not to the contractors.One consequence of the privity require-

ment was to force Arizona contractors tolook to the owner for redress. Rather thansue the architect in tort for a defectivedesign, for example, the general contractorwould sue the owner in contract forbreaching its implied warranty to provideadequate plans and specifications.2 Theowner could then turn to the architect forreimbursement of damages arising out ofthe architect’s defective plans.

The privity rule, however, was aban-doned in Donnelly Construction Co. v.Oberg/Hunt/Gilleland.3 There, theArizona Supreme Court expressly heldthat the lack of privity between a contrac-tor and an architect did not bar an actionagainst the architect for negligent design.According to the Court, the lack of privitydid not per se mean that the contractor’sharm was unforeseeable to the architect.Rather, the Court found it “foreseeable inthe instant case that [the general contrac-tor], hired to follow the plans and specifi-cations prepared by [the architect], wouldincur increased costs if those plans andspecifications were in error.”4

Thus, under Donnelly, contractors inArizona may pursue claims directly againstdesign professionals. The court did notexplicitly decide whether contractors mayrecover purely economic damages.

Arizona Has Adopted the Economic Loss DoctrineThe so-called economic loss doctrine barsrecovery in tort when a plaintiff claimspurely economic damages. Its purpose isto maintain the distinction between thoseclaims properly brought in contract fromthose brought in tort. Or, to put it slight-ly differently, it is “founded on the theorythat parties to a contract may allocate theirrisks by agreement and do not need thespecial protection of tort law to recover fordamages caused by a breach of contract.”5

Shortly after the Donnelly decision, theArizona Supreme Court adopted the eco-nomic loss rule in Salt River Project v.Westinghouse Elec. Corp.6 There, the Courtidentified three factors as controlling when

he scenario is perhaps all toofamiliar on large constructionprojects.

Errors in the project design,an engineer’s unreasonablerejection of materials or anarchitect’s delay in approving

submittals increase the contractor’s cost ofconstruction. The general contractor canlook to the owner for compensation, butthe owner–contractor agreement oftencontains provisions (such as a “no damagefor delay” clause) limiting the contractor’srecovery. Can the contractor circumventthe owner and recoup its full costs directlyfrom the design professional in tort?

There has been a flood of recent deci-sions across the country analyzing thatissue. Unfortunately, quantity has not cre-ated clarity—the case law is hard to recon-cile and often contradictory.

For the most part, the confusion stemsfrom the convergence of two unrelatedlegal trends:• the general deterioration of the privity

requirement, which has encouragedcontractors to sue design professionalsdespite the lack of a contract betweenthem.

• the judicial desire to prevent tort prin-ciples from undermining contractualarrangements, which generally has ledto limitations on claims against designprofessionals for economic losses.In short, one trend has liberalized the

requirements for suing design profession-als, and the other threatens to eliminatesuch suits altogether.

Arizona’s Abolishment of the Privity RequirementHistorically, the absence of contractualprivity doomed cases brought by Arizonacontractors against architects and engi-neers. In Blecick v. School Dist.,1 for exam-ple, the court held that an architecturefirm was not liable in tort to the projectcontractors for the preparation of defec-tive plans and specifications. Due to thelack of privity, the court concluded thatthe architects’ performance obligationswere owed solely to the school district,

24 A R I Z O N A AT T O R N E Y F E B R U A R Y 2 0 0 3

a plaintiff is limited to contractual reme-dies:

• the nature of the defect• the manner in which the loss occurred• the type of loss or damageIf the only loss is non-accidental or a

party’s contract expectations are frustrat-ed, then the remedy is in contract; where aparty is physically harmed due to a suddenoccurrence—like an explosion—the reme-dy is in tort.7

Since adopting the economic loss rule,Arizona appellate courts have not directlyaddressed whether claims by contractorsagainst design professionals for economicdamages (the issue presented in Donnelly)are affected. Other courts from around thecountry, however, have addressed thequestion, with three distinct lines of casesemerging:1. cases where the economic loss rule

always bars contractors’ claims for eco-nomic damages

2. cases where the rule sometimes barsbased on the relationship between thecontractor and the design professional

