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Flagstaff Affordable Hous. Ltd. P’ship v. Design Alliance Inc. - 3/24/2009

Arizona Court ofAppeals Division One Holds That the Economic Loss Doctrine Does Not Bar Professional Negligence Claims Against Architects.

In 1995, Plaintiff Flagstaff Affordable Housing Limited Partnership (“Owner”) contracted with Defendant Design Alliance, Inc. (“Architect”) for the design of apartments.  The apartments ultimately were constructed in accordance with Architect’s plans and specifications.  In 2004, Owner was forced to remedy design deficiencies in the apartments.  Owner subsequently brought claims for breach of contract and professional negligence against Architect, seeking economic losses as compensatory damages.  Architect filed a motion to dismiss, arguing that the contract claim was barred by the statute of repose and the professional negligence claim was barred by the economic loss doctrine.  Owner agreed that the contract claim was untimely, but disputed the application of the economic loss doctrine to its professional negligence claim.  The trial court granted Architect’s motion to dismiss, and Owner timely appealed.

The ArizonaAppeals Court reversed and remanded, holding that the economic loss doctrine does not bar professional negligence claims against design professionals.  It first explained that the economic loss doctrine, which precludes an aggrieved party from recovering economic damages in tort unless accompanied by physical harm to either person or property, has only been applied inArizona in construction defect and product liability cases.  The Court explained that those cases provide no guidance because they involve actual physical defects, unlike professional negligence claims involving negligent design.  The Court then looked to the underlying purpose of the economic loss rule – which is to differentiate between tort, or duty-based recovery, and contract, or promise-based recovery.  Because professionals owe special duties to their clients, regardless of the existence of a contractual relationship, the Court found that there was no need to distinguish between tort and contract actions in professional negligence claims, and therefore the economic loss rule was not implicated.  The Court explained that applying the economic loss doctrine to architects would actually erode their duties implied by law to use ordinary skill, care, and diligence.  The court further noted that the doctrine had not been applied to professional negligence claims against other professionals, such as attorneys or accountants.

The Court rejected Architect’s argument that Owner was merely seeking benefit-of-the-bargain damages such as those in construction defect cases, explaining that this case is not similar to construction defect cases because it involves negligent design, not negligence construction.  The Court also rejected Architect’s argument that the statute of repose, A.R.S. § 12-552, applied, noting that the statute explicitly covers only contract claims, not professional negligence claims.

Judge Gemmill authored the opinion; Judges Downie and Kessler concurred.

Posted On: 3/27/2009