SUPREME COURT OF ARIZONA
En Banc
FLAGSTAFF AFFORDABLE HOUSING ) Arizona Supreme Court
LIMITED PARTNERSHIP, an Iowa ) No. CV-09-0117-PR
limited partnership, )
) Court of Appeals
Plaintiff/Appellant, ) Division One
) No. 1 CA-CV 07-0743
v. )
) Maricopa County
DESIGN ALLIANCE, INC., an Iowa ) Superior Court
corporation, ) No. CV2006-005266
)
Defendant/Appellee. )
)
) O P I N I O N
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable Ruth H. Hilliard, Judge
REVERSED AND REMANDED
________________________________________________________________
Opinion of the Court of Appeals, Division One
221 Ariz. 433, 212 P.3d 125 (App. 2009)
VACATED
________________________________________________________________
TIFFANY & BOSCO, P.A. Phoenix
By Robert A. Royal
Chad A. Hester
Attorneys for Flagstaff Affordable Housing Limited
Partnership
RENAUD COOK DRURY MESAROS, PA Phoenix
By Denise J. Wachholz
Attorneys for Design Alliance, Inc.
FOLK & ASSOCIATES, P.C. Phoenix
By P. Douglas Folk
Heather K. Seiferth
Attorneys for Amici Curiae American Council of Engineering
Companies of Arizona, AIA Arizona, and ASFE
______________________________________________________________
B A L E S, Justice
¶ 1 The “economic loss doctrine” bars plaintiffs, in
certain circumstances, from recovering economic damages in tort.
This Court has previously applied the doctrine only to products
liability claims. Today we apply the doctrine in a construction
defect case and hold that a property owner is limited to its
contractual remedies when an architect’s negligent design causes
economic loss but no physical injury to persons or other
property.
I.
¶ 2 Because the superior court dismissed this action
pursuant to Arizona Rule of Civil Procedure 12(b)(6), we assume
the complaint’s factual allegations to be true for purposes of
our review. Cullen v. Auto Owners Ins. Co., 218 Ariz. 417, 419
¶ 7, 189 P.3d 344, 346 (2008).
¶ 3 In 1995, Flagstaff Affordable Housing Limited
Partnership (“Owner”) contracted with Design Alliance, Inc.
(“Architect”) for the design of eight apartment buildings and a
community center (the “apartments”). To qualify as a low income
housing project, the apartments had to comply with the federal
Fair Housing Act’s accessibility guidelines. Owner separately
contracted with Butte Construction Company (“Contractor”) for
the construction of the apartments, which were completed in
Flagstaff in 1996.
2
¶ 4 In 2004, the U.S. Department of Housing and Urban
Development (“HUD”) filed a complaint against Owner, alleging
that the apartments violated the accessibility guidelines.
After settling with HUD, Owner in 2006 sued Architect and
Contractor, alleging they had breached their respective
contracts and acted negligently. Contractor was later dismissed
from the action.
¶ 5 Architect moved to dismiss the complaint under Rule
12(b)(6). Architect argued that the contract claim is barred by
the statute of repose in Arizona Revised Statutes (“A.R.S.”)
section 12-552 (2003), which provides that no action based in
contract may be brought against a person who “furnishes the
design . . . of an improvement to real property more than eight
years after substantial completion of the improvement.”
Architect argued that the negligence claim should be dismissed
based on Carstens v. City of Phoenix, which held that the
economic loss doctrine precludes tort recovery of economic
losses in the “construction defect setting.” 206 Ariz. 123, 125
¶ 10, 75 P.3d 1081, 1084 (App. 2003).
¶ 6 Owner voluntarily dismissed the contract claim, but
argued that the economic loss doctrine does not bar the claim
for professional negligence. Owner did not dispute that it
seeks recovery only for economic losses, and acknowledged that
Carstens applied the doctrine in a construction defect case.
3
Owner argued, however, that a claim for “professional
negligence” is based on the special relationship between
architects and their clients and therefore is excepted from the
economic loss doctrine. The superior court dismissed the
complaint.
¶ 7 The court of appeals reversed, holding that the
economic loss doctrine does not bar negligence claims against
design professionals. Flagstaff Affordable Hous. Ltd. P’ship v.
Design Alliance, Inc., 221 Ariz. 433, 212 P.3d 125 (App. 2009).
