Real estate broker who breached independent duty of care to contractual party can be held liable for economic losses

Law Reporter, Oct 2002

Hermansen v. Tasulis, 48 P.3d 235 (Utah 2002).

The Utah Supreme Court held that homeowners could pursue a negligence claim for economic losses against real estate professionals who allegedly failed to report material defects in real estate they sold.

Here, two homeowners who discovered structural problems in their property sued a real estate broker and the broker's agent, among others, for negligence. The trial court granted defendants' motion for summary judgment, finding that the "economic loss rule" barred a claim for economic losses arising from a nonintentional tort.

Reversing, the state high court observed that the economic loss rule is a judicially created doctrine that attempts to mark a boundary between contract law, which protects expectancy interests created through an agreement, and tort law, which protects individuals from harm by imposing a duty of reasonable care. The rule has frequently been applied in the construction context, where complex contracts usually govern the parties' relationships, the court said.

But earlier cases cited by defendants, in which the economic loss rule was used to bar claims by plaintiffs, all involved the purchase of completed residences, the court noted. Here, plaintiffs purchased a lot and entered a contract for the construction of a home. They contend that the economic damages they seek relate to the manner in which the real estate broker and his agent provided services to them.

In cases where the line between contract and tort blurs, the court found, the initial question is whether a duty exists independent of any contractual obligations between the parties. When an independent duty exists, the economic loss rule does not 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, the court said.

While real estate professionals do not have a duty to conduct independent inspections of property they sell, they do breach their duty to perform their jobs in an honest fashion if they fail to report known material defects in the property, the court reasoned. Therefore, the economic loss rule does not bar plaintiffs' negligence claim.

Accordingly, the court remanded.

Plaintiff"s' Counsel

*Lincoln W. Hobbs, Salt Lake City, Utah

*Akiko Kawamura, Salt Lake City, Utah

Documents in this case are available through the Court Document Sets section in the back of this issue, courtesy of Mr. Hobbs.