Flagstaff Affordable Housing Ltd. Partnership v. Design Alliance, Inc.

SUPREME COURT OF ARIZONA
En Banc

FLAGSTAFF AFFORDABLE HOUSING ) Arizona Supreme Court
LIMITED PARTNERSHIP, an Iowa ) No. CV-09-0117-PR
limited partnership, )
) Court of Appeals
Plaintiff/Appellant, ) Division One
) No. 1 CA-CV 07-0743
v. )
) Maricopa County
DESIGN ALLIANCE, INC., an Iowa ) Superior Court
corporation, ) No. CV2006-005266
)
Defendant/Appellee. )
)
) O P I N I O N
__________________________________)

Appeal from the Superior Court in Maricopa County
The Honorable Ruth H. Hilliard, Judge

REVERSED AND REMANDED
________________________________________________________________

Opinion of the Court of Appeals, Division One
221 Ariz. 433, 212 P.3d 125 (App. 2009)

VACATED
________________________________________________________________

TIFFANY & BOSCO, P.A. Phoenix
By Robert A. Royal
Chad A. Hester
Attorneys for Flagstaff Affordable Housing Limited
Partnership

RENAUD COOK DRURY MESAROS, PA Phoenix
By Denise J. Wachholz
Attorneys for Design Alliance, Inc.

FOLK & ASSOCIATES, P.C. Phoenix
By P. Douglas Folk
Heather K. Seiferth
Attorneys for Amici Curiae American Council of Engineering
Companies of Arizona, AIA Arizona, and ASFE
______________________________________________________________
B A L E S, Justice

¶1 The “economic loss doctrine” bars plaintiffs, in

certain circumstances, from recovering economic damages in tort.

This Court has previously applied the doctrine only to products

liability claims. Today we apply the doctrine in a construction

defect case and hold that 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.

I.

¶2 Because the superior court dismissed this action

pursuant to Arizona Rule of Civil Procedure 12(b)(6), we assume

the complaint’s factual allegations to be true for purposes of

our review. Cullen v. Auto Owners Ins. Co., 218 Ariz. 417, 419

¶ 7, 189 P.3d 344, 346 (2008).

¶3 In 1995, Flagstaff Affordable Housing Limited

Partnership (“Owner”) contracted with Design Alliance, Inc.

(“Architect”) for the design of eight apartment buildings and a

community center (the “apartments”). To qualify as a low income

housing project, the apartments had to comply with the federal

Fair Housing Act’s accessibility guidelines. Owner separately

contracted with Butte Construction Company (“Contractor”) for

the construction of the apartments, which were completed in

Flagstaff in 1996.

2
¶ 4 In 2004, the U.S. Department of Housing and Urban

Development (“HUD”) filed a complaint against Owner, alleging

that the apartments violated the accessibility guidelines.

After settling with HUD, Owner in 2006 sued Architect and

Contractor, alleging they had breached their respective

contracts and acted negligently. Contractor was later dismissed

from the action.

¶5 Architect moved to dismiss the complaint under Rule

12(b)(6). Architect argued that the contract claim is barred by

the statute of repose in Arizona Revised Statutes (“A.R.S.”)

section 12-552 (2003), which provides that no action based in

contract may be brought against a person who “furnishes the

design . . . of an improvement to real property more than eight

years after substantial completion of the improvement.”

Architect argued that the negligence claim should be dismissed

based on Carstens v. City of Phoenix, which held that the

economic loss doctrine precludes tort recovery of economic

losses in the “construction defect setting.” 206 Ariz. 123, 125

¶ 10, 75 P.3d 1081, 1084 (App. 2003).

¶6 Owner voluntarily dismissed the contract claim, but

argued that the economic loss doctrine does not bar the claim

for professional negligence. Owner did not dispute that it

seeks recovery only for economic losses, and acknowledged that

Carstens applied the doctrine in a construction defect case.

3
Owner argued, however, that a claim for “professional

negligence” is based on the special relationship between

architects and their clients and therefore is excepted from the

economic loss doctrine. The superior court dismissed the

complaint.

