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Economic Loss Doctrine May Not Bar Claims by Secondhand Purchasers against Builders


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Crump

By Robert Crump

New buyers seek damages for defective construction
In Arizona, a builder constructed and sold a home in 2000. The initial purchaser then sold to new buyers in 2003. Naturally, because the new buyers did not purchase the home directly from the builder, the new buyers only entered into a contract with the previous purchaser.

In 2009, the new buyers noticed some irregularities in the home’s hillside retaining wall. They hired an engineer who determined that the wall and home site had been constructed in a dangerously defective manner. When they learned of the hazard, the buyers notified the builder, hoping he would cover the cost of repair. The builder responded that he was no longer responsible for any construction defects in the ten-year-old home.

When they encountered the builder’s unwillingness to cooperate and cover repairs on the property, the buyers brought a suit against the builder. Their claims included consumer fraud, fraudulent concealment and negligent nondisclosure, among others. However, the trial court dismissed all of the claims, holding the builder had never made any representations to the buyers directly and the consumer fraud and fraudulent concealment claims were not actionable. The main point of contention came up regarding the remaining negligence claims. The trial court held that the negligence claims were barred by the economic loss doctrine, which states that a purchaser cannot recover from a manufacturer under a tort theory, such as negligence, when the loss is purely economic. Undeterred, the buyers appealed.  

Ultimately, the Arizona Supreme Court reviewed the case, citing the importance of clarifying the economic loss doctrine. Generally, the doctrine prohibits certain tort actions seeking monetary damages that did not arise from personal injury to the plaintiff. More specifically, the doctrine bars recovery of pecuniary or commercial damage, including any decreased value or repair costs, for a product or property that is itself the subject of a contract between the two parties.

Under this standard, the Arizona Supreme Court held that the doctrine did not apply to the buyers, and the Court refused to extend the doctrine to non-contracting parties. The Court reasoned that the economic loss doctrine did not bar their negligence claims because they had not entered into a contract with the builder.  The reasoning behind the decision was that the economic loss doctrine exists because a contracting party is limited to its contractual remedies for economic losses arising from construction defects. In contrast, a non-contracting party, such as the subsequent purchasers in this case, did not have the same remedies available. Therefore, the Court held subsequent purchasers of a property can bring negligence claims against a builder.

Practice points
The economic loss doctrine serves a number of purposes, such as encouraging the ordering of economic relations, protecting the expectations of contracting parties, ensuring the adequacy of contractual remedies, and promoting accident-deterrence. However, the doctrine is not designed to act as a barrier to tort claims that are otherwise permitted by the law. If there is no contract between the parties in a dispute, there is no boundary-line function to be performed by the economic loss doctrine. Building professionals in Arizona must take heed of this decision, as they may now be exposed to lawsuits from subsequent purchasers alleging negligent construction and will not be protected by the economic loss doctrine.

 

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