3. cases where the rule does not bar suchclaims

1. Claims Always BarredIn a number of cases, the economic lossrule was invoked to bar claims by contrac-tors against design professionals.8

The rationale of these cases is generallythat the parties on a construction projectallocate risks associated with the workthrough an intricate set of contracts.Therefore, contract law, not tort law, isbest suited to measuring those risks. Inother words, even though a contractor hasno direct contract with the design profes-sional, the contractor still has “the oppor-tunity to allocate the risks associated withthe costs of the work when it contractedwith the [owner].”9

Curiously, these cases also say that suchclaims would be allowed if there was privi-ty of contract between the architect andthe contractor.10 This is counterintuitive,to say the least, because the very peoplewho are most likely to allocate risks by

T

W W W. A Z B A R . O R G

contract—the parties to a contract—areapparently able to sue in tort.

In any event, if the concern is pre-serving the sanctity of contractual obli-gations on a construction project, thenthe contractor probably will not be ableto circumvent a no-damages-for-delayclause by suing the architect directly.

2. Claims Sometimes BarredOther cases use a case-by-case approachto determine when application of theeconomic loss rule is appropriate. Thesecases will apply the economic loss ruleunless the parties are in privity or therelationship between the contractor andthe designer approaches privity or isotherwise “special.”11

To determine whether a sufficientnexus exists between the designer andcontractor, these courts “look to thedegree of control the design profession-al exerted over the project and theamount of interaction between thedesign professional and the thirdparty.”12 Direct supervision of the con-tractor’s work usually is sufficient to cre-ate a privity-like nexus. By contrast,merely selling a design that is ultimatelybuilt by a contractor is not.

3. Claims Not BarredFinally, a number of cases have held thatthe economic loss rule does not barclaims by contractors against designprofessionals.13 The rationale of thesecases focuses on the interdependence ofthe various parties on a constructionproject and the design professional’scontrol over the project. As the FloridaSupreme Court put it, “Altogether toomuch control over the contractor neces-sarily rests in the hands of the supervis-ing architect for him not to be placedunder a duty imposed by law to performwithout negligence his functions as theyaffect the contractor.”14

These cases also point to Section 552of the RESTATEMENT (SECOND) OF

TORTS, which says:One who, in the course of hisbusiness, profession or employ-

25F E B R U A R Y 2 0 0 3 A R I Z O N A AT T O R N E Y

EconomicDamage

Claims Against Design

Professionals

stillVIABLE

BY BARRY WILLITS

26 A R I Z O N A AT T O R N E Y F E B R U A R Y 2 0 0 3 W W W. A Z B A R . O R G

ment, or in any other transaction inwhich he has a pecuniary interest,supplies false information for theguidance of others in their businesstransactions, is subject to liability forpecuniary loss caused to them bytheir justifiable reliance upon theinformation, if he fails to exercisereasonable care or competence inobtaining or communicating theinformation.15

Significantly, the Donnelly court quotedSection 552 with approval, implying that—at least at that time—claims for economiclosses were not barred in Arizona.

The Future is UnclearIf there is an emerging consensus, it seemsto be that damages for purely economicloss cannot be recovered by contractorsagainst design professionals in the absenceof privity or a privity-like relationship. Still,in Arizona, the lack of privity does notappear to be an obstacle so long asDonnelly remains good law.

And Donnelly is as alive as ever. Lastyear, for example, Arizona courts expand-ed Donnelly into the legal services contextby holding that a lack of privity did notprevent a non-client from suing a lawyer.16

In fact, the Arizona Supreme Court wrote,“If design professionals cannot escape lia-bility to foreseeably injured third partieswho, although lacking privity, are harmedby a designer’s negligence, we cannot seewhy lawyers should not likewise be held toa similar standard.”17

Thus, at least for now, the economicloss rule appears unlikely to significantlylimit claims by contractors against designprofessionals for economic injuries.

Barry Willits is a member of HoldenBrodman PLC. His practice, like his firm’s,focuses on commercial disputes arising out ofconstruction projects.

