Letter from the Editor
Welcome to the fall 2013 issue of Under Construction. In this issue, we focus on the economic loss doctrine and how the different courts in our firm’s footprint treat it similarly and differently. We hope you enjoy our review of recent and previous state court decisions relating to the economic loss doctrine in Arizona, California, Colorado, Nevada, New Mexico and Utah. As an encore, we have also included articles on the Arizona Prompt Payment Act and Arizona indemnity law, since these continue to be hotly and frequently contested issues.
In the first article, Dan Frost discusses the economic loss doctrine in Colorado and its important implications for construction projects in the state. Dan cites holdings by the Colorado Court of Appeals and the Colorado Supreme Court and illustrates that the range of recovery options for problems on bad projects is limited in Colorado by the economic loss doctrine. In the next article, Josh Grabel reviews the history of the economic loss rule in New Mexico and raises a number of questions about open or unresolved issues that the New Mexico courts have yet to address.
In the following article, Stewart Peay reviews Utah’s economic loss rule, which generally upholds the rights and risks bargained for in a contract in defective design or construction related litigation. Stuart Einbinder and Colin Higgins then discuss the economic loss rule in California, which addresses the distinction between suits in contract and tort. Stuart and Colin deduce that tort claims may be limited or barred in California based upon the economic loss rule and/or the separate duty rule addressed in a California case cited in the article. Robin Perkins’ subsequent article reviews a number of recent rulings by the Nevada Supreme court that uphold and even strengthen its generally recognized prohibition of negligent tort claims asserting purely economic loss in the context of commercial construction. In our final economic loss doctrine article, Ben Mitsuda reviews a recent decision by the Arizona Supreme Court that clarifies how the economic loss rule does not apply to non-contracting parties in the state, and the prior recent history of the economic loss doctrine in Arizona.
As bonus coverage to our economic loss doctrine coverage, Eric Spencer and Rick Erickson address the Arizona Prompt Payment Act arising out of a recent ruling by the Arizona Court of Appeals. They suggest that this recent decision highlights the distinction between construction and architect-engineer agreements based upon various Arizona statutes. In a separate article, Eric Spencer discusses Arizona’s recently passed bill SB 1231, which amends the state’s public anti-indemnity statutes by clarifying and expanding the situations under which the state and local governments cannot require contractors, subcontractors and design professionals to indemnify a government body for the negligence of others.
We hope you enjoy this Under Construction issue and our decision to focus on a single issue throughout our regional footprint. We would like to hear from you if you have any comments or suggestions. Enjoy the fall season!
Best regards,
Jim Sienicki
Economic Loss in Colorado
The economic loss doctrine generally holds parties to the benefits, burdens and obligations set out in their contracts and bars tort claims such as negligence, misrepresentation and theft for purely economic loss when a contract exists. This doctrine is particularly strong in Colorado and has important implication for construction disputes, where claims can often be for economic loss and not personal injury or property damage.
For example, in Hamon Contractors, Inc. v. Carter & Burgess, Inc., 229 P.3d. 282 (Colo. App. 2009) the Colorado Court of Appeals held that claims for fraud, misrepresentation and negligence arising out of alleged excessive water on a construction project were barred by the economic loss rule. Those tort claims were dismissed and attorneys’ fees were awarded against the Plaintiff in that case.
In BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004) the Colorado Supreme Court held that design professionals generally are not responsible to contractors and subcontractors with whom they have no contract for lost profits and project delay and disruption. In other words, contractors can only look to those with whom they have a direct contractual relationship for recovery when projects encounter economic problems.
Obviously, then, those wishing to take advantage of the protections of the economic loss rule on construction projects should be extremely careful in making sure that their agreements state clearly and specifically the manner in which the risks of the project are to be allocated and, even more particularly, the standard of care assumed by each party. And, since the range of recovery for problems on bad projects is limited in Colorado, it is important to make sure that there is some level of comfort with the other parties to the contract, and that where risks cannot be allocated or assigned to another party, that they be insured wherever possible.