The court acknowledged that prior Arizona cases, such as
Carstens, applied the doctrine to cases involving construction
defects. Id. at 436 ¶ 10, 212 P.3d at 128. Distinguishing
Carstens, the court stated that this case does not involve
construction defects, but an architect’s alleged negligent
design. Id. at 436, 449 ¶¶ 11, 28, 212 P.3d at 128, 132. The
court concluded that the economic loss doctrine should not apply
because Owner’s claim is based in tort, not contract, and
reflects the special duties imposed on architects by law. Id.
at 437, 441 ¶¶ 13-14, 30, 212 P.3d at 129, 133.
¶ 8 We granted Architect’s petition for review because the
application of the economic loss doctrine in this context is an
issue of first impression and statewide importance. We have
jurisdiction under Article 6, Section 5(3) of Arizona’s
Constitution and A.R.S. § 12-120.24 (2003).
4
II.
A.
¶ 9 Architect argues that the superior court properly
dismissed the complaint because Owner alleges only economic
loss; the economic loss doctrine applies in construction cases
and precludes tort recovery for such losses absent personal
injury or damage to other property; and the doctrine should
apply to claims against not only contractors but also architects
and other design professionals. The scope of the economic loss
doctrine presents a legal issue that we review de novo. See
Dressler v. Morrison, 212 Ariz. 279, 281 ¶ 11, 130 P.3d 978, 980
(2006) (applying de novo review to legal issues underlying
dismissal of complaint pursuant to Rule 12(b)(6)).
¶ 10 This Court has not addressed the economic loss
doctrine since its decision in Salt River Project Agricultural
Improvement and Power District v. Westinghouse Electric Corp.,
143 Ariz. 368, 694 P.2d 198 (1984).1 In the absence of other
decisions by this Court, the court of appeals and the federal
courts have reached conflicting conclusions regarding the
application of the doctrine under Arizona law. Compare Apollo
1
We subsequently abrogated Salt River to the extent it
suggested that courts may grant summary judgment to a defendant
who asserts an assumption of risk defense, see Phelps v.
Firebird Raceway, Inc., 210 Ariz. 403, 410-11 n.5, 111 P.3d
1003, 1010-11 n.5 (2005), an issue unrelated to the economic
loss doctrine.
5
Group, Inc. v. Avnet, Inc., 58 F.3d 477, 480 (9th Cir. 1995)
(stating that Salt River reflects that Arizona applies the
economic loss rule “broadly”), with Evans v. Singer, 518 F.
Supp. 2d 1134, 1142-45 (D. Ariz. 2007) (stating Salt River
“provided anything but” a broad reading of the rule); compare
also Carstens, 206 Ariz. at 128 ¶ 21, 75 P.3d at 1086 (arguing
that Salt River supports applying doctrine to bar homeowners’
claim for economic losses from construction defects), with
Valley Forge Ins. Co. v. Sam’s Plumbing, LLC, 220 Ariz. 512,
515-16 ¶¶ 11-12, 207 P.3d 765, 768-69 (App. 2009) (arguing that
Carstens misconstrued Salt River).
¶ 11 We begin by clarifying terminology. Courts and
commentators have defined the economic loss doctrine in varying
ways, which itself has created some confusion in the law. See
Eddward P. Ballinger & Samuel A. Thumma, The Continuing
Evolution of Arizona’s Economic Loss Rule, 39 Ariz. St. L.J.
535, 536-37 (2007) (noting confusion surrounding doctrine in
various jurisdictions and stating cases do not define a “single,
unified economic loss rule”); Dan B. Dobbs, An Introduction to
Non-Statutory Economic Loss Claims, 48 Ariz. L. Rev. 713, 733
(2006) (concluding that it “seems impossible to formulate a
single economic loss rule”). “Economic loss,” as we use the
phrase, refers to pecuniary or commercial damage, including any
decreased value or repair costs for a product or property that
6
is itself the subject of a contract between the plaintiff and
defendant, and consequential damages such as lost profits. See
Salt River, 143 Ariz. at 379-80, 694 P.2d at 209-10.
