This is an examination and explanation of the economic-loss doctrine. It reverses a Division One opinion we blogged in March 2009.

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 Design Alliance.

Design Alliance moved to dismiss, arguing that the economic-loss rule barred the claim. That rule, as established 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. The Court of Appeals reversed, holding that the economic-loss rule does not apply to claims against design professionals. The Supreme Court reverses that, in an opinion meant to be a fairly definitive statement on the economic-loss rule.

Carstens had said that there is no tort recovery of economic loss absent physical harm. This opinion says that that’s what the rule is not. Tort plaintiffs who have no contract with the defendant can and often do seek to recover economic loss. The economic-loss doctrine is a creature of contract law: a contracting party is limited “to contractual remedies for the recovery of economic losses unaccompanied by physical injury to persons or other property.”

This was the law before the Court of Appeals mixed things up in Carstens. But the Supreme Court court seems aware that the real culprit was its opinion in the case that confused the Carstens court: Salt River (143 Ariz. 368). That case held that products liability plaintiffs, who could have both contract and tort claims, can’t get economic loss (assuming that the contract doesn’t permit it) unless there is physical harm caused suddenly and accidently by an unreasonably dangerous product (the “three-factor” test). The court tries to iron out one or two smaller problems with Salt River and then throws doubt on the three-factor test itself, apparently signaling a willingness to change it when an appropriate products case comes along.

In construction-defect cases, the court in effect says that building a building is a more contract-centric thing than buying a product and so allowing tort damages would not be appropriate. Therefore, “when a construction defect causes only damage to the building itself or other economic loss, common law contract remedies provide an adequate remedy.” Economic loss is recoverable only if the contract so provides. The three-factor test does not apply.

As to the Court of Appeals’ holding that the economic-loss rule isn’t involved in claims against design professionals, it is true that the architect owes common-law duties to the owner but they arise because there is a contract between them. There is no valid basis for dealing differently with architects than with other construction contractors.

It is at this point that the court seems to come closest to saying frankly that the very idea of an “economic-loss rule” is misleading. Its simply an aspect of the law of contract damages. To call it a “rule” makes more of it than there is and invites its misinterpretation as a piece of substantive law. That isn’t exactly what the court says, though it may not be a bad way to think about what the court means.

The opinion remands the case to the trial court. It announces an economic-loss rule different from the Carstens rule that the trial judge had; the new rule would allow economic loss if permitted by contract but the contract was not in the record on appeal.

This points up a potential source of confusion. Both this case and a number of Court of Appeals cases following Carstens indicate that the economic-loss rule applies to construction-defect cases. But this opinion means something different by “economic-loss rule;” it holds that the Carstens rule does not apply, overturning or making obsolete the CA cases.

One problem this opinion does not address – the facts did not present it – is the “other property” issue. The court repeatedly points out that the economic-loss rule does apply to claims of physical injury to persons or “other property” – i.e., property other than the product, building, etc. that was the subject of the contract. What “other property” means is not always easy to figure out.

A hat-tip to the court for trying in this and other decisions in the last year or so to address some real trouble-spots in our civil law. And also for citing in this one an oldie but a goodie, Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854), which you no doubt remember fondly from law school.

(link to opinion)

This is a rare type of constitutional opinion: it makes its subject easier to understand, not harder.

The case arises out of CityNorth, which some of you may be sick and tired of hearing about but which the rest never heard of. To make a long story short (which the opinion admirably does), CityNorth is a huge office/shopping/etc. project that developers got people excited about before announcing that they didn’t have the money for. They asked for government help. Phoenix agreed to split tax revenue with them (to the tune of $97 million a year or so) in return for the exclusive use of 200 parking spaces and the non-exclusive use (i.e., the public could park in the building if they were lucky enough to find open spaces) of another 2980. 

Plaintiffs sued, arguing that the deal violated the Gift Clause. Article 9  §7 of our constitution prohibits government from making “any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”  Millions for a few parking slots was, Plaintiffs argued, a barely-disguised subsidy to the developers.  The City replied that the money wasn’t just for parking spaces but for more and better business, jobs, tax revenue, happiness, motherhood, apple pie, and all the other things in the standard package of real-estate-developer promises. The trial court ruled for the City; the Court of Appeals ruled for the Plaintiffs; the Supreme Court ruled for both.