New Mexico’s Economic Loss Rule—It Exists, but Its Limits are To Be Determined
In Utah International, Inc. v. Caterpillar Tractor Co., 108 N.M. 539, 775 P.2d 741 (Ct. App. 1989), the New Mexico Court of Appeals adopted, for the first time, the economic loss rule in New Mexico. The defendant designed, manufactured and sold a coal hauler to plaintiff that caught on fire, damaging the hauler only. Plaintiffs brought an action for negligence and strict liability, and sought purely economic damages for replacement of the hauler and loss of use. The Court held:
In commercial transactions, when there is no great disparity in bargaining power of the parties, economic losses from injury of a product to itself are not recoverable in tort actions; damages for such economic losses in commercial settings in New Mexico may only be recovered in contract actions. We so hold in order to allow commercial parties to freely contract and allocate the risk of defective products as they wish. The buyer may bargain for additional warranties from the seller and pay a higher price, or may forego warranty protection entirely in order to obtain a lower purchase price.
Id. at 542, 775 P.2d at 744. Thus, in New Mexico, when two parties of relatively equal economic strength negotiate a contract and later have claims, New Mexico courts should not allow tort claims to proceed between the parties and should instead limit recovery to contract remedies.
Subsequently, New Mexico courts have considered the economic loss rule in other situations and limited its application to some degree. In In re: Consolidated Vista Hills Retaining Wall Litigation v. Shollenbarger Wood Treating, Inc., 119 N.M. 542, 893 P. 2d 438, 447 (1995), the New Mexico Supreme Court upheld the basic ruling from Utah International, but indicated that the economic loss rule did not apply to indemnification “because parties are still bound by their contractual agreements (including indemnification agreements) and because allowing indemnification ... would in no way blur the line between contract and tort.”
In a 1997 case, the court held that the economic loss rule bars claims under a theory of strict liability for damages for not only the product being sold, but also to the building the product was housed in and its contents, because the particular dangers were reasonably foreseeable at the time the contract was entered. Spectron Dev. Lab. v. Am. Hollow Boring Co., 1997-NMCA-025, 936 P.2d 852. The claims in the Spectron case arose out of a unique set of circumstances where the plaintiff was an expert on the use of the “light-gas gun” and thus knew the potential damages it would suffer if the gun was defective. As a result, the Court reasoned the Plaintiff was in a unique situation to negotiate terms related to any potential damages in negotiating the contract.
And, in a recent series of opinions, the U.S. District Court for the District of New Mexico held that the economic loss rule applied to service contracts because service contracts, like those for the sale of goods, involved the same sorts of commercial benefits from the economic loss rule. However, the Court also found that the economic loss rule would not bar a claim for professional negligence if the party providing the service was a “professional” who failed to meet an “independent duty of care.” See Farmers Alliance Mut. Ins. Co. v. Naylor, 452 F.Supp. 2d 1167, 1174 (D.N.M. 2006); Farmers Alliance Mut. Ins. Co. v. Naylor (Naylor II), 480 F.Supp. 2d 1287, 1289 (D.N.M. 2007). The Court reasoned that in such instances, it was likely the professional providing the service had a better understanding of the potential risks to the other party than the party receiving the services did, and thus that there was unequal bargaining power. Thus, whether the economic loss rule will apply in a service contract setting to bar tort claims is determined by a number of factors, including whether the “service” provided involved using professional judgment.
With this said, there are still a number of open issues related to the economic loss rule in New Mexico. How aggressively will New Mexico courts enforce the economic loss rule when it is being applied to a consumer? Who constitutes a consumer of a particular good or service, and when is there equal bargaining power? What about smaller or less sophisticated businesses? What if the contract involves non-commercial parties? As you can see, while the general rule is that it is likely the economic loss rule will apply to most commercial construction matters in New Mexico, it is not clear if it will apply to other situations.
Utah’s Economic Loss Rule
In Utah, a plaintiff must generally in be in privity with the...