¶ 12 Some courts have stated that the economic loss
doctrine “bars a party from recovering economic damages in tort
unless accompanied by physical harm.” Carstens, 206 Ariz. at
125 ¶ 10, 75 P.3d at 1083 (footnote omitted). This formulation
of the doctrine, however, is overly broad. In many contexts,
tort recovery is available for solely pecuniary losses. See
Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 875 (9th
Cir. 2007) (noting that “[t]ort law has traditionally protected
individuals from a host of wrongs that cause only monetary
damage”); Evans, 518 F. Supp. 2d at 1139. Moreover, describing
the doctrine this way conflates two distinct issues: (1)
whether a contracting party should be limited to its contract
remedies for purely economic loss; and (2) whether a plaintiff
may assert tort claims for economic damages against a defendant
absent any contract between the parties. As explained below, we
believe the economic loss doctrine is best directed to the first
of these issues, and we use the phrase to refer to a common law
rule limiting a contracting party to contractual remedies for
the recovery of economic losses unaccompanied by physical injury
to persons or other property.
7
¶ 13 Bearing these definitions in mind, we return to Salt
River. There, an electric utility company asserted contract and
tort claims against the seller of a control device that had
allegedly malfunctioned and damaged the utility’s turbine unit.
This Court held that the utility could not recover in contract
because the seller had, consistent with the Uniform Commercial
Code, disclaimed certain warranties and otherwise limited its
liability. 143 Ariz. at 374, 694 P.2d at 204. The Court,
however, rejected the seller’s argument that the contractual
provisions also precluded a tort claim for strict products
liability. Id. at 375, 381, 694 P.2d at 205, 211.
¶ 14 In the context of an alleged product defect, Salt
River considered whether a plaintiff could seek tort recovery
for economic losses related to the defendant’s contractual
performance. In resolving this question, the Court noted the
distinct policies served by tort and contract law. Strict
liability promotes product safety and spreads the costs of
accidents. Id. at 375-76, 694 P.2d at 205-06. Contract law, in
contrast, seeks to preserve freedom of contract and to promote
the free flow of commerce. Id. at 376, 694 P.2d at 206. These
goals are best served by allowing the parties to specify the
consequences of a breach of their agreement. Id. Accordingly,
“[w]hen a defect renders a product substandard or unable to
perform the functions for which it was manufactured, the
8
purchaser’s remedy for disappointed commercial expectations is
through contract law.” Id. at 376, 694 P.2d at 206.
¶ 15 The Court in Salt River acknowledged that most courts
had held that economic loss resulting from a product defect
(including damage to the product itself) is not recoverable in
tort absent accompanying physical damage to other property or
personal injury. Id. at 379, 694 P.2d at 209. Salt River,
however, expressly declined to follow that majority rule and
instead embraced a narrower, case-specific approach:
Where economic loss, in the form of repair costs,
diminished value, or lost profits, is the plaintiff’s
only loss, the policies of the law generally will be
best served by leaving the parties to their commercial
remedies. Where economic loss is accompanied by
physical damage to person or other property, however,
the parties’ interests generally will be realized best
by the imposition of strict tort liability. If the
only loss is non-accidental and to the product itself,
or is of a consequential nature, the remedies
available under the UCC will govern and strict
liability and other tort theories will be unavailable.
Id. at 379-80, 694 P.2d at 209-10 (footnote omitted).
¶ 16 Under Salt River, the economic nature of the loss is
only one factor in a three-part test to determine whether tort
remedies will be available: a court must also consider whether
the defect was “unreasonably dangerous” and whether the loss
occurred in a “sudden, accidental manner.” Id. at 379, 694 P.2d
at 209. When these factors are present, Salt River allows a
plaintiff to recover in tort for purely economic loss. See id.
9
at 380-81, 694 P.2d at 210-11 (applying factors and holding
utility could seek tort recovery of damage to turbine unit even
if it was not a loss to “other property”).
¶ 17 Thus, in the products liability context, Salt River
declined to categorically bar tort recovery of economic losses.
Instead, the Court reasoned that, “[e]ach case must be examined
to determine whether the facts preponderate in favor of the
application of tort law or commercial law exclusively or a
combination of the two.” Id. at 380, 694 P.2d at 210. Applying
a narrow version of economic loss doctrine, Salt River held that
the commercial purchaser in that case could assert a products
liability claim against a commercial seller for economic losses
for which the contract disclaimed liability.
B.
