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The Arizona Supreme Court held that the “economic loss doctrine” did not prevent a homeowner from pursuing economic damages for negligence against the home’s builder because there had never been a contract between the parties. Generally speaking, the economic loss doctrine limits that ability of a plaintiff to bring a negligence action when the damages are purely “economic” in nature and occur independently of any physical harm to a person or property. While some jurisdictions have applied the economic loss doctrine broadly to serve as a bar on all economic damages through negligence actions, the high court in Arizona has construed it more narrowly. Here the Court held that the doctrine only applies between contracting parties, and since the homeowners in this case did not buy the house directly from the builder they were able to seek economic damages through a negligence action. Sullivan v. Pulte Home Corp., 306 P.3d 1 (Ariz. 2013).

The builder, Pulte Home Corporation, constructed a house and sold it to the original owners in 2000. In 2003 the current homeowners, John and Susan Sullivan, bought the house from the original owners. Later in 2009 the homeowners became aware of problems with the home’s hillside retaining wall, and an engineer determined that it was constructed in a “dangerously defective manner.” Because the homeowners were the second buyers there had been no direct contractual relationship with the builder. The homeowners brought a lawsuit against the builder for various negligence counts and a breach of implied warranty. The trial court found that the homeowners were beyond the 8 year time limit to bring a breach of implied warranty claim and that the remaining negligence claims were barred under the economic loss doctrine.

On appeal, Arizona’s intermediate court found that the economic loss doctrine should not prevent the homeowner’s negligence claims. The state’s highest court agreed. In making its decision, the Court revisited its earlier ruling in Flagstaff Affordable Housing, where the Court had held that in Arizona “a contracting party is limited to contractual remedies for purely economic loss from construction defects.” In other words, the Flagstaff ruling stated that under the economic loss doctrine a contracting party cannot recover for an economic loss through a negligence action because there was already a “contractual remedy.”

The builder tried to use the Flagstaff case in its favor by arguing that the homeowners had a “contractual remedy” against the builder despite the fact that the builder had only contracted with the original owner. The builder explained that any subsequent owner of the home had 8 years from the time it was built to bring an action against the builder alleging a breach of “implied warranty of workmanship and habitability” under Arizona law. They reasoned that this implied warranty was a contractual remedy in nature and therefore the Flagstaff ruling precluded the homeowners from now seeking economic damages through a negligence action.

The Court disagreed with the builder’s interpretation of extending the economic loss doctrine to non-contracting parties. The decision explained that a policy behind the economic loss doctrine is to encourage parties with a contractual relationship to adequately address any liability for economic loss in the confines of the contract. The Court reasoned that this policy would not be served by extending it to contracts that are “implied” under common law or statutes because these implied contracts are not the product of a bargained-for exchange between two parties. As a result, there was no opportunity for the subsequent homeowners to negotiate the risk of economic loss with the builder. Notably, the Court’s decision to limit the economic loss doctrine to contracting parties is in line with the definition proposed in a recent draft of the Restatement, an influential American legal treatise.

 

About the author: Article written by J. Kent Holland, Jr. and James Rhodes.

J. Kent Holland, Jr. is  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 15, No. 11 (Nov 2013).

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