¶7 The court of appeals reversed, holding that the

economic loss doctrine does not bar negligence claims against

design professionals. Flagstaff Affordable Hous. Ltd. P’ship v.

Design Alliance, Inc., 221 Ariz. 433, 212 P.3d 125 (App. 2009).

The court acknowledged that prior Arizona cases, such as

Carstens, applied the doctrine to cases involving construction

defects. Id. at 436 ¶ 10, 212 P.3d at 128. Distinguishing

Carstens, the court stated that this case does not involve

construction defects, but an architect’s alleged negligent

design. Id. at 436, 449 ¶¶ 11, 28, 212 P.3d at 128, 132. The

court concluded that the economic loss doctrine should not apply

because Owner’s claim is based in tort, not contract, and

reflects the special duties imposed on architects by law. Id.

at 437, 441 ¶¶ 13-14, 30, 212 P.3d at 129, 133.

¶8 We granted Architect’s petition for review because the

application of the economic loss doctrine in this context is an

issue of first impression and statewide importance. We have

jurisdiction under Article 6, Section 5(3) of Arizona’s

Constitution and A.R.S. § 12-120.24 (2003).

4
 II.

A.

¶9 Architect argues that the superior court properly

dismissed the complaint because Owner alleges only economic

loss; the economic loss doctrine applies in construction cases

and precludes tort recovery for such losses absent personal

injury or damage to other property; and the doctrine should

apply to claims against not only contractors but also architects

and other design professionals. The scope of the economic loss

doctrine presents a legal issue that we review de novo. See

Dressler v. Morrison, 212 Ariz. 279, 281 ¶ 11, 130 P.3d 978, 980

(2006) (applying de novo review to legal issues underlying

dismissal of complaint pursuant to Rule 12(b)(6)).

¶10 This Court has not addressed the economic loss

doctrine since its decision in Salt River Project Agricultural

Improvement and Power District v. Westinghouse Electric Corp.,

143 Ariz. 368, 694 P.2d 198 (1984).1 In the absence of other

decisions by this Court, the court of appeals and the federal

courts have reached conflicting conclusions regarding the

application of the doctrine under Arizona law. Compare Apollo

1
We subsequently abrogated Salt River to the extent it
suggested that courts may grant summary judgment to a defendant
who asserts an assumption of risk defense, see Phelps v.
Firebird Raceway, Inc., 210 Ariz. 403, 410-11 n.5, 111 P.3d
1003, 1010-11 n.5 (2005), an issue unrelated to the economic
loss doctrine.

5
Group, Inc. v. Avnet, Inc., 58 F.3d 477, 480 (9th Cir. 1995)

(stating that Salt River reflects that Arizona applies the

economic loss rule “broadly”), with Evans v. Singer, 518 F.

Supp. 2d 1134, 1142-45 (D. Ariz. 2007) (stating Salt River

“provided anything but” a broad reading of the rule); compare

also Carstens, 206 Ariz. at 128 ¶ 21, 75 P.3d at 1086 (arguing

that Salt River supports applying doctrine to bar homeowners’

claim for economic losses from construction defects), with

Valley Forge Ins. Co. v. Sam’s Plumbing, LLC, 220 Ariz. 512,

515-16 ¶¶ 11-12, 207 P.3d 765, 768-69 (App. 2009) (arguing that

Carstens misconstrued Salt River).

¶11 We begin by clarifying terminology. Courts and

commentators have defined the economic loss doctrine in varying

ways, which itself has created some confusion in the law. See

Eddward P. Ballinger & Samuel A. Thumma, The Continuing

Evolution of Arizona’s Economic Loss Rule, 39 Ariz. St. L.J.

535, 536-37 (2007) (noting confusion surrounding doctrine in

various jurisdictions and stating cases do not define a “single,

unified economic loss rule”); Dan B. Dobbs, An Introduction to

Non-Statutory Economic Loss Claims, 48 Ariz. L. Rev. 713, 733

(2006) (concluding that it “seems impossible to formulate a

single economic loss rule”). “Economic loss,” as we use the

phrase, refers to pecuniary or commercial damage, including any

decreased value or repair costs for a product or property that

6
is itself the subject of a contract between the plaintiff and

defendant, and consequential damages such as lost profits. See

Salt River, 143 Ariz. at 379-80, 694 P.2d at 209-10.

