Construction Risk

Economic Loss Doctrine did not Preclude Developer’s Negligence Action against Engineer

A builder who purchased a couple building lots from a subdivision developer in a new subdivision and built houses on them was sued by the homeowners on the basis of improper soil compaction that resulted in soil subsidence and structural damage to their homes. The builder settled with the homeowners and then sued to recover its costs from the engineering firm that had planned and inspected the soil compaction for the developer. The basis of the suit was a negligence claim alleging the engineer had breached its duty to “ensure that the subdivision lots could be sued for the construction of single family residences,” and to determine whether the lots “met minimum requirements for compaction and soil expansion.” The suit also alleged the engineer failed to “advise the public . . . of any conditions that would prevent the development of the lots as reasonably anticipated.”

The engineer filed motions for summary judgment, asserting that the economic loss doctrine barred the builder’s claims. This doctrine precludes a party from recovering in tort (for a negligence claim) if the party has suffered only an economic loss and, therefore, should pursue its remedy in contract instead of tort. (Note that the decision does not explain what contractual relationship existed between the builder and the engineer such that the economic loss doctrine would apply under any circumstances). The trial court granted summary judgment—concluding that the economic loss doctrine precluded the claims because they did not allege any personal injury or secondary property loss resulting from the engineer’s alleged negligence or breach of implied warranty.

On appeal, in the case of Hughes Custom Building v. Davey, 221 Ariz. 527, 212 P.3d 865 (2009),the builder argued that the economic loss doctrine does not apply to its negligence claim because there is an exception to the doctrine under Arizona case law for negligence by design professionals. The court distinguished the facts of this case from those involved in the decision earlier in the year in the case of Flagstaff Affordable Housing, Ltd v. Design Alliance, Inc, 212 P.3d 125 (2009). That decision held the economic loss doctrine did not bar recovery in a negligence action against an architect for defects in design, as opposed to defects in construction.

The court stated that to the extent the claims are based on negligent design, “the economic loss doctrine arguably does not apply” to bar the builder’s claim. The builder’s claims here, however, were not limited to negligent design, but rather also asserted that the engineer had a duty to determine whether the lots were suitable for their intended use-construction of single family residences-and also had a duty to advise the public of any conditions that would prevent that use.

The court stated that it did not need to determine whether the builder’s claim should be characterized as one for negligent design, construction, inspection, or some combination of these. In addition, the court stated that it did not need to decide whether those distinctions would be meaningful in determining whether the economic loss doctrine applies, because it found that even if the doctrine applies to design services, it does not apply the particular claim in this case. Determination of whether the economic loss doctrine applies does not rest solely on whether there was a personal injury or damage secondary property, says the court, but instead should be made on a case-by-case basis to evaluate whether a claim sounds in tort or in contract.

Having decided to conduct a case-specific analysis in this case, the court found the economic loss was accompanied by physical damage to secondary property. It stated that in such a case the parties’ interests generally will be realized best by the imposition of tort liability. Key to deciding that the economic loss doctrine would not apply here was the court’s determination that the houses that were constructed by the builder constitute “secondary property” separate from the lots upon which they were built.

The builder had purchased only empty lots. The houses were subsequently built on the lots and suffered damage because of the condition of the lots. The key to the claim was that the engineer’s negligence in planning and inspecting the fill dirt used in the lots resulted in building sites unsuitable for construction. Thus, the defect alleged against the engineer concerns the soil of the lots – not the construction of the houses. Houses and lots remained separate types of property and the houses did not become integrated with the lots such that they would be considered a single item of property for application of the economic loss doctrine.

Defects in the lots caused subsidence resulting in damage to the other property—the houses. Providing subdivision lots that are unsuitable for construction, concludes the court, “plainly creates an unreasonable danger to property.” For these reasons, the court held that a claim for damage to the houses was property brought in tort.

Comment: It is not clear from the text of the decision what contractual relationship the builder had with the engineer. From the factual description it seems that the engineer was under contract to a subdivision developer that bore no relationship to the home builder who purchased two individual building lots from the developer. There must have been a contractual relationship between the builder and the engineer, however, in order for the court to address the applicability of the economic loss doctrine to the facts of the case.

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