The legal point of the opinion is to clarify Gift Clause law, which it does well. The public expenditure must be (1) for a “public purpose”  and (2)  proportional to the consideration received (or at least not “grossly disproportionate”). “Public purpose” is broad; the court agreed that getting public parking spaces met the test. But the consideration must be that actually obtained in the agreement, not the alleged indirect benefits. So, government can’t pay a developer big bucks and receive a pittance plus pie in the sky – that’s a subsidy, not a purchase. The parking spaces themselves have to be worth what Phoenix would pay.

Are they? The court, no doubt wisely, finds that “difficult to believe.” But it finds it even more difficult to say “no” to the City of Phoenix. Instead of remanding for a finding that would kill the CityNorth deal, it announces that its holding will have prospective effect only. This is because its earlier holdings may have “confused” government lawyers and because “various amici [namely, other cities and towns and developers] have claimed that a number of public-private transactions were entered into . . . under a similar misapprehension.”

The court is of course correct to say that the amici “claimed” to have similar projects in the works. Its careful use of the word is a respectful bow to the law of evidence – which the court then head-butts to the ground by quite obviously accepting the claim as fact and basing the resolution on it. (To the court’s credit, though, the opinion is also careful repeatedly to put  the word “panoptic” – which an earlier case had employed – in quotes. We hope this signals that courts should stick to words they understand rather than indulge in others whose only value is impressive mystery.)

Its interesting that all those government types were “confused” in the same direction. Normally, you deny retroactive effect only when you’re changing the law; here, the court makes clear that that’s what its not doing. We trust that no private industry will ever be naive enough to rely on the “mass confusion” defense, no matter how big the industry nor how tangled the law.

This is a political case; almost everyone within 100 yards of it is either a lawyer-politician or a politician-lawyer. (That often happens in constitutional and elections cases – a reason, perhaps, for the legal confusions so often found there.) Political cases tend to have odd outcomes – odd, that is, to plebian lawyer-lawyers – and that’s just life in the big city, or at least in Phoenix.

How odd this one is remains to be seen; the Supreme Court remanded to the Court of Appeals, which had addressed only one of the Plaintiff’s constitutional arguments. In the mean time, we know that the Gift Clause means what it has always meant, except during that period when law was suspended due to confusion.

This ruling on an application for admission to the bar is one of those when-can-criminals-become-lawyers cases.

Lazcano was charged with burglary and sexual assault while in college in 2002.  He pled no contest to attempted sexual assault and, under a Texas procedure called “deferred adjudication,” was given ten years probation and community service and registered as a sex offender. In 2008 – having while on probation gone to law school, graduated, and passed the Arizona bar exam – Lazcano applied to become a lawyer.

To join our bar a convicted felon must show his rehabilitation by clear and convincing evidence. Rehabilitation means that he accepts responsibility for his crime and has “identified and overcome the weakness” that led to it. So, to prove his rehabilitation to the Character and Fitness Committee Lazcano explained that a terrible mistake one drunken night was that of a foolish youth, for which the mature and remorseful man sought genuinely to atone by committing his life to the law – right? Not quite. Instead, he used the “she wanted it” defense.

And the Committee bought it. It decided – based, it seems, on what Lazcano told it and on his interpretation of a police report – that “the initial report of non-consensual sexual relations may not be reliable.” It recommended that Lazcano be admitted.

So, the court had to tell the Committee that its job was not to re-try criminals. “The Committee should instead accept that the defendant has been found guilty beyond a reasonable doubt, either by verdict or plea.” 

The court then decided that “individuals currently on Texas deferred adjudication are not eligible for admission to the Arizona State Bar until they have completed their probationary term and can demonstrate complete rehabilitation.” People on probation can’t become lawyers (at least generally, it seems, although the holding here applies only to “Texas deferred adjudication”), people who are already lawyers would be suspended if they copped the plea Lazcano did, and public confidence in lawyers’ “exemplary moral character” might be just a teensy bit compromised by letting in a registered sex offender on probation. As soon as his probation is up, though, he can try again.

We don’t know Mr. Lazcano and we trust that, regardless of his past, he is in fact a fine fellow. In any event, if it were true that only those of “exemplary moral character” could become lawyers then some of the cases cited in this opinion would have had different outcomes. What we can’t explain is how the Character and Fitness Committee – which is supposed to have on it not only lawyers but also sensible people – could decide that a fellow on probation can become a lawyer by denying his crime, and that a plausible denial can be based on half the evidence.