¶12 Some courts have stated that the economic loss

doctrine “bars a party from recovering economic damages in tort

unless accompanied by physical harm.” Carstens, 206 Ariz. at

125 ¶ 10, 75 P.3d at 1083 (footnote omitted). This formulation

of the doctrine, however, is overly broad. In many contexts,

tort recovery is available for solely pecuniary losses. See

Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 875 (9th

Cir. 2007) (noting that “[t]ort law has traditionally protected

individuals from a host of wrongs that cause only monetary

damage”); Evans, 518 F. Supp. 2d at 1139. Moreover, describing

the doctrine this way conflates two distinct issues: (1)

whether a contracting party should be limited to its contract

remedies for purely economic loss; and (2) whether a plaintiff

may assert tort claims for economic damages against a defendant

absent any contract between the parties. As explained below, we

believe the economic loss doctrine is best directed to the first

of these issues, and we use the phrase to refer to a common law

rule limiting a contracting party to contractual remedies for

the recovery of economic losses unaccompanied by physical injury

to persons or other property.

7
¶ 13 Bearing these definitions in mind, we return to Salt

River. There, an electric utility company asserted contract and

tort claims against the seller of a control device that had

allegedly malfunctioned and damaged the utility’s turbine unit.

This Court held that the utility could not recover in contract

because the seller had, consistent with the Uniform Commercial

Code, disclaimed certain warranties and otherwise limited its

liability. 143 Ariz. at 374, 694 P.2d at 204. The Court,

however, rejected the seller’s argument that the contractual

provisions also precluded a tort claim for strict products

liability. Id. at 375, 381, 694 P.2d at 205, 211.

¶14 In the context of an alleged product defect, Salt

River considered whether a plaintiff could seek tort recovery

for economic losses related to the defendant’s contractual

performance. In resolving this question, the Court noted the

distinct policies served by tort and contract law. Strict

liability promotes product safety and spreads the costs of

accidents. Id. at 375-76, 694 P.2d at 205-06. Contract law, in

contrast, seeks to preserve freedom of contract and to promote

the free flow of commerce. Id. at 376, 694 P.2d at 206. These

goals are best served by allowing the parties to specify the

consequences of a breach of their agreement. Id. Accordingly,

“[w]hen a defect renders a product substandard or unable to

perform the functions for which it was manufactured, the

8
purchaser’s remedy for disappointed commercial expectations is

through contract law.” Id. at 376, 694 P.2d at 206.

¶15 The Court in Salt River acknowledged that most courts

had held that economic loss resulting from a product defect

(including damage to the product itself) is not recoverable in

tort absent accompanying physical damage to other property or

personal injury. Id. at 379, 694 P.2d at 209. Salt River,

however, expressly declined to follow that majority rule and

instead embraced a narrower, case-specific approach:

Where economic loss, in the form of repair costs,
diminished value, or lost profits, is the plaintiff’s
only loss, the policies of the law generally will be
best served by leaving the parties to their commercial
remedies. Where economic loss is accompanied by
physical damage to person or other property, however,
the parties’ interests generally will be realized best
by the imposition of strict tort liability. If the
only loss is non-accidental and to the product itself,
or is of a consequential nature, the remedies
available under the UCC will govern and strict
liability and other tort theories will be unavailable.

Id. at 379-80, 694 P.2d at 209-10 (footnote omitted).

¶16 Under Salt River, the economic nature of the loss is

only one factor in a three-part test to determine whether tort

remedies will be available: a court must also consider whether

the defect was “unreasonably dangerous” and whether the loss

occurred in a “sudden, accidental manner.” Id. at 379, 694 P.2d

at 209. When these factors are present, Salt River allows a

plaintiff to recover in tort for purely economic loss. See id.

9
at 380-81, 694 P.2d at 210-11 (applying factors and holding

utility could seek tort recovery of damage to turbine unit even

if it was not a loss to “other property”).

¶17 Thus, in the products liability context, Salt River

declined to categorically bar tort recovery of economic losses.

