Construction Defects / Economic Loss: Flagstaff Affordable House v. Design Alliance



Az Sup. Ct. (2010-Feb-12)

In a construction defect case, a property owner is limited to its contractual remedies when an architect’s negligent design causes economic loss but no physical injury to persons or other property.  The “economic loss doctrine” bars plaintiffs, in certain circumstances, from recovering economic damages in tort.

In construction defect cases involving only pecuniary losses related to the building that is the subject of the parties’ contract, there are no strong policy reasons to impose common law tort liability in addition to contractual remedies. When a construction defect causes only damage to the building itself or other economic loss, common law contract remedies provide an adequate remedy because they allow recovery of the costs of remedying the defects, and other damages reasonably foreseeable to the parties upon entering the contract.  The policies of accident deterrence and loss-spreading also do not require allowing tort recovery in addition to contractual remedies for economic loss from construction defects.

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.”

In the construction context, the economic loss doctrine respects the expectations of the parties when, as will often be true, they have expressly addressed liability and remedies in their contract. Thus, the parties can contractually agree to preserve tort remedies for solely economic loss, just as they may otherwise specify remedies that modify common law recovery.

If the parties do not provide otherwise in their contract, they will be limited to contractual remedies for any loss of the bargain resulting from construction defects that do not cause personal injury or damage to other property.  

In the context of construction defects, the court adopted a version of the economic loss doctrine holding that a plaintiff who contracts for construction cannot recover in tort for purely economic loss, unless the contract otherwise provides.  The doctrine does not bar tort recovery when economic loss is accompanied by physical injury to persons or other property.

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Posted in Arizona, Construction Defects, Economic Loss Doctrine