§ 7.2.2

• Jurisdiction: Arizona

§ 7.2.2 The Economic Loss Rule

The scope of the economic loss rule is a frequent issue.²⁰⁷⁶ The boundaries of the defense have not been fully delineated in Arizona.²⁰⁷⁷ When it applies, the defense prevents a plaintiff with contract remedies from recovering economic losses that are not accompanied by physical injury to a person or property.²⁰⁷⁸ "The idea is that, between contracting parties, the contract's provisions should control."²⁰⁷⁹ "There is also the idea that if a point covered by a misrepresentation was important to the plaintiff, that point would have been expressed in the contract, and if it was not, then the plaintiff should suffer the risk that the trier of fact will believe the point was not so important as the plaintiff now claims."²⁰⁸⁰

For a time, it was unclear whether the economic loss rule was so broad as to cover situations in which the plaintiff was not a party to a contract. Division One, in a decision that was questioned by Division Two, expanded the doctrine to hold that the defense did not depend upon the ability to sue the defendant for breach of contract.²⁰⁸¹ That approach was subsequently rejected by the Supreme Court.²⁰⁸²

In Flagstaff Affordable, a 2010 decision, the Arizona Supreme Court addressed the need for contract remedies and held that when the plaintiff lacks privity and cannot pursue contract remedies, courts "should instead focus on whether the applicable substantive law allows liability in the particular context."²⁰⁸³ The court recognized that tort recovery is often available for solely pecuniary losses²⁰⁸⁴ and listed negligent misrepresentation as an example of a tort that allows non-contracting parties to sue for economic losses.²⁰⁸⁵

Three years later, the Supreme Court addressed the doctrine again and squarely held that it does not apply to noncontracting parties.²⁰⁸⁶

The context-specific approach adopted by Flagstaff Affordable is the view Professor Dobbs advocated in a 2006 law review article. According to Dobbs, "[i]t seems impossible to formulate a single economic loss rule."²⁰⁸⁷ Instead, the rule, such as it is, is context specific. This is so because "the problem of recovery for pure economic loss that is unaccompanied by physical harm to person or property occurs in a number of contexts that may invoke differing concerns of policy."²⁰⁸⁸

Pre-Flagstaff Affordable federal decisions that applied Arizona's economic loss rule to deny negligent-misrepresentation claims should be approached with caution.²⁰⁸⁹ As Professor Dobbs put it in a pre-Flagstaff Affordable article, "'More reason, less rule' . . . might do as a bumper sticker for the economic loss cases."²⁰⁹⁰ The rule is not a heuristic shortcut for analysis. Federal cases decided after Flagstaff Affordable have denied dispositive motions that used the economic loss rule to challenge fraud,²⁰⁹¹ breach of fiduciary duties,²⁰⁹² breach of the implied contractual duty of good faith,²⁰⁹³ and unjust enrichment.²⁰⁹⁴

To decide whether the economic loss rule should extend beyond products-liability cases, the Supreme Court in Flagstaff Affordable undertook a context-specific consideration of "the underlying policies of tort and contract law in the construction setting."²⁰⁹⁵ Ultimately the court concluded "that in construction defect cases, 'the policies of the law generally will be best served by leaving the parties to their commercial remedies' when a contracting party has incurred only 'economic loss, in the form of repair costs, diminished value, or lost profits.'"²⁰⁹⁶

To what extent Arizona will recognize the economic loss rule in cases other than products-liability and construction defects is unsettled.²⁰⁹⁷ But cases decided since Flagstaff Affordable have found the rule applicable in other contexts.²⁰⁹⁸

A 2013 decision by the Court of Appeals held that the doctrine does not apply to consumer-fraud claims.²⁰⁹⁹ The same decision expressed concern "about applying the economic loss rule . . . to any claim of fraud in the inducement . . . based on misinformation intentionally provided by one contracting party to another."²¹⁰⁰

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