Instead, the Court reasoned that, “[e]ach case must be examined

to determine whether the facts preponderate in favor of the

application of tort law or commercial law exclusively or a

combination of the two.” Id. at 380, 694 P.2d at 210. Applying

a narrow version of economic loss doctrine, Salt River held that

the commercial purchaser in that case could assert a products

liability claim against a commercial seller for economic losses

for which the contract disclaimed liability.

B.

¶18 This case involves alleged defects in a building

rather than a defective product. Many other courts, and the

parties here, have assumed that Arizona law also applies the

economic loss doctrine to construction defect cases. The only

opinion by this Court cited for this proposition is Woodward v.

Chirco Construction Co., 141 Ariz. 514, 687 P.2d 1269 (1984) — a

case decided a few months before Salt River.

¶19 Woodward, however, concerned the limitations period

for contract actions for breach of implied warranty, not the

preclusion of tort claims. In that case, a couple contracted

10
with a builder for the construction and purchase of a residence.

Id. at 515, 687 P.2d at 1270. After the closing, the soil

subsided and caused extensive damage to the home. Id. The

homeowners sued the builder alleging both negligence for failing

to conduct a soil study and breach of the implied warranty of

workmanlike performance and habitability. Id. The trial court

dismissed the negligence claim for lack of proof of the relevant

standard of care; it also dismissed the warranty claim as barred

by the statute of limitations. The court of appeals affirmed

the dismissal of the negligence claim but reversed the dismissal

of the contract claim, holding that the six-year limitations

period in A.R.S. § 12-548 applied. Id.

¶20 The builder petitioned for review, arguing that breach

of an implied warranty is actionable only in tort, which

generally has a two-year limitations period. See id. at 515,

687 P.2d at 1270. Rejecting this argument, this Court agreed

with other jurisdictions holding that a home purchaser may sue

both in contract for breach of the implied warranty and in tort

for the builder’s breach of the common law duty of care. Id. at

515-16, 687 P.2d at 1270-71. The Court stated:

For example, if a fireplace collapses, the purchaser
can sue in contract for the cost of remedying the
structural defects and sue in tort for damage to
personal property or personal injury caused by the
collapse. Each claim will stand or fall on its own; a
distinct statute of limitation applies to each.

11
Id. at 516, 687 P.2d at 1271.

¶21 Although some courts have construed this language as

approving the economic loss doctrine, Woodward did not do so.

The Court was not asked to address the doctrine and did not

discuss it. Moreover, when later applying the economic loss

doctrine in Salt River, the Court did not mention Woodward.

¶22 Nor can this Court’s remarks in Woodward about a

plaintiff’s potential claims in contract and tort be viewed as

implicitly endorsing the economic loss doctrine. Woodward

stated that it agreed with Cosmopolitan Homes, Inc. v. Weller,

663 P.2d 1041 (Colo. 1983), which allowed a subsequent purchaser

to assert negligence claims against a contractor for residential

construction defects. Woodward, 141 Ariz. at 516, 687 P.2d at

1271. Cosmopolitan Homes rejected the argument that claims for

recovery of economic loss sound exclusively in contract. 663

P.2d at 1044-45.2

¶23 In short, Woodward does not resolve whether the

economic loss doctrine should apply to construction defects.

Although several opinions by the court of appeals have concluded

2
Subsequent Colorado decisions have reaffirmed Cosmopolitan
Homes while declining to apply the economic loss doctrine to bar
claims for negligence in home construction. See, e.g., A.C.
Excavating v. Yacht Club II Homeowners Ass’n, Inc., 114 P.3d 862
(Colo. 2005). Since Cosmopolitan Homes, however, Colorado
courts have applied the doctrine in construction defect cases
not involving homes. See Town of Alma v. Azco Constr., Inc., 10
P.3d 1256, 1264 (Colo. 2000).

12
that the doctrine applies, those cases rely heavily on an

interpretation of Woodward that we today reject. See, e.g.,

Carstens, 206 Ariz. at 126 ¶¶ 11-12, 75 P.3d at 1084; Colberg v.

