss rule doesnot bar a tort claim because the claim is based on a recognized independent duty of care and thus does not fall within the scope of the rule.”

Purchaser argued that Seller owed two distinct duties that were independent of the contract.

Duty 1: Duty of Sellers of Real Property.

This is a duty to “disclose material known defects that cannot be discovered by reasonable inspection by an ordinary prudent buyer.” But the court found that the Seller had a contractual obligation to disclose the same information and the contract and negligence counts of the complaint therefore overlapped – thus making the economic loss rule applicable.

Duty 2: Duty of Developer-Sellers and Contractor-Sellers.

This duty is that of the seller-developer to “disclose information known to [them] concerning real property … when that information is material to the condition of the property purchase by buyer.” This argument failed because the Seller was not original builder of the home on the Property. And there was no contract for construction services to be provided by the Seller to the Buyer. For these reasons, the court concluded that the Buyer failed to demonstrate that the terms “developer-seller” and “contractor-seller”, as contemplated by a common law duty, “applied to the those who take to remodel and sell and already existing home.”

B. Fraudulent Misrepresentation.

Fraud-based torts are also subject to the economic loss rule. “If the ‘bad acts’ (even intentional ones) are covered by acontract, they remain in the realm of contract law.” “Accordingly, the economic loss rule bars even intentional torts where the claim “overlaps completely with a contract claim” because a breach of contract claim would allow the wronged partyto recover for the same conduct.” As further explained by the court,

“Thorp asserts that the economic loss rule does not bar his claim for fraudulent misrepresentation because he “does not plead an overlapping contract claim in the Verified Complaint that is ‘entirely duplicative’ ofhis tort claims. Rather, [he] pleads claims that arise from duties independent of the REPC (or any other contract).” Because we concluded above that the duties he pleaded were duplicative of the REPC, weconclude that Thorp's fraudulent misrepresentation claim also “overlaps completely with a contract claim” and is accordingly barred by the economic loss rule.”

Prevailing Party Attorneys Fees

The trial court had jurisdiction to award attorneys fees. The legal right to attorneys fees was established by the contract. Utah law requires the court to apply the contractual attorney fee provision and do so strictly in accordance with the terms of the contract.

The relevant provision of the REPC states, “In the event of litigation or binding arbitration to enforce this Contract, the prevailing party shall be entitled to costs and reasonable attorney fees.” Here, the issue presented is whether Charlwood's invocation of the economic loss rule to defend against Thorp's tort claims was an action “to enforce” the REPC. Thorpargues that Charlwood's invocation of the economic loss rule “is premised merely on the ‘existence’ of a contract and notthe enforcement of any contractual obligation.”

The court explained that:

“Although Thorp ultimately brought causes of action sounding in tort, his complaint relied on specific provisions of the Seller's Disclosures (and the REPC, more generally) in bringing those claims.” “Furthermore, by arguing that the economic loss rule barred Thorp's tort claims, Charlwood necessarily sought to enforce specific terms ofthe REPC. First, the very nature of Charlwood's argument involved establishing that a valid contract existed and thatthrough application of the economic loss rule, the terms of that contract should be enforced to bar Thorp's non-contractual claims. Second, the economic loss rule required Charlwood to establish that the terms of the REPCoverlapped with the alleged common law duties of disclosure that Thorp was alleging were violated. And inholding that the economic loss rule applies in this case, the district court concluded that “the alleged misrepresentations” on which Thorp's tort claims were based “are all governed by the [Contract].”

For these reasons the court affirmed the award of attorneys fees both at the trial level and also for attorneys fees incurred in handling the appeal.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 9 (November 2022).