¶ 18 This case involves alleged defects in a building
rather than a defective product. Many other courts, and the
parties here, have assumed that Arizona law also applies the
economic loss doctrine to construction defect cases. The only
opinion by this Court cited for this proposition is Woodward v.
Chirco Construction Co., 141 Ariz. 514, 687 P.2d 1269 (1984) — a
case decided a few months before Salt River.
¶ 19 Woodward, however, concerned the limitations period
for contract actions for breach of implied warranty, not the
preclusion of tort claims. In that case, a couple contracted
10
with a builder for the construction and purchase of a residence.
Id. at 515, 687 P.2d at 1270. After the closing, the soil
subsided and caused extensive damage to the home. Id. The
homeowners sued the builder alleging both negligence for failing
to conduct a soil study and breach of the implied warranty of
workmanlike performance and habitability. Id. The trial court
dismissed the negligence claim for lack of proof of the relevant
standard of care; it also dismissed the warranty claim as barred
by the statute of limitations. The court of appeals affirmed
the dismissal of the negligence claim but reversed the dismissal
of the contract claim, holding that the six-year limitations
period in A.R.S. § 12-548 applied. Id.
¶ 20 The builder petitioned for review, arguing that breach
of an implied warranty is actionable only in tort, which
generally has a two-year limitations period. See id. at 515,
687 P.2d at 1270. Rejecting this argument, this Court agreed
with other jurisdictions holding that a home purchaser may sue
both in contract for breach of the implied warranty and in tort
for the builder’s breach of the common law duty of care. Id. at
515-16, 687 P.2d at 1270-71. The Court stated:
For example, if a fireplace collapses, the purchaser
can sue in contract for the cost of remedying the
structural defects and sue in tort for damage to
personal property or personal injury caused by the
collapse. Each claim will stand or fall on its own; a
distinct statute of limitation applies to each.
11
Id. at 516, 687 P.2d at 1271.
¶ 21 Although some courts have construed this language as
approving the economic loss doctrine, Woodward did not do so.
The Court was not asked to address the doctrine and did not
discuss it. Moreover, when later applying the economic loss
doctrine in Salt River, the Court did not mention Woodward.
¶ 22 Nor can this Court’s remarks in Woodward about a
plaintiff’s potential claims in contract and tort be viewed as
implicitly endorsing the economic loss doctrine. Woodward
stated that it agreed with Cosmopolitan Homes, Inc. v. Weller,
663 P.2d 1041 (Colo. 1983), which allowed a subsequent purchaser
to assert negligence claims against a contractor for residential
construction defects. Woodward, 141 Ariz. at 516, 687 P.2d at
1271. Cosmopolitan Homes rejected the argument that claims for
recovery of economic loss sound exclusively in contract. 663
P.2d at 1044-45.2
¶ 23 In short, Woodward does not resolve whether the
economic loss doctrine should apply to construction defects.
Although several opinions by the court of appeals have concluded
2
Subsequent Colorado decisions have reaffirmed Cosmopolitan
Homes while declining to apply the economic loss doctrine to bar
claims for negligence in home construction. See, e.g., A.C.
Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862
(Colo. 2005). Since Cosmopolitan Homes, however, Colorado
courts have applied the doctrine in construction defect cases
not involving homes. See Town of Alma v. Azco Constr., Inc., 10
P.3d 1256, 1264 (Colo. 2000).
12
that the doctrine applies, those cases rely heavily on an
interpretation of Woodward that we today reject. See, e.g.,
Carstens, 206 Ariz. at 126 ¶¶ 11-12, 75 P.3d at 1084; Colberg v.
Rellinger, 160 Ariz. 42, 44, 770 P.2d 346, 348 (App. 1988);
Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 444-45, 690
P.2d 158, 163-64 (App. 1984).
¶ 24 Nor does the fact that the doctrine applies to product
defects necessarily establish that it should also apply to
construction defects. The economic loss doctrine may vary in
its application depending on context-specific policy
considerations. To determine whether the doctrine should apply
here, we must consider the underlying policies of tort and
contract law in the construction setting. Cf. Salt River, 143
Ariz. at 376, 694 P.2d at 206 (stating that purposes of tort and
contract law should determine which law applies in products
liability cases).
¶ 25 The contract law policy of upholding the expectations
of the parties has as much, if not greater, force in
construction defect cases as in product defect cases.