Rellinger, 160 Ariz. 42, 44, 770 P.2d 346, 348 (App. 1988);

Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 444-45, 690

P.2d 158, 163-64 (App. 1984).

¶24 Nor does the fact that the doctrine applies to product

defects necessarily establish that it should also apply to

construction defects. The economic loss doctrine may vary in

its application depending on context-specific policy

considerations. To determine whether the doctrine should apply

here, we must consider the underlying policies of tort and

contract law in the construction setting. Cf. Salt River, 143

Ariz. at 376, 694 P.2d at 206 (stating that purposes of tort and

contract law should determine which law applies in products

liability cases).

¶25 The contract law policy of upholding the expectations

of the parties has as much, if not greater, force in

construction defect cases as in product defect cases.

Construction-related contracts often are negotiated between the

parties on a project-specific basis and have detailed provisions

allocating risks of loss and specifying remedies. In this

context, allowing tort claims poses a greater danger of

undermining the policy concerns of contract law. That law seeks

13
to encourage parties to order their prospective relationships,

including the allocation of risk of future losses and the

identification of remedies, and to enforce any resulting

agreement consistent with the parties’ expectations. See, e.g.,

Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist., 881 P.2d

986, 993 (Wash. 1994).

¶26 Moreover, 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, see Woodward, 141 Ariz.

at 516, 687 P.2d at 1271, and other damages reasonably

foreseeable to the parties upon entering the contract. See

Higgins v. Ariz. Sav. & Loan Ass'n, 90 Ariz. 55, 63-64, 365 P.2d

476, 482-83 (1961) (adopting rule of Hadley v. Baxendale, 9

Exch. 341, 156 Eng. Rep. 145 (1854), for identifying damages

recoverable in contract).

¶27 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. These considerations have less force when parties to a

14
site-specific construction contract have allocated the risk of

loss and identified remedies for non-performance. Cf. Salt

River, 143 Ariz. at 376, 694 P.2d at 206 (noting that contract

law policy “is best served” by allowing “parties to limit the

redress of a purchaser who fails to receive the quality of

product he expected”). Moreover, although a homeowner’s

purchase of a mass-produced home might in some ways be analogous

to a consumer’s purchase of a product, even in this situation

there is less reason to preserve tort remedies for purely

economic loss. Arizona law allows home purchasers to bring

contract claims for breach of the implied warranty of good

workmanship and habitability even if they are not in privity

with the builder. See Richards v. Powercraft Homes, Inc., 139

Ariz. 242, 245, 678 P.2d 427, 430 (1984).3

¶28 Given these considerations, we conclude that 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.” Salt River, 143 Ariz. at 379, 694 P.2d at 209. We

3
In this respect, Arizona law differs from Colorado law.
The subsequent purchaser in Cosmopolitan Homes could not
maintain a contract action for breach of implied warranty
because Colorado law allows such claims only by first
purchasers. 663 P.2d at 1043. In this context, Cosmopolitan
Homes held the economic loss doctrine should not preclude
negligence claims by homeowners.

15
accordingly apply the economic loss doctrine and hold that a

contracting party is limited to its contractual remedies for

purely economic loss from construction defects.

¶29 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. See Green v. Snodgrass, 79 Ariz. 319, 322, 289 P.2d

191, 192 (1955) (noting that contract will control when it

specifies remedies in event of breach). But 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.

¶30 Applying the economic loss doctrine to construction

cases also requires that we discuss two other aspects of the

Salt River decision. First, Salt River identified certain

requirements for the waiver of tort remedies, which is a

separate question from whether the economic loss doctrine

applies. See 143 Ariz. at 375, 385, 694 P.2d at 205, 215.

Salt River’s requirements for an effective waiver do not

determine whether a party is limited to contractual remedies for

16
purely economic losses resulting from construction defects.

Instead, a party will be so limited unless the parties have

provided in their contract for tort remedies.

¶31 Salt River also outlined a three-factor test for

determining, on a case-specific basis, whether to apply the

economic loss doctrine to claims involving a defective product.

