930 P.2d 1182 (Utah 1996)
The American Towers opinion, dealing with an association’s right to pursue developers and contractors for construction defects, put a disastrous impediment – “the economic loss rule” – in the way of associations’ efforts to seek redress for poor construction. Fortunately, the underpinnings of American Towers have been limited by several subsequent cases, and the viability of the opinion is questionable. Because of its historical significance, however, a review of the case is warranted.
The first claim for relief which was rejected in American Towers was the association’s claims for breach of contract and warranty. The court held that the association was not a party to any contracts with the contractors, and held that the association was not a clearly intended third-party beneficiary of the contracts between the developer and the contractors.
Next, the Court discarded the association’s negligence claims based upon the determination that negligence claims cannot stand for purely economic losses resulting from negligence, in the absence of physical harm to persons or other property. The Court held that the association’s (and the owners) damages were all economic in nature, and thus should be protected by contracts agreed to between the parties.
The Court’s determination that the association was not entitled to sue under the contracts to which they were not parties, followed by the preclusion of a negligence claim, effectively left associations with few, if any methods of recourse against builders. American Towers left the option of pursuing developers, but developers often insulate themselves from liability through the use of limited liability companies that are disolved at the end of construction. Naively, the court suggested that “A buyer can avoid economic loss resulting from defective construction by obtaining a thorough inspection of the property prior to purchase and then by either obtaining insurance or by negotiating a warranty or reduction in price to reflect the risk of any hidden defects.”
Lastly, the Court rejected the imposition of an implied warranty of habitability in condominiums, again based upon the naive determination that “a condominium homeowners’ association typically oversees the management, maintenance, and operation of the units. The potential buyer can contact this association, which is equipped to know of respond to, and guard against defects in the complex.” In making this assertion, the Court closed its eyes to the reality that the association is inevitably controlled by the developer/seller during the initial sales period, and it is often conflicted from “responding to” defects.
Fortunately, the subsequent opinions of Hermansen and Yazd have significantly cut back upon the pronouncements of American Towers, and associations do, in fact, now have options and remedies available when construction defects are discovered.