Economic Loss Doctrine: Arizona Courts are Chinking Away at the Shield – Starting with Design Professionals and Fiduciaries

Pamela Kingsley,

Often misunderstood by state and federal courts (and lawyers), the Economic Loss Doctrine (the “Doctrine”), as enunciated in 2003, precludes an aggrieved party from recovering economic damages in tort unless accompanied by physical harm in the form of personal injury or secondary property damage.Its purpose has been to distinguish contract claims (with only pecuniary injury) from those that fall within tort principles.Courts have relied on the Doctrine to distinguish between tort, or “duty based” recovery, and contract, or “promised based” recovery.Purely economic losses resulting from contract are not recoverable under tort claims.

In Arizona, the Doctrine generally has been applied only in product liability and construction defect cases.However, this Doctrine has been raised as a defense for years in other types of cases such as professional negligence, breach of fiduciary duty, fraud, and employment.Consequently, courts have struggled in allowing the Doctrine as a defense to various types of claims for economic damage resulting from the tortious conduct of parties engaged in a contractual relationship.

Recently, however, the Arizona Court of Appeals has addressed the Doctrine through a series of opinions, including Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc., decided on April 20, 2009.The Court held that the Doctrine did not preclude the claims asserted for professional negligence against a licensed architect.It reasoned that Arizona law imposes special duties as a matter of public policy on licensed professionals to all persons within the foreseeable range of harm, regardless of whether there is a contract.Therefore, breaches of those special duties are generally recognized as torts.

The reasoning is that the essential nature of the action to recover for the breach is not one arising out of contract, but rather one arising out of tort—breached legal duties imposed by law.The Court also recognized that actions against attorneys, accountants, and other professionals are permitted for negligence in performing their services despite the existence of a contract.

In an unpublished decision, the Ninth Circuit Court of Appeals recently reviewed Arizona law to reverse a district court’s dismissal of claims against directors of a corporation that they had acquiesced in their corporation’s misdeeds.The Court observed that there was no basis for believing the law would allow a broader application of the Doctrine beyond product liability and construction defect cases.It recognized, however, that if there were proof that there had been bargaining and risk allocation in the contract establishing the fiduciary relationship, claimants could be restricted to contract claims for damages.

Through these and other decisions, appellate courts applying Arizona law have begun to curtail the application of the Doctrine to preclude otherwise valid tort claims against professionals and fiduciaries.By allowing claimants to seek tort based damages against professionals and fiduciaries with whom they have contractual relationships, claimants are not limited in their recovery of damages to their contract expectations, but are entitled to seek damages resulting from injuries caused by the breaches of legal duties owed to them.

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