This approach allows tort recovery for purely economic losses if

they result from an “accident” that poses unreasonable risks of

harm to other property or persons. See Salt River, 143 Ariz. at

380-81, 694 P.2d at 210-11. This minority view has been

criticized as being too unpredictable and allowing non-

contractual recovery when a purchaser has only been deprived of

the benefit of the bargain. See East River S.S. Corp. v.

Transamerica Delaval, Inc., 476 U.S. 858, 869-70 (1986)

(refusing to apply Salt River-type approach to products

liability claim under admiralty law).

¶32 Whatever the wisdom of continuing to apply Salt

River’s three-factor test in products liability cases, we

decline to extend it to construction defect cases. The economic

loss doctrine appropriately applies in this context because

construction contracts typically are negotiated on a project-

specific basis and the parties should be encouraged to

prospectively allocate risk and identify remedies within their

agreements. These goals would be undermined by an approach that

17
allowed extra-contractual recovery for economic loss based not

on the agreement itself, but instead on a court’s post hoc

determination that a construction defect posed risks of other

loss or was somehow accidental in nature. Cf. Lincoln Gen. Ins.

Co. v. Detroit Diesel Corp., 293 S.W.3d 487, 492-93 (Tenn. 2009)

(noting similar concerns in adopting East River’s majority

approach in products liability); Restatement (Third) of Torts:

Products Liability § 21 & cmt. d (1998) (adopting East River

approach).

¶33 In sum, in the context of construction defects, we

adopt a version of the economic loss doctrine and hold 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.

C.

¶34 Consistent with the opinion of the court of appeals,

Owner argues that even if the economic loss doctrine applies to

construction defect cases against those who construct buildings,

it should not apply to professional negligence claims based on

an architect’s design.

¶35 Owner argues that applying the economic loss doctrine

would conflict with Donnelly Construction Co. v.

18
Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984).4 In

Donnelly, a contractor relied on an architect’s plans to prepare

a bid for improvements to a school complex. Id. at 185, 677

P.2d at 1293. After starting work, the contractor found the

plans were in error, which increased the contractor’s

construction costs. Id. at 185-86, 677 P.2d at 1293-94. The

contractor later sued the architect to recover the increased

costs, asserting claims for negligence, negligent

misrepresentation, and breach of implied warranty. Id. at 186,

677 P.2d at 1294. The architect argued that, because it had not

entered into a contract with the contractor, it owed no duty and

could not be liable on any of the claims. Id. at 187, 677 P.2d

at 1295.

¶36 This Court held that lack of privity did not bar the

claims. Id. at 187-89, 677 P.2d at 1295-97. With regard to the

negligence claim, the Court noted that “[d]esign professionals

have a duty to use ordinary skill, care, and diligence in

rendering their professional services,” and that “an action in

negligence may be maintained upon the plaintiff’s showing that

the defendant owed a duty to him, that the duty was breached,

and that the breach proximately caused an injury which resulted

4
We subsequently rejected Donnelly’s reliance on
foreseeability to determine the existence of a duty of care for
purposes of tort law, see Gipson v. Kasey, 214 Ariz. 141, 144 ¶¶
14-15, 150 P.3d 228, 231 (2007), an issue unrelated to the
economic loss doctrine.

19
in actual damages.” Id. at 187, 677 P.2d at 1295. The Court

further explained, “[w]e only hold here that design

professionals are liable for foreseeable injuries to foreseeable

victims which proximately result from their negligent

performance of their professional services.” Id. at 188, 677

P.2d at 1296.

¶37 Donnelly thus held that a contractor had stated a

claim for negligence to recover economic losses based on an

architect’s allegedly defective design. The architect did not

argue that the contractor should be limited to its contractual

remedies for economic loss; instead, the architect argued that

the absence of a contract precluded all liability. Without

discussing the economic loss doctrine, Donnelly correctly

implied that it would not apply to negligence claims by a

plaintiff who has no contractual relationship with the

defendant.

¶38 Although some courts have applied the doctrine in that

context, see, e.g, Carstens, 206 Ariz. at 127 ¶ 17, 75 P.3d at

1085; Davencourt at Pilgrims Landing Homeowners Ass’n v.

