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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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