Construction-related contracts often are negotiated between the
parties on a project-specific basis and have detailed provisions
allocating risks of loss and specifying remedies. In this
context, allowing tort claims poses a greater danger of
undermining the policy concerns of contract law. That law seeks
13
to encourage parties to order their prospective relationships,
including the allocation of risk of future losses and the
identification of remedies, and to enforce any resulting
agreement consistent with the parties’ expectations. See, e.g.,
Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist., 881 P.2d
986, 993 (Wash. 1994).
¶ 26 Moreover, in construction defect cases involving only
pecuniary losses related to the building that is the subject of
the parties’ contract, there are no strong policy reasons to
impose common law tort liability in addition to contractual
remedies. When a construction defect causes only damage to the
building itself or other economic loss, common law contract
remedies provide an adequate remedy because they allow recovery
of the costs of remedying the defects, see Woodward, 141 Ariz.
at 516, 687 P.2d at 1271, and other damages reasonably
foreseeable to the parties upon entering the contract. See
Higgins v. Ariz. Sav. & Loan Ass'n, 90 Ariz. 55, 63-64, 365 P.2d
476, 482-83 (1961) (adopting rule of Hadley v. Baxendale, 9
Exch. 341, 156 Eng. Rep. 145 (1854), for identifying damages
recoverable in contract).
¶ 27 The policies of accident deterrence and loss-spreading
also do not require allowing tort recovery in addition to
contractual remedies for economic loss from construction
defects. These considerations have less force when parties to a
14
site-specific construction contract have allocated the risk of
loss and identified remedies for non-performance. Cf. Salt
River, 143 Ariz. at 376, 694 P.2d at 206 (noting that contract
law policy “is best served” by allowing “parties to limit the
redress of a purchaser who fails to receive the quality of
product he expected”). Moreover, although a homeowner’s
purchase of a mass-produced home might in some ways be analogous
to a consumer’s purchase of a product, even in this situation
there is less reason to preserve tort remedies for purely
economic loss. Arizona law allows home purchasers to bring
contract claims for breach of the implied warranty of good
workmanship and habitability even if they are not in privity
with the builder. See Richards v. Powercraft Homes, Inc., 139
Ariz. 242, 245, 678 P.2d 427, 430 (1984).3
¶ 28 Given these considerations, we conclude that in
construction defect cases, “the policies of the law generally
will be best served by leaving the parties to their commercial
remedies” when a contracting party has incurred only “economic
loss, in the form of repair costs, diminished value, or lost
profits.” Salt River, 143 Ariz. at 379, 694 P.2d at 209. We
3
In this respect, Arizona law differs from Colorado law.
The subsequent purchaser in Cosmopolitan Homes could not
maintain a contract action for breach of implied warranty
because Colorado law allows such claims only by first
purchasers. 663 P.2d at 1043. In this context, Cosmopolitan
Homes held the economic loss doctrine should not preclude
negligence claims by homeowners.
15
accordingly apply the economic loss doctrine and hold that a
contracting party is limited to its contractual remedies for
purely economic loss from construction defects.
¶ 29 In the construction context, the economic loss
doctrine respects the expectations of the parties when, as will
often be true, they have expressly addressed liability and
remedies in their contract. Thus, the parties can contractually
agree to preserve tort remedies for solely economic loss, just
as they may otherwise specify remedies that modify common law
recovery. See Green v. Snodgrass, 79 Ariz. 319, 322, 289 P.2d
191, 192 (1955) (noting that contract will control when it
specifies remedies in event of breach). But if the parties do
not provide otherwise in their contract, they will be limited to
contractual remedies for any loss of the bargain resulting from
construction defects that do not cause personal injury or damage
to other property.
¶ 30 Applying the economic loss doctrine to construction
cases also requires that we discuss two other aspects of the
Salt River decision. First, Salt River identified certain
requirements for the waiver of tort remedies, which is a
separate question from whether the economic loss doctrine
applies. See 143 Ariz. at 375, 385, 694 P.2d at 205, 215.
Salt River’s requirements for an effective waiver do not
determine whether a party is limited to contractual remedies for
16
purely economic losses resulting from construction defects.
Instead, a party will be so limited unless the parties have
provided in their contract for tort remedies.
¶ 31 Salt River also outlined a three-factor test for
determining, on a case-specific basis, whether to apply the
economic loss doctrine to claims involving a defective product.