Davencourt at Pilgrims Landing, LC, 221 P.3d 234, 243 (Utah

2009), we decline to do so. The principal function of the

economic loss doctrine, in our view, is to encourage private

ordering of economic relationships and to uphold the

expectations of the parties by limiting a plaintiff to

20
contractual remedies for loss of the benefit of the bargain.

These concerns are not implicated when the plaintiff lacks

privity and cannot pursue contractual remedies. See Vincent R.

Johnson, The Boundary-Line Function of the Economic Loss Rule,

66 Wash. & Lee L. Rev. 523, 556 (2009) (concluding that when

“established tort principles entitle a third party to protection

under tort law for economic loss, an agreement to which the

third party never assented should not be permitted to vitiate

his or her right to tort remedies”).

¶39 Rather than rely on the economic loss doctrine to

preclude tort claims by non-contracting parties, courts should

instead focus on whether the applicable substantive law allows

liability in the particular context. For example, whether a

non-contracting party may recover economic losses for a

defendant’s negligent misrepresentation should depend on whether

the elements of that tort are satisfied, including whether the

plaintiff is within the limited class of persons to whom the

defendant owes a duty. Cf. Donnelly, 139 Ariz. at 189, 677 P.2d

at 1297 (recognizing that defendants may be liable for pecuniary

losses incurred by certain third parties based on defendant’s

negligent misrepresentations); Restatement (Second) of Torts §

552 (1977) (same).

¶40 Owner also argues that the economic loss doctrine

should not apply because Architect breached duties imposed by

21
law. Although architects have common-law duties of care, this

case illustrates that it is often difficult to draw bright lines

between obligations imposed by law and those arising from

contract. Architect’s duties with regard to Owner’s project

existed only because of the contract between the parties.

Architectural contracts generally include compliance with

applicable building codes and other legal design requirements as

an implied term. See Howard v. Usiak, 775 A.2d 909, 916 (Vt.

2001). Owner here alleges that Architect designed a building

that did not conform to certain requirements of the federal Fair

Housing Act; the complaint alleges that this conduct both

breached Architect’s contractual obligations and constituted

professional negligence. Attempting to label claims by

distinguishing between contractual and extra-contractual duties

is an unduly formalistic approach to determining if plaintiffs

like Owner should be limited to their contractual remedies for

economic loss.5

¶41 Nor should the professional status of architects

determine whether the economic loss doctrine applies in this

5
Courts have looked to the source of duties in determining
whether a tort action “arises out of contract” and thus
qualifies for an award of attorney fees under A.R.S. § 12-341.01
(2003). Barmat v. John and Jane Doe Partners A-D, 155 Ariz.
519, 523, 747 P.2d 1218, 1222 (1987). Rather than extend
Barmat’s approach here, we think application of the economic
loss doctrine should rest on explicit consideration of the
relevant tort and contract law policies. See Salt River, 143
Ariz. at 375-76, 694 P.2d at 205-06.

22
context. The purposes of the doctrine are served by applying it

to contracts entered by architects and design professionals, as

other courts have recognized. See, e.g., Terracon Consultants

W., Inc. v. Mandalay Resort Group, 206 P.3d 81, 83, 89 (Nev.

2009) (applying economic loss doctrine to negligence claims

against design professionals). Moreover, the fact that an

architect, as a professional, has legally imposed duties of care

does not displace the general policy concerns that parties to

construction-related contracts should structure their

relationships by prospectively allocating the risks of loss and

identifying remedies.

¶42 Owner further contends that applying the economic loss

doctrine to architects would be contrary to public policy

because it would reduce their incentives to properly design

buildings. Limiting the parties to their contractual remedies

for economic losses related to design defects does not, however,

eliminate incentives for due care. The doctrine instead limits

a party to contractual remedies when the injury is solely

economic (including damage to the property that is the subject

of the contract), but allows tort recovery if there is also

physical injury to persons or other property. This is no more

contrary to public policy than are contractual provisions

limiting a design professional’s liability to the amount of fees

received. Cf. 1800 Ocotillo, LLC v. WLB Group, Inc., 219 Ariz.

