Every Realtor Should Know Economic Loss Rule

By Hafez Daraee

On December 27, 2006, the Oregon Court of Appeals handed down its opinion in Bunnell v. Dalton Construction Inc. (--- P3d ---, 2006 WL 3788126 (Or App)). The holding in Bunnell reiterates the mainstream applicability of the Economic Loss Rule (the "Rule"), which provides: "One ordinarily is not liable for negligently causing a stranger's purely economic loss without injury to his person or property. It does not suffice that the harm is a foreseeable consequence of negligent conduct that may make one liable to someone else. Some source of duty outside of the common law of negligence is required." See Hale v. Groce, 304 Or 281, 744 P2d 1289 (1987). Oregon courts have held that if there is no injury to person or property, a claimant must show the existence of a special relationship with the person who caused the injury. "Special relationship" is difficult to define. Obvious examples include a relationship arising out of a direct contractual relationship or a relationship created by law.

While at first blush the Bunnell opinion appears innocuous, potentially it is a malpractice pitfall for real estate brokers.

In nearly all cases, the direct contractual relationship between buyer and seller will constitute the required "special relationship" for a duty to arise. The danger in failing to understand the Rule within the context of a real estate transaction, however, may result in a licensed professional incorrectly assuming (1) that the buyer does not have remedies against the person from whom seller initially purchased or from the seller's builder (a party with whom there is no contractual relationship), thus failing to assist in the preservation of claims through the contract; or (2) that the seller has no liability to subsequent purchasers who acquire title via the initial buyer, thus failing to properly limit the seller's downstream liability. Either circumstance may result in a claim against the real estate professional for malpractice.

The facts in Bunnell are not complex. In 1997, Dalton Construction, Inc., sold a newly constructed home to the Evanses. In 2003, the Evanses listed the home for sale and eventually accepted an offer from the Bunnells. As part of their prepurchase due diligence, the Bunnells commissioned a home inspection, which revealed water damage caused by, among other things, defectively installed siding. The Bunnells obtained several repair estimates. They eventually negotiated a $2,500 reduction of the price and purchased the home from the Evanses for $517,500. After taking possession, the Bunnells discovered that water damage caused by the defective siding was much more extensive than originally thought, so they filed a lawsuit against Dalton to recover the cost of repairing the defective construction. Dalton then filed a summary judgment, arguing that the Rule precluded the Bunnells' claims. The trial judge agreed and granted Dalton's motion. The court of appeals, however, reversed the trial court, indicating that because the Bunnells' loss resulted from property damage to the home, the Rule was not applicable.

Ordinarily, the claims found in Bunnell would not have ended up in a conventional lawsuit for two basic reasons: first, the residential real estate purchase agreement forms used by nearly every realtor in this state require nonjudicial resolution of all disputes through mediation and, if necessary, arbitration. Second, injuries like the ones in this case are typically discovered relatively quickly after the initial purchase and are often fully resolved before the home is sold by the first purchaser. Because the Bunnell plaintiffs were the second purchasers of the home, the dispute resolution requirements of the original Dalton-to-Evans purchase agreement did not apply.

While Bunnell contains several interesting and important points, all real estate brokers who work with builders or developers should keep the following two points in mind when listing or presenting a newly constructed home:

• As the listing agent, you should identify and bring to the attention of your builder or developer clients the potential for defective construction liability to subsequent purchasers of the home; and,
• Depending on the agency relationship established between buyer and seller in the transaction, you should understand how the statute of limitations relates to potential construction-defect claims so that this issue can be identified before the sale is completed.

Bunnell challenges all real estate brokers who primarily market new construction to strike a balance between managing the liability of the builder who wants to terminate all liability upon sale and a prospective buyer who wants to keep all options available. One solution for this conundrum is for one party (typically the builder or developer) to purchase insurance that will address any potential claims. Another solution is to employ an attorney to assist with the management or preservation of liabilities. In light of Bunnell, every real estate professional must understand the Economic Loss Rule in order to avoid professional misconduct.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

BACK TO TOP | BACK TO ARTICLE INDEX | PRINTER-FRIENDLY PAGE