This approach allows tort recovery for purely economic losses if
they result from an “accident” that poses unreasonable risks of
harm to other property or persons. See Salt River, 143 Ariz. at
380-81, 694 P.2d at 210-11. This minority view has been
criticized as being too unpredictable and allowing non-
contractual recovery when a purchaser has only been deprived of
the benefit of the bargain. See East River S.S. Corp. v.
Transamerica Delaval, Inc., 476 U.S. 858, 869-70 (1986)
(refusing to apply Salt River-type approach to products
liability claim under admiralty law).
¶ 32 Whatever the wisdom of continuing to apply Salt
River’s three-factor test in products liability cases, we
decline to extend it to construction defect cases. The economic
loss doctrine appropriately applies in this context because
construction contracts typically are negotiated on a project-
specific basis and the parties should be encouraged to
prospectively allocate risk and identify remedies within their
agreements. These goals would be undermined by an approach that
17
allowed extra-contractual recovery for economic loss based not
on the agreement itself, but instead on a court’s post hoc
determination that a construction defect posed risks of other
loss or was somehow accidental in nature. Cf. Lincoln Gen. Ins.
Co. v. Detroit Diesel Corp., 293 S.W.3d 487, 492-93 (Tenn. 2009)
(noting similar concerns in adopting East River’s majority
approach in products liability); Restatement (Third) of Torts:
Products Liability § 21 & cmt. d (1998) (adopting East River
approach).
¶ 33 In sum, in the context of construction defects, we
adopt a version of the economic loss doctrine and hold that a
plaintiff who contracts for construction cannot recover in tort
for purely economic loss, unless the contract otherwise
provides. The doctrine does not bar tort recovery when economic
loss is accompanied by physical injury to persons or other
property.
C.
¶ 34 Consistent with the opinion of the court of appeals,
Owner argues that even if the economic loss doctrine applies to
construction defect cases against those who construct buildings,
it should not apply to professional negligence claims based on
an architect’s design.
¶ 35 Owner argues that applying the economic loss doctrine
would conflict with Donnelly Construction Co. v.
18
Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984).4 In
Donnelly, a contractor relied on an architect’s plans to prepare
a bid for improvements to a school complex. Id. at 185, 677
P.2d at 1293. After starting work, the contractor found the
plans were in error, which increased the contractor’s
construction costs. Id. at 185-86, 677 P.2d at 1293-94. The
contractor later sued the architect to recover the increased
costs, asserting claims for negligence, negligent
misrepresentation, and breach of implied warranty. Id. at 186,
677 P.2d at 1294. The architect argued that, because it had not
entered into a contract with the contractor, it owed no duty and
could not be liable on any of the claims. Id. at 187, 677 P.2d
at 1295.
¶ 36 This Court held that lack of privity did not bar the
claims. Id. at 187-89, 677 P.2d at 1295-97. With regard to the
negligence claim, the Court noted that “[d]esign professionals
have a duty to use ordinary skill, care, and diligence in
rendering their professional services,” and that “an action in
negligence may be maintained upon the plaintiff’s showing that
the defendant owed a duty to him, that the duty was breached,
and that the breach proximately caused an injury which resulted
4
We subsequently rejected Donnelly’s reliance on
foreseeability to determine the existence of a duty of care for
purposes of tort law, see Gipson v. Kasey, 214 Ariz. 141, 144 ¶¶
14-15, 150 P.3d 228, 231 (2007), an issue unrelated to the
economic loss doctrine.
19
in actual damages.” Id. at 187, 677 P.2d at 1295. The Court
further explained, “[w]e only hold here that design
professionals are liable for foreseeable injuries to foreseeable
victims which proximately result from their negligent
performance of their professional services.” Id. at 188, 677
P.2d at 1296.
¶ 37 Donnelly thus held that a contractor had stated a
claim for negligence to recover economic losses based on an
architect’s allegedly defective design. The architect did not
argue that the contractor should be limited to its contractual
remedies for economic loss; instead, the architect argued that
the absence of a contract precluded all liability. Without
discussing the economic loss doctrine, Donnelly correctly
implied that it would not apply to negligence claims by a
plaintiff who has no contractual relationship with the
defendant.
