Preserving the Economic Loss Doctrine in Utah for Everyone’s Benefit

The economic loss doctrine is something that most people in the construction industry know little about. However, it has been an essential part of the legal landscape governing claims on construction projects in Utah for many years. Its existence has prevented an insurance crisis for construction companies, design professionals and others working in the construction industry. It has protected both purchasers of improved real estate and construction industry professionals. These problems, among others, have arisen in other states where the economic loss doctrine has been eroded or eliminated.

So, what is the economic loss doctrine? Essentially, the economic loss doctrine is based in the distinction between contract claims (enforcing the standards negotiated and agreed to in contracts and usually applicable only the parties to those contracts) and tort claims (enforcing the standards that have been established by the courts or legislatures governing the behavior of all of us as members of society).

The following questions and answers should help to further clarify some of the major basic issues relating to the economic loss doctrine.

Q: What is the economic loss doctrine?

A: A court-developed legal principle that holds that purely economic damages arising from one party’s failure to perform as agreed by contract cannot be claimed and recovered via legal theory based in tort. Essentially, the economic loss doctrine precludes claims for negligent design or construction except through the contract under which the work was performed.

Q: What are economic damages?

A: “Damages for inadequate value, costs or repair and replacement of the defective product, or consequent loss of profits . . . as well as diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.” American Towers Owners v. CCI Mechanical, 930 P.2d 1182, 1191 (Utah 1996). Economic damages are those that arise from poor design or construction. Claims in tort for damages arising from personal injury or physical damage to other property are not barred by the economic loss doctrine because they are not considered to be purely economic damages.

Q: What is the difference between contract and tort?

A: Contract law protects expectancy interests created through contractual agreements between the parties, while tort law protects individuals and their property from physical harm by imposing a duty of reasonable care. Expectancy interests arise from a contract between the parties to that contract and do not exist independently. Tort duties, on the other hand, are independent from any contract or agreement, and arise at law.

Q: Why have Utah courts adopted the economic loss doctrine?

A: The economic loss doctrine exists because of a policy determination that it would not be fair to allow a party to recover for “defective construction,” where the defects are defined by a tort-based legal standard that is higher than, or different from, the original contract between the parties. The contract alone defines the construction standards that will be imposed and any deviation from the agreed upon standards is a breach of the contract, but not a breach of any legal tort duty independent of the contract. Thus, liability for defective construction must be defined by the contract between the parties not by later claims that the builder has been negligent by not adhering to an amorphous standard that was never defined or agreed to by the parties to the contract. As long as the construction does not cause damage to people or property, the parties to a construction contract are free to agree to choose the lowest possible standards of construction. If the economic loss doctrine did not exist, design or construction professionals would remain liable to an indeterminate class of people for an indeterminate amount of time and for an indeterminate amount of money.

Q: Why does any of this matter?

A: If the economic loss doctrine were to be undermined in Utah, designers and builders could expect to regularly be sued by remote purchasers with whom the designer or builder had no legal relationship. These lawsuits would allege that the builder was negligent by not using certain construction techniques or by using certain materials, even though those techniques were not required by the contract, or in some situations would have been a breach of the contract. Such lawsuits would seek to impose standards that the builder never agreed to in the contract. Thus, if the economic loss doctrine were to be eliminated, courts would begin to formulate a “reasonable construction standard” that could be independent of contractual provisions or even building codes. Unfortunately, such a standard would be subjective and flexible, depending on each judge, and the outcome would depend to a certain extent on the effectiveness of the attorneys. This would typically become a problem in the context of homeowners associations suing designers and builders for construction defects throughout a development. Such suits in other states have created a pricing crisis for housing and an insurance crisis for everyone involved in the construction industry.

The economic loss doctrine is a court created rule that can be modified or even eliminated by the courts. In the 2008 general legislative session, the Utah legislature, recognizing recent attacks on the economic loss doctrine by enterprising attorneys, took action to codify the economic loss doctrine by enacting Senate Bill 220. This should insulate the economic loss doctrine from significant modifications or outright elimination by the Utah courts.

Darrell Bostwick is Of Counsel with Rudd Cooper with more than 30 years’ experience in representing clients in complex real estate matters including construction and general litigation, contract negotiation, labor and employment law, and municipal and other governmental legal matters. Mr. Bostwick as extensive litigation experience in state and federal courts, including at the appellate level, and federal and state regulatory agencies. Mr. Bostwick can be reached at (801) 676-5337 or at dbostwick@ ruddfirm.com.

Managing Construction Legal Risks and Liabilities

The Utah construction industry has had unprecedented growth and success over the past few years. In the good economic times, there is often a tendency to become lax in considering and managing legal risks. In such a positive market, it is often more profitable to worry about the next project rather than be concerned with the risks and potential problems on the current projects. However, in tight construction markets, such a lax attitude cannot continue because there are fewer projects and tighter margins.