23
200, 202-04 ¶¶ 9-21, 196 P.3d 222, 224-26 (2008) (rejecting

argument that contractual liability limits in design

professional contracts are contrary to public policy).

¶43 In a related argument, Owner maintains that architects

should be treated differently than contractors for purposes of

the economic loss doctrine because Arizona statutes regulate

architects to protect the public. Contractors and architects

are governed by different statutory requirements and

administrative regulations. Compare A.R.S. §§ 32-1101—1107

(2008) (regulating contractors), with A.R.S. §§ 32-101—112, 121—

131, 141—152 (2008 & Supp. 2009) (regulating architects). But

this does not preclude applying the economic loss doctrine to

claims against architects.

¶44 More relevant here are certain Arizona statutes

governing actions involving construction defects. These

statutes do not distinguish between contractors and architects,

although they do draw distinctions that in some ways parallel

the economic loss doctrine. For example, the statute of repose

in A.R.S. § 12-552 generally provides that actions based in

contract involving the design, engineering, or construction of

improvements to real property must be brought within eight

years. The statute applies to architects as well as

contractors, but like the economic loss doctrine it does not

apply to actions involving personal injury. Id. § 12-552(D).

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Similarly, A.R.S. § 12-1363 (Supp. 2009) does not distinguish

between architects and contractors in requiring notice and an

opportunity to repair before plaintiffs can bring certain

actions related to the “design, construction, condition or sale”

of a dwelling. Id.; § 12-1361(7) (Supp. 2009) (defining

“seller” as any person engaged in the business of designing,

constructing, or selling dwellings). This statute, like the

economic loss doctrine, does not apply to claims involving

personal injury or damage to other property. See A.R.S. § 12-

1366(A)(2) & (4) (Supp. 2009); cf. A.R.S. § 32-1159 (2008)

(barring certain indemnity provisions in both construction

contracts and contracts for architect-engineer professional

services). In light of these provisions, we are not persuaded

by Owner’s arguments that Arizona statutes require

distinguishing architects from contractors for purposes of the

economic loss doctrine.

¶45 Finally, Owner argues that applying the economic loss

doctrine to architects would imply that it also applies to other

claims for professional negligence, such as claims for legal

malpractice. This argument is not compelling. Lawyers owe

fiduciary duties to their clients and generally are barred from

entering agreements that prospectively limit their liability.

See Ariz. R. Sup. Ct. 42, ER 1.8(h)(1); Dobbs, supra, at 727

(arguing that economic loss doctrine should not apply to claims

25
against lawyers and fiduciaries because “[w]hen you retain

someone for the express purpose of being on your side, he cannot

rightly contract to be your adversary instead or to be on your

side but free to be negligent”).

¶46 We do not hold that the economic loss doctrine applies

to architects because they are professionals, but instead

because the policy concerns that justify applying the doctrine

to construction defect cases do not justify distinguishing

between contractors on the one hand and design professionals,

including architects, on the other. Our adoption of the

economic loss doctrine in construction defect cases reflects our

assessment of the relevant policy concerns in that context; it

does not suggest that the doctrine should be applied with a

broad brush in other circumstances. Cf. Ellen M. Bublick,

Economic Torts: Gains in Understanding Losses, 48 Ariz. L. Rev.

693, 701 (2006) (noting that not all economic loss cases invoke

the same interests or call for the same treatment).

III.

¶47 Because the court of appeals found the economic loss

doctrine inapplicable to Owner’s negligence claim against

Architect, we vacate the opinion below. In ruling on the motion

to dismiss, the superior court did not apply the version of the

economic loss doctrine we adopt today. The complaint refers to

Owner’s contract with Architect, but a copy of the contract is

26
not attached and is not otherwise included in the record.

Although it seems unlikely that the contract would preserve tort

remedies for purely economic loss, we will not make assumptions

about its provisions. Instead, it is appropriate to reverse the

judgment for Architect and to remand this case to the superior

court for further proceedings.

_____________________________________
W. Scott Bales, Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Andrew D. Hurwitz, Vice Chief Justice

_____________________________________
Michael D. Ryan, Justice

_____________________________________
A. John Pelander, Justice

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