Section 3.7.10 Reconciling Contract and Tort Law Principles in Professional Liability Claims

• Library: Construction Law Practice Manual 3rd Edition 2016

§ 3.7.10 Reconciling Contract and Tort Law Principles in Professional Liability Claims

Over the course of many years, Arizona courts held?generally, but not uniformly? that a client’s liability claim against a professional adviser sounded in tort, not contract.⁶⁵ And yet, the law has steadily evolved away from this general proposition after Arizona courts recognized the economic loss doctrine. Since 1984, claims asserted by both clients and non-clients against design professionals in Arizona have been shaped in one way or another by Donnelly Construction Co. v. Oberg/Hunt/Gilleland,⁶⁶ which allowed a contractor to sue an architect for economic loss⁶⁷ caused by errors and omissions in design and construction documents even though no contract existed between the two parties.

In Donnelly, the Arizona Supreme Court held that “[d]esign professionals have a duty to use ordinary skill, care, and diligence in rendering their professional services”⁶⁸ The court also stated the elements of this cause of action: “An action in negligence may be maintained upon the plaintiff’s showing that the defendant owed a duty to him, that the duty was breached, and that the breach proximately caused an injury which resulted in actual damages.”⁶⁹

More recently, the Federal District Court for Arizona has recognized that the Donnelly standard could also support a negligence claim against a contractor for an engineer’s economic loss suffered after the contractor erroneously alleged to the project owner that the engineer’s specifications were defective.⁷⁰ However, the federal court did not recognize a claim against the contractor for negligent misrepresentation under RESTATEMENT (SECOND) OF TORTS § 552 because the contractor’s misrepresentations to the owner were not made “for the benefit of the design professional.”⁷¹

For many years, Donnelly’s duty element was given insufficient emphasis because that case suggested a duty exists whenever harm was reasonably foreseeable.⁷² Implying duty from the foreseeability of injury was rejected in Gipson v. Kasey⁷³, when the supreme court held that, “We do not understand the law to be that one owes a duty of reasonable care at all times to all people under all circumstances.”⁷⁴

Gipson reaffirmed a key holding of the supreme court’s prior decision in Markowitz v. Arizona Parks Board⁷⁵ that the determination of whether a duty exists is an independent, threshold question of law to be decided by the court. But Gipson also rejected another holding of Markowitz, that the duty must be premised on a pre-existing relationship between the plaintiff and defendant.⁷⁶ This requirement that the court determine first whether a duty of care exists before allowing tort claims to be asserted remains unchanged by the economic loss doctrine.⁷⁷

When the Arizona Supreme Court restated the economic loss doctrine in Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc.,⁷⁸ it held that claims for economic loss between a design professional and its client are best resolved by contractual remedies. A claim for professional negligence or negligent misrepresentation is not permitted when the design professional has a contract with the plaintiff. The economic loss doctrine also bars claims for fraud in the inducement based on an alleged misrepresentation of professional qualifications.⁷⁹

The economic loss doctrine has also been extended in the context of other service contracts to bar claims for common law fraud but not statutory consumer fraud claims when the defendant’s failure to perform its contractual obligation causes economic loss.⁸⁰ It also does not apply to claims for physical injury to persons or damage to other property.⁸¹

The Arizona Supreme Court declined to extend application of the economic loss doctrine in Flagstaff to claimants who allege economic loss but do not have a contract with a design professional, leaving for a future case the question or whether substantive law allows a non-client to sue in tort for economic loss.⁸² That question was answered in the negative by the supreme court in Sullivan v. Pulte Home Corp.⁸³ (hereafter referred to as Sullivan I for clarity) and the court of appeals in a subsequent appeal of the final dismissal of the Sullivan case following remand.⁸⁴ Read together, Sullivan I and Sullivan II further clarify the boundaries between tort and contract law?as well as the special status of the implied-in-law warranty of habitability and workmanship in residential projects?in economic loss claims.

While the Sullivan case involved a claim against a residential homebuilder, the supreme court’s reliance on Tentative Draft No. 1 of the Restatement (Third) of Torts: Liability for Economic Harm (April 4, 2012) provides an analytical and policy framework that is not limited to developers, builders, or residential projects.⁸⁵

In Sullivan I, the supreme court reconciled Flagstaff’s economic loss doctrine with Donnelly’s right for third parties to sue in tort for negligent misrepresentation, the implied warranty of habitability...