Analysis of Arizona’s Economic Loss Rule

Generally, one may recover in tort for negligently caused property damage. See Restatement (Second) of Torts ? 281 (1965) (invasion of protected interest of another element of negligence action); see also Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 445, 690 P.2d 158, 164 (App. 1984) (“‘Property interests . . . have generally been found to merit protection from physical harm.'”), quoting Crowder v. Vandendeale, 564 S.W.2d 879, 882 (Mo. 1978).

However, when the property damaged is the subject of a contract or warranty, a typical feature of product liability and defective construction cases, the question arises whether the plaintiff’s claims, if any, should sound in contract or tort. E.g., Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 375, 694 P.2d 198, 205 (1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc., 210 Ariz. 403, 111 P.3d 1003 (2005); Woodward v. Chirco Constr. Co., 141 Ariz. 514, 515, 687 P.2d 1269, 1270 (1984).

This issue is resolved on a case-by-case basis with the court analyzing the purposes of the respective bodies of law and applying whichever law is most appropriate. Salt River, 143 Ariz. at 375-76, 694 P.2d at 205-06; Valley Forge Ins. Co. v. Sam’s Plumbing, LLC, 220 Ariz. 512, 514 (Ariz. Ct. App. 2009).

Contract law protects the expectation that the parties will receive the benefits of their bargain and encourages the efficient private ordering of liabilities by allowing parties to negotiate and distribute their respective responsibilities, while tort law promotes safety and protects personal and property rights by imposing a baseline duty of care. See id.; Carstens, 206 Ariz. 123, P 10, 75 P.3d at 1084. Accordingly, in the context of property damage, contract law focuses on standards of quality as defined by the contracting parties; tort law on the objective reasonableness of certain conduct and the actual harm it causes. Carstens, 206 Ariz. 123, P 10, 75 P.3d at 1084; Valley Forge Ins. Co. v. Sam’s Plumbing, LLC, 220 Ariz. 512, 514 (Ariz. Ct. App. 2009).

With these principles in mind, the Arizona Supreme Court has directed Arizona courts to consider three non-dispositive factors to determine whether tort or contract law should apply to a particular claim: (1) the nature of the defect causing loss, (2) how the loss occurred, and (3) “the type of loss for which the plaintiff seeks redress.” Salt River, 143 Ariz. at 376, 694 P.2d at 206. The first factor turns on whether quality or safety concerns are primarily implicated. See id. at 376-77, 694 P.2d at 206-07. The second factor looks to whether the loss results from a slow deterioration or a sudden accident or calamity. See id. at 377-78, 694 P.2d at 207-08.

If damage occurs suddenly and accidentally and the defect poses an unreasonable risk of danger to people or other property, the claim will sound in tort, even if, as in Salt River, the only property damaged is the defective product itself. See id; Valley Forge Ins. Co. v. Sam’s Plumbing, LLC, 220 Ariz. 512, 514 (Ariz. Ct. App. 2009). In the Valley Forge case, the Arizona Court of Appeals found that there was no reason to bar Valley Forge’s tort action under the economic loss rule because the work done by the contractor not only fell below the quality standards specified in the contract, but the work presented an extreme risk of danger to everyone and everything around the subject piping.

The Arizona Supreme Court provided a list of factors, not a bright-line test, for determining whether to apply tort or contract law to a given situation when property has been damaged. 143 Ariz. at 376, 379-80, 694 P.2d at 206, 209-10 (“Each 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.”). And Carstens overlooks that one of the factors articulated by the court as relevant to a determination of whether a property damage claim sounds in tort is the dangerousness of the defect. Salt River, 143 Ariz. at 376, 694 P.2d at 206.

The public policy goals of the economic loss rule is to assure that contract law does not “drown in a sea of tort” and to encourage parties to efficiently negotiate the distribution of potential liabilities arising from their contractual relationships. Delaval, 476 U.S. at 866. But, as our supreme court’s extensive discussion of the problem in the context of products liability aptly demonstrates, the law of tort also pursues important societal goals. Salt River, 143 Ariz. at 376-78, 694 P.2d at 206-08 (emphasizing role of tort law in protecting public and “preventing accidents by deterring the distribution of unsafe products”).

In the Flagstaff decision, the Arizona Supreme Court stated that, 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). This Flagstaff decision, however, was completely devoid of any analysis with respect to contracts entered into by an unlicensed contractor through the use of fraud (i.e. consumer fraud).