1. 406 P.2d 750 (Ariz. Ct. App. 1965).2. See Chaney Building Co. v. City of Tucson, 716

P.2d 28, 31 (Ariz. 1986); Kubby v. CrescentSteel, 466 P.2d 753 (Ariz. 1970).

3. 677 P.2d 1292 (Ariz. 1984).4. Id. at 1296.

endnotes

27F E B R U A R Y 2 0 0 3 A R I Z O N A AT T O R N E YW W W. A Z B A R . O R G

5. Rissler & McMurry Co. v. Sheridan AreaWater Supply Bd., 929 P.2d 1228, 1235 (Wyo.1996).

6. 694 P.2d 198 (Ariz. 1984).7. See also Apollo Group, Inc. v. Avnet, 58 F.3d

477 (9th Cir. 1995) (construing Arizona lawto bar a purchaser’s negligent misrepresenta-tion claim against a seller; the claim essentiallyamounted to frustrated contract expectations);Colberg v. Rellinger, 770 P.2d 346 (Ariz. Ct.App. 1988) (purchaser’s tort claims againstseller barred).

8. Fireman’s Fund Ins. Co. v. SEC Donohue, Inc.679 N.E.2d 1197 (Ill. 1997) (involving claimby subcontractor); Spancrete, Inc. v. Frazier &Assocs., 630 So.2d 1197 (Fla. Dist. Ct. App.1994) (claim by subcontractor); Fleischer v.Hellmuth Obata & Kassabaum, 870 S.W.2d832 (Mo. Ct. App. 1993) (claim by construc-tion manager against architect); Tomb &Assocs., Inc. v. Wagner, 612 N.E.2d 468 (OhioCt. App. 1992) (claim by general contractor);Berschauer/Phillips v. Seattle School Dist., 881P.2d 986 (Wash. 1994) (claim by general con-tractor); Rissler & McMurry Co., 929 P.2d at1228 (claim by general contractor).

9. Rissler & McMurry Co., 929 P.2d at 1235.10. See Fleischer, 870 S.W.2d at 836–837.11. Ohio Plaza Assocs., Inc. v. Hillsboro Assocs.,

1998 WL 394370 (Ohio Ct. App. 1998)(designer did not have sufficient nexus to sub-sequent purchaser of shopping center);Clevecon v. Northeast Ohio Regional SewerDist., 628 N.E.2d 143 (Ohio Ct. App. 1993)(architect’s participation in project sufficientto create a privity-like nexus with contractor);Foster Wheeler Enviresponse, Inc. v. FranklinCounty Convention Facilities Auth., 621N.E.2d 410 (Ohio 1993) (because contractorhad a wide range of interactions with thedesigner, it could maintain a tort suit for eco-nomic damages); Griffin Plumbing &Heating v. Jordan, 463 S.E.2d 85 (S.C. 1995)(engineer’s participation in project created a“special relationship” to contractor).

12. Ohio Plaza Assocs., 1998 WL 394370 at *5.13. Eastern Steel Constructors, Inc. v. City of

Salem, 549 S.E.2d 266 (W. Va. 2001); Jim’sExcavating Serv. v. HKM Assocs., 878 P.2d248 (Mont. 1994) (claim for negligent designand negligent supervision of project). But seeDebcon, Inc. v. City of Glasgow, 28 P.3d 478(Mont. 2001) (designer did not owe duty tounsuccessful bidder on public works project);A.R. Moyer, Inc. v. Graham, 285 So.2d 397(Fla. 1973).

14. A.R. Moyer, Inc., 285 So.2d at 401.15.Emphasis added; but see RESTATEMENT

(SECOND) OF TORTS § 766C (“One is notliable to another for pecuniary harm notderiving from physical harm to the other, ifthat harm results from the actor’s negligently… interfering with the other’s performance ofhis contract or making the performance moreexpensive or burdensome”).

16. Paradigm Ins. Co. v. Langerman Law Offices,P.A., 24 P.3d 593 (Ariz. 2001); Kremser v.Quarles & Brady, L.L.P., 36 P.2d 761 (Ariz.Ct. App. 2002).

17. Paradigm Ins. Co., 24 P.3d at 601.