Article 2

Economic Loss Doctrine Enforced in Arizona to Bar Negligence Action by Project Owner against Engineering Subcontractor

See similar articles: Economic Loss Doctrine

Project Owner sued the engineering subcontractor of its general construction contractor alleging damages from negligently surveying property and putting stakes in wrong location. The engineer admitted it erred in the survey and this caused damages. Summary judgment was granted for the engineer because the economic loss doctrine prohibited the suit against the engineer. This was affirmed on appeal, with the court finding the engineer owed no duty to the Owner. This court decision reexamined a 1984 Arizona decision in the case of Donnelly Construction and stated “we clarify that it is no longer good law.” Arizona does not recognize design professionals as parties to any special relationship with project owners. Cal-Am Properties Inc. v. Edais Engineering Inc., 253 Ariz. 78 (Ariz. Supreme Ct., 2022)

Rather than explain the courts reasoning it is easier to just quote the decision as done below:

In Donnelly, we held that “[d]esign professionals have a duty to use ordinary skill, care, and diligence in rendering their professional services” and confirmed that such liability extends to “foreseeable injuries to foreseeable victims which proximately result from ... negligent performance of their professional services.”139 Ariz. at 187–88, 677 P.2d at 1295–96. In other words, the potential liability of design professionals, such as land surveyors, for negligence extended not only to the entity who contracted them, but to other foreseeable plaintiffs which may include property or project owners.

Donnelly’s holding controlled on the existence of such a duty until our decision in Gipson. There, we heldthat “foreseeability is not a factor to be considered by courts when making determinations of duty” and we “reject[ed] any contrary suggestion in prior opinions.” Gipson, 214 Ariz. at 144 ¶ 15, 150 P.3d at 231. We have since clarified that “[p]ost-Gipson, to the extent our prior cases relied on foreseeability to determineduty, they are no longer valid.” Quiroz, 243 Ariz. at 565 ¶ 12, 416 P.3d at 829. Indeed, we have notedrepeatedly that Donnelly employed the now-rejected foreseeability framework. See id. at 564 ¶ 10, 416 P.3d at 828 (citing Donnelly as an example of a prior case that relied on foreseeability); Gipson, 214 Ariz. at 144 ¶ 14, 150 P.3d at 231 (same); Flagstaff Affordable Hous. Ltd. v. Design All., Inc., 223 Ariz. 320, 327 ¶35 n.4, 223 P.3d 664, 671 (2010) (stating that we have “rejected Donnelly’s reliance on foreseeability to determine the existence of a duty of care for purposes of tort law”). To the extent that Donnelly’s viability remains in question today, we clarify that it is no longer good law.

But, despite Cal-Am's contention that Donnelly created a special relationship between design professionals and project owners and that other jurisdictions have followed suit, Arizona does not recognize design professionals as parties to any such relationship…. Arizona has yet to recognize the relationship between a design professional and an owner as a categorical, special relationship. We decline to do so now.

The statutes and regulations governing surveyors and similar professionals were not designed to protect plaintiffs like Cal-Am—project owners—from purely economic harm. Instead, their purpose is to protect the safety, health, and welfare of individuals who enter the buildings and structures, which regulatedprofessionals construct and maintain, from injury resulting from poor workmanship.

The court also rejected the Owner’s argument that Restatement (Second) of Torts and Restatement (Third) of Torts applied to the case. Restatement Second was not applicable because the misplaced staking didn’t physically harm the land itself. And Restatement Third was not applicable because the Owner didn’t rely on the Engineer’s defective staking. The staking was done by the Engineer for the Contractor. The Owner could sue the Contractor to recover its damages.

Article 3

Broad Arbitration Clause Flowed Down to Subcontractor Requiring it to Arbitrate Claim against Prime Even though not in Dispute with Owner

See similar articles: Arbitration

Parties to a construction subcontract disagreed over whether their dispute fit within the scope of the arbitration provision in the subcontract. Trial court denied a motion to compel arbitration. Appellate court reversed, holding that the arbitration provision in the Prime Contract flowed down to the dispute under the subcontract even though the project owner was not directly involved in the dispute. Because the Owner could have to pay more for the change orders in dispute on the subcontract level, the court found the dispute had to be arbitrated. SR Construction, Inc. v Peek Brothers Construction, Inc., 510 P.3d 794 (Nevada 2022).

The MSA includes an arbitration provision:

(a) Contractor and Subcontractor shall not be obligated to resolve disputes arising under this Subcontract by arbitration, unless:

(i) the prime contract has an arbitration requirement; and
(ii) a particular dispute between Contractor and Subcontractor involves issues of fact or law which the Contractor is required to arbitrate under the terms of the prime contract.

The prime contract also includes an arbitration provision, which states as follows:

Arbitration shall be utilized as the method for binding dispute resolution in the Agreement[.] [A]ny Claim subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with its Construction Industry Arbitration Rules in effect on the date of the Agreement.

