Flagstaff Affordable Housing v. Design Alliance (CA1 3/24/09)


In the last few days, both divisions of the Court of Appeals have issued opinions discussing the economic loss rule.

We will not comment on Valley Forge Insurance v. Sam’s Plumbing, L.L.C. (CA2 3/19/09) since an AzAppBlog writer was among the many lawyers involved, in one way or another, in the six or eight or more pieces of litigation that arose out of that accident (see our FAQ).

Design Alliance designed apartments that Flagstaff Affordable Housing built. The design violated federal handicap-accessibility  requirements. FAH was required to remedy the problem at considerable expense so it sued for, among other things, negligence.

Design Alliance moved to dismiss, arguing that the economic loss rule barred the claim. That rule, established in Arizona by the First Division in  Carstens v. City of Phoenix, 206 Ariz. 123, says that there can be no recovery for economic loss absent personal injury or property damage. The trial court granted the motion.

On appeal, the court reversed.

The relationship between architect and owner is one between professional and client. Professionals owe special duties to their clients. Therefore, the owner’s claim against the architect is based in tort, not contract.

If that reasoning seems a bit sketchy to you, it apparently did to the court, too, which may explain why the opinion states it in a few sentences then spends most of the remaining thirteen pages of the opinion trying to justify it. In ruling, apparently, that the economic loss rule does not apply to claims against professionals, all the court really says is that it knows a tort when it sees one and it sees one in that situation.

The plaintiff also sued in contract but that claim had lapsed under the statute of repose. The defendant argued that to allow a negligence claim would “eviscerate” the statute. The court’s response was, basically, “So what?”

The real problem is that the economic-loss rule has sat uneasily in Arizona law. Carstens dealt with a government entity, which courts almost never look at the same way they look at you and me. Since then, though, other types of defendants have tried to use it to escape what would previously have been accepted as negligence claims.

Valley Forge contains a more extensive analysis – and criticism – of Carstens, an analysis the Flagstaff Affordable Housing court did not need or care to make. But both cases rule in favor of claimants, reversing trial court decisions, and together they should considerably dampen defendants’ enthusiasm for the economic loss rule.