Now is a good time to get back to the basics in managing the legal aspects of your business and construction projects. And, there is no better place to start than with your contracts. Even though your general contracts, subcontracts, supplier agreements, credit applications, etc. have served you well, over time they can get out of date as statutes change and can become disjointed as they are “tweaked” from time-to-time. One of the most common problems is that someone may borrow another company’s contract and implement it into their company without serious thought as to how it will work for their unique way of doing business. You should make sure that your contracts are consistent with your company’s goals and expectations and that the various risks are allocated according to those goals and expectations.

Financial risk can be managed, to a degree, through collection procedures and documentation. Although Utah law was changed with regard to lien waivers and restrictive endorsement, the majority of construction businesses still have not implemented the new requirements. If you issue checks with restrictive endorsement waivers and you have not changed the language to be consistent with the new statute, your restrictive endorsements will not be effective to waive mechanic’s lien rights. The new restrictive endorsement language can be found at Utah Code Annotated § 38-1-39(4)(d)

Insurance is another way to manage certain legal risks and liabilities on construction projects. However, most insurance companies exclude many of the risks from which construction industry participants need protection. These may include stucco, mold, and other important issues. These coverages can be negotiated back into insurance contracts but many construction industry participants do not know that such coverage is not routinely included. In addition, many do not understand even the basics of the insurance coverage they pay for. It is time to dust off that insurance policy and read it from beginning to end. More importantly, it is time to understand the coverage, negotiate with your insurance company for the additional coverage you require and to learn how to manage the risks for which you are unable to insure or for which coverage is too expensive.

Darrell Bostwick is Of Counsel with Rudd Cooper with more than 30 years’ experience in representing clients in complex real estate matters including construction and general litigation, contract negotiation, labor and employment law, and municipal and other governmental legal matters. Mr. Bostwick as extensive litigation experience in state and federal courts, including at the appellate level, and federal and state regulatory agencies. Mr. Bostwick can be reached at (801) 676-5337 or at dbostwick@ ruddfirm.com.

Starting Your Own Business

For most, life’s dream includes spouse, children, buying a home, and starting your own business. It’s the dream of owning your own business that I want to address, particularly how to reduce the emotional and financial risks associated with a new enterprise.

Not long ago, I had a woman make an appointment to see me because of problems she was having with a friend that she had gone into business with. The two had gone onto the Internet and had an online service prepare the paperwork for forming a Limited Liability Company, or LLC. The LLC is a popular business entity because of its partnership tax advantages and liability protection. The LLC is often a good structure for the new business, but that’s not always the case.

The Internet is replete with websites enticing people to create business entities, particularly LLC’s and corporations, by using documents which they advertise as “tried and true” and “proven” documents from years of experience in the law. Unfortunately, one size seldom fits all.

My soon-to-be client (we’ll call her Debra), had entered into the business with a partner in what appeared to be a very lucrative opportunity. Now she was expressing fear that she was being forced out of business by her partner and friend, and she was right. For months her partner had been attempting to take-over the reins of the company. Debts were being incurred without her approval, bills were going up-paid, and her partner was engaged in questionable marketing practices. Her focus had been finding new clients and bringing money into business, of which she did a remarkable job. She left much of the day-to-day business decisions to her partner. Debra also learned that her partner had formed other businesses of which Debra was unaware, diverting the partner’s attention away from the joint venture with Debra.

Because the Operating Agreement had not been tailored to address the situation now facing her, Debra’s business partner was capitalizing on missing and ambiguous language in the agreement. There was also an issue of ownership interest. When Articles of Organization are filed with the state, the state doesn’t look at the fairness of the ownership interests, just that the forms are completed and the fees paid.

I met with the other party’s attorney and got the mistreatment to stop, but the damage had already been done. The thought of a legal battle with her partner was so traumatic to both Debra and her family that she just wanted out. Despite her belief that the LLC agreements provided by the internet provider were adequate, they were not. Debra walked away but only after losing many thousands of dollars, along with all the goodwill she had created.

Debra has rebounded and is today a thriving entrepreneur . . . without her former business partner. But how much better it would have been had we visited before the business was formed instead of after the drama had unfolded. Had she used an attorney upfront, hopefully, that relationship would have been such that she would have felt comfortable in calling the attorney at the first sign of impropriety.

In most cases, the price of a business formation charged by a local attorney is not much more than the prices charged by internet providers. But what it offers, exceeds any cost savings that may come from using a faceless legal services provider.

My recommendation, always seek competent local legal assistance when chasing that dream of starting a business and minimize the possibility of legal doom.