The court goes on to state that “A ‘claim’ under the contract is “a demand or assertion by one of the parties seeking, as a matter of right, payment of money, a change in the Contract Time, or other relief with respect to the terms of the Contract... [and] other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.” (emphasis added)”

The prime contract further permits PRIME to include subcontractors in arbitration of a claim:

Arbitration, at the Contractor's election, may include Subcontractors to Contractor that Contractor deems relevant to the matter in dispute and upon Contractor's request, the Arbitrator shall decide all or a particular portion of a dispute between the Contractor and a Subcontractor and, as Contractor may request, the Arbitrator shall speak to the extent to which the Arbitrators decisions regarding a dispute between Contractor and Owner and the dispute between Contractor and Subcontractor are inter-related.

The underlying contract dispute concerns whether the subcontractor deviated from the means and methods its used to bid the project in elevating the building pad. Changes made by the subcontractor allegedly added $140,000 to the subcontractor’s costs, and it sought to recover those costs through change orders submitted to the Prime Contractor. The Prime forwarded the change orders to the project owner, but the Owner denied them because it concluded they were not necessary. Owner directed the Prime to initiate dispute resolution with the Sub. But before that happened, the Sub sued the Prime in court. The Prime then filed an arbitration demand in which it named the Subcontractor and the Project Owner as defendants.

On appeal, Prime argues that Sub's dispute involves issues of fact and law about the reasonableness of its additional costs that Prime must arbitrate with Owner under the prime contract, so this dispute is therefore arbitrable as between Prime and Sub under the MSA provision. Prime further argues that the district court ignored the presumption of arbitrability when it denied the motion to compel and that Sub cannot artfully plead its way out of arbitration by omitting OWNER as a defendant. Sub argues that this dispute does not involve OWNER because PRIME is solely responsible for its additional costs, and the district court therefore correctly concluded that this dispute is not arbitrable under the MSA provision because the prime contract only mandates arbitration of disputes between OWNER and PRIME.

“Even matters tangential to the subject agreement will be arbitrable under a broad provision. 1Oehmke, supra, § 6:10 (Supp. 2021) (“[W]hen the language of the arbitration provision is broad, a claim will proceed to arbitration if the underlying allegations simply touch upon any matters covered by the provision.”).

“Given that a strong presumption of arbitrability applies if the MSA provision is deemed broad, Sub argues it is narrow—a plausible position at first blush—because the clause states that a disputeis not arbitrable “unless” two prerequisites are satisfied….. But unlike other narrowly phrased arbitration agreements, the MSA provision does not limit arbitration to specific issues, subjectmatter, or dollar amounts. Instead, it incorporates the prime contract's terms by looking to (1)whether the prime contract includes an arbitration requirement, and (2) whether the dispute“involves issues of fact or law which [PRIME] is required to arbitrate under the terms of the primecontract.”

“Accordingly, where a prime contract includes a broad arbitration provision, the MSA provision's purported limits are nearly illusory. The prime contract applicable here includes an expansivearbitration provision that covers all disputes between PRIME and OWNER, including “matters in question ... arising out of or relating to the contract….” The MSA provision is therefore likewisebroad because it requires PRIME and Sub to arbitrate a “dispute ... involve[ing] issues of fact or law [that PRIME] is required to arbitrate under the terms of the prime contract,” which in turnincludes any dispute or “matter[ ] in question” arising under the agreement. Further, because the MSA provision does not limit its application to disputes involving issues of fact or law that both the contractor and subcontractor must arbitrate under the prime contract, it is irrelevant to determiningthe MSA provision's scope that OWNER is not a defendant to the underlying action and that Sub is not a party to the prime contract's arbitration agreement. Rather, under the MSA provision's plain language, if PRIME would have to arbitrate an issue of fact or law under the prime contract with OWNER, then in turn, PRIME and Sub must arbitrate that same issue”

In this situation the court found that the subcontract provision is broad and an attendant presumption of arbitrability applied. Meanwhile, Sub provided no evidence to rebut this presumption and show that the parties intended to exclude this dispute from arbitration. For these reasons, the court enforced arbitration as the appropriate means for resolving this contract dispute between the parties.

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