Economic Loss Rule Limits
Contractor Liability
In Arizona, bad
workmanship doesn't necessarily expose the contractor to a tort claim
After you build a home or
commercial structure, the owner discovers major construction defects that you
are unable to correct. He sues you for breach of contract and for damages that
he suffered due to your negligence.
Guilty on both counts,
right? Not necessarily, says the Arizona Court of Appeals. You may be on the
hook for the contract breach, but—under the court’s September 2003 ruling in
Carstens v. City of Phoenix—your corporate and personal liability, if any,
for the tort of negligence depends on the type of damages he incurred.
You may be entitled to a
dismissal of the negligence claim entirely, depending on how the economic loss
rule applies to the situation. The economic loss rule bars a party from
recovering economic damages in tort actions unless the negligent act results in
physical harm, either in the form of personal injury or secondary property
damage.
Background. In
1999, Carstens bought a $2 million home at the Arizona Biltmore and began some
minor remodeling. His remodeling contractor found some construction defects and
building code violations that evidently eluded the attention of City of Phoenix
building inspectors when the previous owner did a major renovation in 1997.
Carstens brought in
engineers to perform a thorough assessment, and they found missing fire
blocking, weak floor and ceiling joists, inadequate beam support, leaky natural
gas piping, and hazardous venting and electrical wiring. In January 2000
Carstens demolished the house.
In June 2000 Carstens
sued the City and the three inspectors personally, alleging that (a) they were
grossly negligent in failing to discover the many building code violations
during the 1997 remodeling, and (b) their gross negligence created a substantial
risk of physical harm to Carstens.
Economic loss rule.
A Maricopa County Superior Court judge dismissed Carstens’ suit, and
Carstens appealed. The Arizona Court of Appeals upheld the trial court’s ruling,
citing the economic loss rule.
“The economic loss rule,”
wrote the court, citing a 2000 Nevada ruling in Calloway v. City of Reno,
“serves to distinguish between tort, or duty-based recovery, and contract, or
promise-based recovery, and clarifies that economic losses cannot be recovered
under a tort theory.”
In other words, if it’s a
bad building, and no one is physically injured and no property is damaged as a
result of the building’s flaws, the owner’s only remedy is to sue for breach of
contract, regardless of whether the contractor (or, in the Carstens case,
the City and its building inspectors) was negligent.
Example. Because
of a contractor’s negligence, a fireplace and chimney collapse. If the collapse
injures someone, the injured party may successfully sue the contractor for
breach of contract and for negligence. The same would be true if the collapsing
fireplace takes out an entertainment system and its resident television, DVD
player, stereo, etc.
But if, in the process of
collapsing, the fireplace miraculously does not hurt anyone or break anything, a
negligence suit against the contractor will likely receive the same treatment as
Carstens’ suit against the City of Phoenix and its building inspectors.
In short, the owner’s
only remedy would be to sue the contractor for breach of contract.
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