When the Economic Loss Rule Bars Tort Claims in Arizona

The economic loss doctrine limits a party to contractual remedies when there is no personal injury or other property damages. The Arizona Supreme Court has applied the economic loss doctrine to construction defect cases, stating that recovery in tort will not be permitted for purely economic losses, unless there is a physical injury to persons on other property. Flagstaff Affordable Hous. L.P. v. Design Alliance, Inc., 223 P.3d 664, 223 Ariz. 320, 2010 Ariz. LEXIS 11, 575 Ariz. Adv. Rep. 31 (Ariz. 2010). Parties also have the option to expressly preserve tort remedies when contracting.

This doctrine is designed to encourage parties to contract and uphold their expectations when they have done so. In the construction context, this prevents a property owner from bringing a negligence claim due to a construction defect, and limits them to breach of contract and other contract claims, such as breach of express or implied warranties. However, the economic loss doctrine will not applied in all circumstances. In Arizona, it had been used in products liability cases and construction defect cases, while other courts have extended it to cover more situations.

While this doctrine may prevent recovery in tort for some construction defect cases, there are still several options available to redress construction defects. Contractors have an implied duty to complete work in a workmanlike manner, and construction defects may result in a claim for a breach of this implied warranty. Any failure to meet the standards specified in the contract will also support a breach of contract claim. You can also report a contractor’s defective work to the Arizona Registrar of Contractors, which can order the contractor to fix the defect, and possibly suspend or revoke the license of a contractor.

Tort claims may also be pursued, but only in cases where physical injury or damage to other property occurs. For example, a collapsed fireplace may result in a contract claim for the cost of repairing the fireplace, and a separate tort claim for any physical injury or damage to other property caused by the collapse.

There are also other situations in the real estate context where tort claims are permitted, such as a fraud or misrepresentation claim when a seller fails to disclose known defects in a property. If you have questions about whether you can pursue a tort claim to resolve your issue, ask a real estate attorney.

Chernoff Law handles real estate litigation and construction defect cases throughout Arizona. Contact us by calling 480-719-7307 to discuss your real estate matters.