Alan Rudd is the senior attorney for The Rudd Firm, P.C. and one of its founders. He has more than 35 years of legal and business experience. Mr. Rudd focuses his practice in Business Law, specifically Entity Formations, Commercial Contracts, Shareholder and Partner Disputes, Corporate Governance, Software Licensing and Mergers and Acquisitions.

THIS ARTICLE IS NOT INTENDED AS LEGAL ADVICE, AND IS FOR INFORMATIONAL PURPOSES ONLY.

What I learned about Dealers & Technology in the Automotive Industry

In 2000, my partner and I started Arkona, Inc. to introduce a revolutionary new Dealer Management System (“DMS”) to automobile dealers based on Cloud Technology. I had no practical experience in the automotive industry, but with 20 years in the computer industry and law it was obvious that automobile dealers had been excluded from technology revolution. I deemed this largely the result of monopolistic-type practices of the large technology providers, ADP and Reynolds & Reynolds. These publicly traded companies on the NYSE, were the epitome of a “duopoly” within a mega billion-dollar industry. A third significant provider was Universal Computer Systems (“UCS”), a privately held company, much smaller than either ADP or Reynolds, but with an offering successfully positioned as the Rolls Royce of the DMS solutions—and UCS pricing reflected it. There were other DMS providers, but many vanished, got bought by the big three, or remained niche players.

For more than 7 years as the CEO and attorney for Arkona, I saw the challenges faced by dealers. I remember well a call I received from a dealer in Texas who wanted to change from UCS to Arkona (I received a lot of these calls). He asked if I would review his UCS contract to see if he could change systems. Imagine the dealer’s horror when I informed him that the numerous add-on products from UCS had extended the term of the entire agreement an additional 30 years. I have read vendor agreements exceeding 100 pages. Without an industry experienced attorney, the dealer was at a distinct disadvantage.

Not long after selling the company to DealerTrack (NASDQ: TRAK), I returned to my legal roots and became a founding shareholder in The Rudd Firm, P.C. My ambition was to continue to support dealers, not just in the contract phase, but in every aspect of the dealership. I have spoken with more than 1000 dealerships and I believe I understand their challenges, especially in the area technology management.

Here are just a few things I learned from my automotive experience, maybe it has a familiar tone:

1. Don’t underestimate the power of the DMS vendor in your dealership (positive or negative).
2. Most vendors attempt to lock dealerships into longer-term agreements with no accountability provisions for products that fail to perform as expected.
3. Dealerships negotiate from a position of strength, but fail to capitalize on it. Vendors are masters of the contract and their agreements are difficult and expensive to terminate.
4. A vendor may claim to own the dealership’s data residing on the vendor’s technology.
5. Many vendors promise enhancements, integration, or performance levels that go unfulfilled.
6. Dealers look to technology to increase revenues and margins, particularly with service and CRM applications. Unfortunately, dealerships pay a higher percentage of their net revenues for technology and technical support than other business of the same size.
7. Dealers too often pay for more than what they need, or get.
8. Dealers are concerned that OEMs will by-pass the dealer channel and sell direct. Ford tried and failed. Tesla is pushing the direct model today. Franchise laws are important in this area.
9. There is a high dissatisfaction level with technology vendors in the dealership space.

If you are an auto dealer, new or used, The Rudd Firm knows your business. Let us help.

Alan Rudd is the Senior Attorney in The Rudd Firm. P.C. in Salt Lake City. Mr. Rudd was recognized as Entrepreneur of the Year in 2004 by Ernst Young for his leadership with Arkona.

THIS ARTICLE IS NOT INTENDED AS LEGAL ADVICE, AND IS FOR INFORMATIONAL PURPOSES ONLY.

Why Having Your Adult Child On Title To Your Home Or Bank Account Is a Bad Idea

You have probably had a neighbor or friend tell you that you should put one of your kids on title to your house and your bank accounts so that if anything happens to you, that child can step in and pay your bills and won’t have to hire an attorney. Also, if you pass away, your estate won’t have to go through probate. If done correctly, that is all true. However, putting your child on title to your house or bank account is a really bad idea for several reasons:

