119 Action in Tort Versus Action in Contract

• Jurisdiction: Arizona

A breach of contract also will often involve negligence by someone, or possibly other torts. But under the “economic loss” rule, an action in contract is the sole remedy unless there is personal injury involved, or damage to property already in existence, as opposed to defective installation of new construction.

The economic loss rule was applied in Carstens v. City of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (App. 2003). The owners brought an action against the City for gross negligence in inspection, resulting in the owners purchasing a house that had numerous violations of the building codes, involving substantial risk of physical harm to the owners. The court held that since there was no actual personal injury, or physical damage other than to the structure itself, the economic loss rule would control, and the economic damages could not be recovered against the City on this tort claim.

The court held that it does not matter whether or not the owner has a viable contract action against the particular defendant. The owner has a breach of contract action against some defendant, and if the only action against this defendant is for tort, and the only damages were economic, then there will be no action against the tort defendant. The court also held that it did not matter whether the resulting defects were dangerous, as long as no actual physical harm had occurred other than to the structure.

The court distinguished Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984). In that case, economic damages could...