¶ 38 Although some courts have applied the doctrine in that
context, see, e.g, Carstens, 206 Ariz. at 127 ¶ 17, 75 P.3d at
1085; Davencourt at Pilgrims Landing Homeowners Ass’n v.
Davencourt at Pilgrims Landing, LC, 221 P.3d 234, 243 (Utah
2009), we decline to do so. The principal function of the
economic loss doctrine, in our view, is to encourage private
ordering of economic relationships and to uphold the
expectations of the parties by limiting a plaintiff to
20
contractual remedies for loss of the benefit of the bargain.
These concerns are not implicated when the plaintiff lacks
privity and cannot pursue contractual remedies. See Vincent R.
Johnson, The Boundary-Line Function of the Economic Loss Rule,
66 Wash. & Lee L. Rev. 523, 556 (2009) (concluding that when
“established tort principles entitle a third party to protection
under tort law for economic loss, an agreement to which the
third party never assented should not be permitted to vitiate
his or her right to tort remedies”).
¶ 39 Rather than rely on the economic loss doctrine to
preclude tort claims by non-contracting parties, courts should
instead focus on whether the applicable substantive law allows
liability in the particular context. For example, whether a
non-contracting party may recover economic losses for a
defendant’s negligent misrepresentation should depend on whether
the elements of that tort are satisfied, including whether the
plaintiff is within the limited class of persons to whom the
defendant owes a duty. Cf. Donnelly, 139 Ariz. at 189, 677 P.2d
at 1297 (recognizing that defendants may be liable for pecuniary
losses incurred by certain third parties based on defendant’s
negligent misrepresentations); Restatement (Second) of Torts §
552 (1977) (same).
¶ 40 Owner also argues that the economic loss doctrine
should not apply because Architect breached duties imposed by
21
law. Although architects have common-law duties of care, this
case illustrates that it is often difficult to draw bright lines
between obligations imposed by law and those arising from
contract. Architect’s duties with regard to Owner’s project
existed only because of the contract between the parties.
Architectural contracts generally include compliance with
applicable building codes and other legal design requirements as
an implied term. See Howard v. Usiak, 775 A.2d 909, 916 (Vt.
2001). Owner here alleges that Architect designed a building
that did not conform to certain requirements of the federal Fair
Housing Act; the complaint alleges that this conduct both
breached Architect’s contractual obligations and constituted
professional negligence. Attempting to label claims by
distinguishing between contractual and extra-contractual duties
is an unduly formalistic approach to determining if plaintiffs
like Owner should be limited to their contractual remedies for
economic loss.5
¶ 41 Nor should the professional status of architects
determine whether the economic loss doctrine applies in this
5
Courts have looked to the source of duties in determining
whether a tort action “arises out of contract” and thus
qualifies for an award of attorney fees under A.R.S. § 12-341.01
(2003). Barmat v. John and Jane Doe Partners A-D, 155 Ariz.
519, 523, 747 P.2d 1218, 1222 (1987). Rather than extend
Barmat’s approach here, we think application of the economic
loss doctrine should rest on explicit consideration of the
relevant tort and contract law policies. See Salt River, 143
Ariz. at 375-76, 694 P.2d at 205-06.
22
context. The purposes of the doctrine are served by applying it
to contracts entered by architects and design professionals, as
other courts have recognized. See, e.g., Terracon Consultants
W., Inc. v. Mandalay Resort Group, 206 P.3d 81, 83, 89 (Nev.
2009) (applying economic loss doctrine to negligence claims
against design professionals). Moreover, the fact that an
architect, as a professional, has legally imposed duties of care
does not displace the general policy concerns that parties to
construction-related contracts should structure their
relationships by prospectively allocating the risks of loss and
identifying remedies.
¶ 42 Owner further contends that applying the economic loss
doctrine to architects would be contrary to public policy
because it would reduce their incentives to properly design
buildings. Limiting the parties to their contractual remedies
for economic losses related to design defects does not, however,
eliminate incentives for due care. The doctrine instead limits
a party to contractual remedies when the injury is solely
economic (including damage to the property that is the subject
of the contract), but allows tort recovery if there is also
physical injury to persons or other property. This is no more
contrary to public policy than are contractual provisions
limiting a design professional’s liability to the amount of fees
received. Cf. 1800 Ocotillo, LLC v. WLB Group, Inc., 219 Ariz.
