Adam B. Campbell 2013-09-19 00:30:18
Will Arizona’s Economic Loss Doctrine Limit or Expand Construction Defect Claims? Adam Campbell is a partner in the law firm of Rai & Barone, P.C. His firm represents clients in the practice areas of construction defect litigation, specializing in subcontractor defense, general liability, business transactions, commercial litigation and insurance defense of all types. The firm has extensive arbitration, mediation and trial experience. Rai & Barone’s goal is to provide expeditious, affordable and effective representation to its clients. Adam can be reached at (602) 476-7100 or via email at firstname.lastname@example.org. Recently, the Arizona Supreme Court sought to clarify Arizona’s version of the economic loss doctrine. Sullivan v. Pulte Home Corp., No. CV-12-0419-PR, 2013 WL 3929151 (July 31, 2013). The Sullivans purchased a home in 2003 that Pulte had constructed and sold in 2000 to the original purchasers. In 2009, the Sullivans noticed problems with a retaining wall that an engineer confirmed had been built defectively. The Sullivans sued Pulte on claims of consumer fraud, fraudulent concealment, negligence, negligent nondisclosure, negligence per se, negligent misrepresentation, and breach of implied warranty. The trial judge dismissed the consumer fraud and fraudulent concealment claims because Pulte made no representations to the Sullivans. The court also dismissed the breach of implied warranty claim because the statute of repose period had passed. The trial court held that the economic loss doctrine barred the remaining tort claims. The court of appeals remanded, holding that the doctrine did not bar the tort claims because the Sullivans did not contract with Pulte. Reaffirming its application of the economic loss doctrine in Flagstaff Affordable Hous. Ltd. P’ship v. Design Alliance, Inc., 223 Ariz. 320, 223 P3d. 664 (2010), the Arizona Supreme Court in Sullivan reiterated that the doctrine precludes tort recovery for pecuniary damage only when a product or property is the subject of a contract between the litigating parties. The court declined to extend the doctrine to non-contracting parties such as Pulte and the Sullivans, finding that limiting the doctrine to contracting parties furthers the public policies “to encourage the private ordering of economic relationships, protect the expectations of contracting parties, ensure the adequacy of contractual remedies, and promote accident-deterrence and loss-spreading.” Significantly, the Supreme Court rejected Pulte’s argument that the economic loss doctrine should bar the Sullivans’ tort claims because they could pursue a possible breach of implied warranty claim. The court reasoned that the implied warranty did not arise from an opportunity to negotiate with Pulte but rather was imputed by law. The court found that allowing tort remedies would not frustrate the purposes of the statute of repose, which applies only to contract claims. The Supreme Court chose not to grant review on the remainder of the court of appeals decision, thus leaving intact other rulings impacting construction defect law. First, the court of appeals confirmed that Arizona’s statute of repose applies to claims for the breach of the implied warranty of good workmanship and habitability, and held that it barred the Sullivans’ warranty claim brought over nine years aft er substantial completion. The court also reiterated that the statute of repose does not violate the Arizona Constitution’s anti-abrogation clause. The court also held that equitable tolling cannot extend the statutory period because of the legislature’s clear intent to establish an outer cutoff for breach of contract and breach of implied warranty claims. Second, the court of appeals held that the private right of action afforded to consumers under Arizona’s Consumer Fraud Act does not extend to subsequent home purchasers. In contrast to the public policy allowing subsequent homeowners to pursue a breach of implied warranty claim, the court of appeals found inapplicable to subsequent purchasers the act’s legislative purpose of protecting consumers in transactions involving disproportionate bargaining power. The court upheld the dismissal of the Sullivans’ fraudulent concealment claim on similar grounds. Third, the court of appeals applied a prior holding that attorney’s fees are not available for breach of implied warranty claims under Ariz. Rev. Stat. § 12-341.01. That decision rested originally on an Arizona Supreme Court legal malpractice decision holding that the fees statute applies only to express and implied-in-fact contracts, and not to contractual remedies implied in law. See also, Barmat v. John and Jane Doe Partners A-D, 155 Ariz. 519, 521, 747 P.2d 1218, 1220 (1987). At first glance, the Sullivan ruling appears narrow in its application of the economic loss doctrine and in its desire to protect the public policies underlying contract law. Practically, the decision extends the time period in which subsequent homeowners may pursue a claim for construction defects against a homebuilder beyond the statutory repose period for a breach of implied warranty claim. The statute of limitations would circumscribe that extension to two years following the discovery of any latent defects. Ariz. Rev. Stat. § 12-542. Some practitioners may believe the decision also allows homeowners to bring direct tort claims against other parties not in privity, such as the subcontractors who worked on a home. Whether the Arizona Supreme Court meant to allow such a broad expansion may have to await the next decision. Homeowners will not be able to collect their attorney’s fees, however, in any direct action lacking a contract.
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