1. If you make your child a part owner to your house or bank account, then any of your child’s future creditors will be able to take your child’s assets including all or part of your home and bank accounts. You might think that your child is responsible and won’t have any creditors that they can’t pay, but even if that is true, there are some events that create creditors to even responsible people, like divorce or car accidents. Suppose, you and your spouse add your son to your home as joint tenants, then your son would own 1/3 of your home. If your son then gets a divorce, then his ex-wife will probably have a marital interest in your home. You then have to buy her out or she may force the sale of your home.
2. It makes you liable for gift taxes. You can only give a limited amount to an individual each year tax free. For 2017, that amount is $15,000. If you give someone more than $15,000 (either in cash or anything of value, including an interest in your home) you then may have a gift tax problem or need to file a gift tax return (which usually doesn’t get done). For example, if you and your wife decide to add your oldest son to your home as joint tenants and your home is worth $300,000.00 (even if you owe $400,000) then you gifted your son $100,000 and you would owe gift taxes. There are other tax related problems that this can cause like loss in step-up-in basis and loss of property tax benefits.
3. It creates extra potential liabilities for your child. For example, if someone gets hurt on your property and your home insurance doesn’t pay for it all, then your child as a joint owner can be responsible for any damages.
4. You lose complete control. Perhaps you have heard about a child kicking an elderly parent out of their house after being put on the title. Most people will say that this would never happen, but even family members can act completely out-of-character when pressured by outside influences.
5. It creates inheritance problems. Frequently a couple will put one of their children on the title to their house with the directive that all their children are to receive equal portions of the property upon the couple’s death. However, such a child is under no legal obligation to give equal portions of the proceeds from the sale of the house to the other children. In fact, if the child does give portions to the other children, then that child may have to pay gift taxes on those gifts.

Whether you want to avoid probate, qualify for long term care Medicaid, want someone to be able to pay your bills if you can’t, or whatever the reason, there are better ways of doing so then adding children to titles. If you have added a child to your assets, or if you are a child whose parent(s) have added you, maybe you should reconsider the approach taken. You also don’t need to have amassed significant wealth to need a customized estate plan. Call the Rudd Cooper for a free initial consultation.

Mr. Nelson is an Associate with The Rudd Cooper, in Salt Lake City, Utah with extensive expertise in Wills, Trusts, Probate and complex Estate Planning. Mr. Nelson can be contacted at (801) 676-5337 or rnelson@ruddfirm.com

THIS ARTICLE IS NOT INTENDED AS LEGAL ADVICE, AND IS FOR INFORMATIONAL PURPOSES ONLY.

What Victims Need to Know about Dog Bite Cases

First, the victim should contact an experienced personal injury attorney to receive credible, reliable advice1 about how to move forward with their case. Trevor A. Bradford of the Rudd Firm has handled numerous dog bite cases over the years with a great deal of success.

Second, you must focus on the individual dog. Here are some factors to consider about the individual dog:

1. Behavioral History—Individual behavioral history is very important, as each dog within a breed may not present all of the characteristics commonly attributed to that breed. An in-depth investigation into the defendant’s dog’s temperament and previous behavior is a must. Often insurance carriers believe their insured when they are told by the insured that the dog involved wouldn’t hurt anyone. Very often insurance carriers will only accept the possibility that their insured is not telling the truth if you prove it to them with evidence. A good attorney will help you gather this evidence.
2. Breed—Each breed has characteristics that are common to most dogs within the breed. You should find out the breed of dog involved.
3. Chaining—According to People for the Ethical Treatment of Animals (“PETA”; PETA.org), dogs that have been chained for long periods of time have been shown to be 3 times more likely to bite. Often, the victims of chained dog bites are children.
4. Inside vs. Outside—Experts have determined that “[d]ogs that are kept outside and not allowed into the home are typically poorly socialized and more likely to demonstrate aggression towards strange people.”
5. Sex—Some experts have determined that intact (un-neutered) male dogs are involved in 70-76% of reported dog bite incidents (Wright J.C., Canine Aggression toward people: bite scenarios and prevention. Vet Clin North Am Sm Ani Pract 1991:21(2):299-314). You should find out whether the dog that attacked you was male or female.
6. Size—It stands to reason that large breeds can cause more damage than smaller breed, especially when children are involved. A good attorney will check the dog’s veterinary records at the date closest to the incident for the dog’s weight and size.
7. Temperament—Experts have opined that a dog’s temperament does not change over time. For example, a dog with an aggressive temperament will always have an aggressive temperament. Also, if a dog is aggressive at the door or towards strangers in its territory, that behavior will likely be ritualized with time and repetition. A seasoned attorney will know to investigate and discovery information about the dog’s temperament.

Third, the bite wounds will help tell the story of what happened. According to experts, “there is a motivational difference between offensive and defensive aggression that shows up in the dynamics of the attack.” This is often evidenced by the number of bite wounds. A dog that is provoked into defending itself and responds with a quick inhibited bite is different than a dog who runs up to and attacks a victim with multiple deep punctures over different parts of the victims anatomy and has to be pulled off the victim by the owner/handler.

Finally, although there are many good sources of evidence in a dog bite injury case there are two sources that often are the most reliable: (1) the dog; and (2) the bite wounds.

In conclusion, please contact the Rudd Firm if you are a victim of a dog bite to see if we can help you with your case.

THIS ARTICLE IS NOT INTENDED AS LEGAL ADVICE, AND IS FOR INFORMATIONAL PURPOSES ONLY.