23
200, 202-04 ¶¶ 9-21, 196 P.3d 222, 224-26 (2008) (rejecting
argument that contractual liability limits in design
professional contracts are contrary to public policy).
¶ 43 In a related argument, Owner maintains that architects
should be treated differently than contractors for purposes of
the economic loss doctrine because Arizona statutes regulate
architects to protect the public. Contractors and architects
are governed by different statutory requirements and
administrative regulations. Compare A.R.S. §§ 32-1101—1107
(2008) (regulating contractors), with A.R.S. §§ 32-101—112, 121—
131, 141—152 (2008 & Supp. 2009) (regulating architects). But
this does not preclude applying the economic loss doctrine to
claims against architects.
¶ 44 More relevant here are certain Arizona statutes
governing actions involving construction defects. These
statutes do not distinguish between contractors and architects,
although they do draw distinctions that in some ways parallel
the economic loss doctrine. For example, the statute of repose
in A.R.S. § 12-552 generally provides that actions based in
contract involving the design, engineering, or construction of
improvements to real property must be brought within eight
years. The statute applies to architects as well as
contractors, but like the economic loss doctrine it does not
apply to actions involving personal injury. Id. § 12-552(D).
24
Similarly, A.R.S. § 12-1363 (Supp. 2009) does not distinguish
between architects and contractors in requiring notice and an
opportunity to repair before plaintiffs can bring certain
actions related to the “design, construction, condition or sale”
of a dwelling. Id.; § 12-1361(7) (Supp. 2009) (defining
“seller” as any person engaged in the business of designing,
constructing, or selling dwellings). This statute, like the
economic loss doctrine, does not apply to claims involving
personal injury or damage to other property. See A.R.S. § 12-
1366(A)(2) & (4) (Supp. 2009); cf. A.R.S. § 32-1159 (2008)
(barring certain indemnity provisions in both construction
contracts and contracts for architect-engineer professional
services). In light of these provisions, we are not persuaded
by Owner’s arguments that Arizona statutes require
distinguishing architects from contractors for purposes of the
economic loss doctrine.
¶ 45 Finally, Owner argues that applying the economic loss
doctrine to architects would imply that it also applies to other
claims for professional negligence, such as claims for legal
malpractice. This argument is not compelling. Lawyers owe
fiduciary duties to their clients and generally are barred from
entering agreements that prospectively limit their liability.
See Ariz. R. Sup. Ct. 42, ER 1.8(h)(1); Dobbs, supra, at 727
(arguing that economic loss doctrine should not apply to claims
25
against lawyers and fiduciaries because “[w]hen you retain
someone for the express purpose of being on your side, he cannot
rightly contract to be your adversary instead or to be on your
side but free to be negligent”).
¶ 46 We do not hold that the economic loss doctrine applies
to architects because they are professionals, but instead
because the policy concerns that justify applying the doctrine
to construction defect cases do not justify distinguishing
between contractors on the one hand and design professionals,
including architects, on the other. Our adoption of the
economic loss doctrine in construction defect cases reflects our
assessment of the relevant policy concerns in that context; it
does not suggest that the doctrine should be applied with a
broad brush in other circumstances. Cf. Ellen M. Bublick,
Economic Torts: Gains in Understanding Losses, 48 Ariz. L. Rev.
693, 701 (2006) (noting that not all economic loss cases invoke
the same interests or call for the same treatment).
III.
¶ 47 Because the court of appeals found the economic loss
doctrine inapplicable to Owner’s negligence claim against
Architect, we vacate the opinion below. In ruling on the motion
to dismiss, the superior court did not apply the version of the
economic loss doctrine we adopt today. The complaint refers to
Owner’s contract with Architect, but a copy of the contract is
26
not attached and is not otherwise included in the record.
Although it seems unlikely that the contract would preserve tort
remedies for purely economic loss, we will not make assumptions
about its provisions. Instead, it is appropriate to reverse the
judgment for Architect and to remand this case to the superior
court for further proceedings.
_____________________________________
W. Scott Bales, Justice
CONCURRING:
_____________________________________
Rebecca White Berch, Chief Justice
_____________________________________
Andrew D. Hurwitz, Vice Chief Justice
_____________________________________
Michael D. Ryan, Justice
_____________________________________
A. John Pelander, Justice
27