Section 1: The Economic Loss Rule
The Davencourt opinion begins with the analysis of the most eagerly anticipated portion of the opinion; how the Court would deal with the economic loss rule.
Background on the Economic Loss Rule
The economic loss rule, as it applies to construction disputes in Utah and more particularly with community associations, began with the 1996 ruling in the case of American Towers Owners Ass’n v. CCI Mechanical. In that case, the Court held that in the absence of physical property damage to “other property,” or personal injury, economic losses could not be recovered through a negligence claim. (Simply stated, a negligence claim involves an assertion that one party failed to comply with duties involved to another – in building, for example, to meet the “standard of care” expected of a contractor.) Because of the American Towers ruling, it has been difficult for community associations to pursue claims against developers.
In 2002, the Court limited the Economic Loss Doctrine somewhat in the case of Hermansen v. Tasulis; in that case, the court held that the doctrine did not bar claims where one party owed an “independent duty” to the other party. The Hermansen case, which we filed and argued, involved claims against real estate agents.
Davencourt’s Holdings Respecting the Economic Loss Rule
The plaintiff homeowners association, and I acting as amicus counsel for the Community Associations Institute, had hoped that the Court would further limit, or even overrule the American Towers case, because of its adverse consequences to community associations. The ultimate goal would have been the elimination of the doctrine, at least as it related to construction defect claims asserted by community associations which, by their nature, do not have contractual relations with the builders. A lesser, but still desirable result, would have been the establishment of an independent duty to be owed from builders to the purchasers in community associations.
In Section I.A. of the opinion, the Court rejected an outright reversal of American Towers, stating that the doctrine was “particularly applicable to claims of negligent construction.” Furthermore, the opinion expressed an inability to overrule the doctrine based upon the “codification” of the doctrine in Utah Code Ann. 78B-4-513. (That section of the code arose from the Legislature’s passage of Senate Bill 220, in 2008.
In Section I.B., the Court next refused the Association’s request that the Court recognized that the unique status of community associations warranted that the doctrine not be applicable to associations. The Court declined, asserting that contractual expectations created in the contracts among the Unit Owners, the Developer and the Builder” could not be ignored. Under the ruling, then, neither an individual owner nor an association can pursue a claim, in negligence, against the Builder.
The third argument rejected by the Court was a contention that various components of the structures had been damaged by defects in other components, triggering the “other physical damage” exception to the doctrine. Again, the Court rejected this argument, finding that Unit Owners had not bargained for individual components, but rather for “a finished product, which included the integral components of the roof, the foundation and the siding.”
Turning to the review of “independent duties,” the Court rejected a request to extend the independent duty between a contractor-seller and a home purchaser to a similar duty between a contractor-seller and the Association. Interestingly, however, the Court appears to have clearly established that a contractor-seller’s duty “to disclose known material information” to a buyer. If the Developer of a condominium project was also the contractor-seller, that developer/contractor-seller would owe each unit owner a duty to disclose known defects in the units and the common areas, an interest in which was also being sold.
Next, the Court held, to a limited degree, that the developer’s limited fiduciary duty to the Association does fall outside of the doctrine. The Court expressly recognized and acknowledged “the inherent conflict that a developer faces in promoting and marketing property for a profit, while simultaneously ensuring the interests of a homeowners association and its members…” In light of the conflict, the Court expressly adopted Section 6.20 of the Restatement (Third) of Property, which establishes several clear and important duties owed by a developer to an association. These duties, set out in full here, include 1) “reasonable care and prudence in managing and maintaining the common property;” 2) establishment of a sound fiscal basis for the association; 3) disclosure of developer subsidies, if any; 4) records and an accounting; 5) compliance with governing documents; 6) disclosure of “material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and 7) disclosure of “all material facts and circumstances affecting the financial condition of the association…”
The Court’s opinion stated: “In adopting this limited fiduciary duty, we recognize that it constitutes a newly-recognized independent duty of care in Utah.” These types of claims, the Court stated, “lie outside of the economic loss rule.” Recovery under this independent duty, however, is restricted to the common areas. The Court indicated that the association could “bring its claims for negligence and negligent misrepresentation against the [developer] insofar as the claims stem from the limited fiduciary duty owed.”
In the next successive sections of its opinion, the Court declined to find an independent duty to comply with the building code, and declined an independent duty to build without negligence in the construction of a home. The Court’s opinion seems to intentionally leave open the possibility, however , that the Court could find such a duty in a sale between a contractor/seller of a new home, and a buyer.