Arizona Supreme Court Further Clarifies the Availability and Use of the Economic Loss Doctrine

On July 31, 2013, the Arizona Supreme Court issued another decision in the line of cases clarifying the availability and use of the economic loss doctrine in construction defect claims. In Sullivan v. Pulte Home Corp., 2013 Ariz. LEXIS 162 (2013) the court refused to extend the use of the economic loss doctrine as a defense to tort claims against builders brought by subsequent purchasers of a home. In doing so, the court refused to extend its holding from Flagstaff Affordable Housing, Ltd. P’ship. v. Design Alliance, 223 Ariz. 320 (2010), to situations where the litigating parties did not have a contract between them.

Generally, the economic loss doctrine limits a party to contractual remedies when their damages are solely economic but allows tort recovery if there is physical injury to persons or other property. (See Flagstaff Affordable Housing, 223 Ariz. at 328) In Sullivan, Pulte constructed and sold a home in 2000 to its initial purchaser who in turn sold it to the plaintiffs in 2003. Since they did not purchase the home directly from the builder, the plaintiffs never entered into a contract with Pulte. In 2009, the plaintiffs began to notice deficiencies in a retaining wall and hired an engineer who opined that it was constructed in a dangerously defective manner. (2013 Ariz. LEXIS 162 at p. 3) They filed action against Pulte to recover the costs of repair alleging consumer fraud, fraudulent concealment, negligent non disclosure, negligence per se, negligent misrepresentation, and breach of implied warranty. The lower court dismissed the fraud and fraudulent concealment claims on the basis that Pulte never made representations to the plaintiffs. The breach of implied warranty claim was dismissed on the basis of Arizona’s statute of repose. The lower court dismissed the remaining claims holding that they were barred by the economic loss doctrine. (Id. at p. 4)

The Arizona Supreme Court overturned the trial Court’s ruling on the economic loss doctrine. In doing so, the court noted that the “economic loss doctrine serves to encourage the private ordering of economic relationships to protect the expectations of the contracting parties, ensure the adequacy of contractual remedies, and promote accident-deterrence and loss spreading.” (Id. at p. 10 citing Flagstaff Affordable Housing, 223 Ariz. at 325-26.) When the parties have no contractual relationship, the Court noted that the doctrine would not serve its purpose. (Id. at p. 11)

The court rejected the argument that the economic loss doctrine should be applied because the plaintiffs previously had a contractual remedy available to them by virtue of the breach of warranty claims. In doing so, the court noted that the plaintiffs did not have an opportunity to negotiate remedies with Pulte Homes. Interestingly, the Court commented that the implied warranty claim was a duty implied by law. While some may use this comment to argue that parties should not recover attorneys fees in breach of warranty cases, this may be dicta, as Arizona courts have typically held that breach of warranty claims arise under contract giving rise to fee claims under Ariz. R. Stat 12-341.01. This is so even where the claims involve a subsequent purchaser of a building. See Hall v. Read Dev., Inc., 229 Ariz. 277, 278-79 (App. 2012)

The impact of the court’s ruling is clear. Where the parties to the litigation never negotiated a contract between them, the economic loss doctrine will not bar a plaintiff’s tort claims. While construction defect is one area affected by this holding, one can foresee that the holding will be used to preclude economic loss arguments against other professionals. These may include construction delay claims by contractors against design professionals. See Donnelly Constr.Co. v. Oberg/Hunt/Gilleland 139 Ariz. 184 (1984). For the same reason, the economic loss doctrine may not apply to claims by home purchasers against appraisers hired by banks to perform appraisals for lending purposes. See Sage v. Blagg Appraisal, 221 Ariz. 33 (2009)