In an important decision, the Supreme Court of Arizona held that design professionals that lack privity of contract with project owners owe no duty to reimburse those owners for purely economic losses. This is a reversal of the 1984 decision in Donnelly Construction v. Oberg/Hunt/Gilleand, which held that a design professional’s duty to use the generally accepted standard of care extended to persons foreseeably affected by a breach of the design professional’s duty to its client. In this particular case the designer in question was working for a design-build contractor. In performing its survey of the property, the designer erred in its placement of property location stakes and this resulted in the building being constructed several feet north of its planned location – and this caused the Owner economic loss in that eight planned RV parking spaces near the building had to be eliminated. Foreseeability of injury is no longer a test to be exercised in Arizona in determining the design professional’s duty to third parties. Cal-Am Properties, Inc. v. Edais Engineering, Inc., No. CV-21-0929-PR (2022).
The court explained:
“In Donnelly, we held that “[d]esign professionals have a duty to use ordinary skill, care, and diligence in rendering their professional services” and confirmed that such liability extends to “foreseeable injuries to foreseeable victims which proximately result from . . . negligent performance of their professional services.” 139 Ariz. at 187–88. In other words, the potential liability of design professionals, such as land surveyors, for negligence extended not only to the entity who contracted them, but to other foreseeable plaintiffs which may include property or project owners.”
“Donnelly’s holding controlled on the existence of such a duty until our decision in Gipson. There, we held that “foreseeability is not a factor to be considered by courts when making determinations of duty” and we “reject[ed] any contrary suggestion in prior opinions.” Gipson, 214 Ariz. at 144 ¶ 15. We have since clarified that “[p]ost-Gipson, to the extent our prior cases relied on foreseeability to determine duty, they are no longer valid.” Quiroz, 243 Ariz. at 565 ¶ 12. Indeed, we have noted repeatedly that Donnelly employed the now-rejected foreseeability framework.”
The court expressly rejected the precedent set by courts in other states because “Most of these jurisdictions rely on foreseeability….” In this case, the court stated that no contractual or familial relationship existed between the project owner and the design subcontractor. “No liability exists where, as here, parts of an overall enterprise were organized by another entity and the defendant’s relevant undertaking was with and for that entity. Thus, no ‘special relationship’ gives rise to a duty in this case.”
The court also rejected the project owner’s arguments that state statutes and regulations governing qualification and minimum standards for design professionals establish a duty. The purpose of such statutes, says the court are “to provide for the safety, health and welfare of the public.” This particular case does not involve anything other than purely economic damages. The court stated:
“The statutes and regulations governing surveyors and similar professionals were not designed to protect plaintiffs like Cal-Am—project owners—from purely economic harm. Instead, their purpose is to protect the safety, health, and welfare of individuals who enter the buildings and structures, which regulated professionals construct and maintain, from injury resulting from poor workmanship.”
The decision went on to also reject arguments that the Restatement (Third) of Torts: Liability for Economic Harm applied to create a duty owed by the professional to a third party. The court concluded:
“Our holding does not render Cal-Am or similarly situated plaintiffs devoid of a remedy. In general, when a project owner is economically harmed due to a subcontractor’s negligence, it “is viewed just as a failure in the performance of [the subcontractor’s] obligations to its contractual partner, not as a breach of duty in tort to . . . the owner of the project.” Restatement (Third) Torts, § 6 cmt. b. The remedies available to the project owner sound in contract, not tort.”
Comment: This is an important win for design professionals. We can only hope states that have been finding design professionals liable for economic losses incurred by third parties may in the future see the wisdom of this decision and adopt its sound reasoning. Project owners can recover from the design-builders or contractors that are under direct contract with them, and they have no need to attempt a tort action against a design subconsultant.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 7 (August 2022).
Copyright 2022, ConstructionRisk, LLC