[co-author: Maxwell Herath]

Clarifying its case law, Arizona’s Supreme Court further limited when foreseeability can establish a duty for tort liability in its recent Cal-Am opinion. Key for contractors and design professionals, while the decision could restrict certain causes of action for project and property owners, Cal-Am does not shield design professionals from legal actions for their negligence. Instead, it clarifies (1) who is the appropriate party to sue if there are purely economic damages, and (2) what kind of claim to bring.

Cal-Am featured a developer (essentially acting as an owner) suing the project’s design professional under a negligence theory. It did so at least in part because there was no direct contractual relationship between the two. Importantly, the developer sued the design professional (Edais) only for economic damages (i.e. no one was physically harmed).

Generally, a negligence claim requires (1) a duty demanding a defendant conform to a standard of care, (2) a breach of that standard, (3) a connection between a defendant’s conduct and the injury, and (4) actual damages. Thus, proving that a duty exists between a defendant and the injured plaintiff is integral to a negligence claim. Under the old framework described in Donnelly, design professionals in Arizona owed this duty of care for foreseeable injuries to foreseeable victims. This meant that potential liability for design professionals extended not only to the party who contracted with them, but to other parties such as property or project owners. However, after Donnelly, the Arizona Supreme Court in Gipson v. Kasey rejected the use of foreseeability as a factor in determining duty.

With foreseeability out and applying Gipson’s duty framework, the Cal-Am Court determined there are two avenues for a plaintiff to establish duty: special relationships or public policy. Special relationships that give rise to a duty in negligence claims include a legally recognized relationship formed by contract, a familial association, or a joint undertaking. Arizona already recognizes many of these relationships such as landowner-invitee, landowner-licensee, and employer-employee. The Court in Cal-Am rejected the idea that, absent a binding contract, some special relationship exists between design professionals and project owners that establishes a duty. According to the Court, a duty based on a special relationship requires a preexisting relationship, which it did not find existed between the two parties in the case. Cal-Am, effectively the project owner, argued that Donnelly recognized a special relationship. But with foreseeability no longer the standard, that argument was rejected. Thus, the Court found that no special relationship existed giving rise to a duty. Likewise, the idea that a joint undertaking established a special relationship was rejected on the grounds that privity between two parties requires that one party undertake conduct directly with or for another party. However, in this case, the defendant (Edais) had a contract with the main contractor (VB Nickle) and not with the project owner (Cal-Am). Thus, the Court found that there was no joint-undertaking between Cal-Am and Edais.

In the absence of a special relationship, public policy reflected in state and federal statutes can establish a duty. The primary source for public policy duty is derived from Arizona’s state statutes. Accordingly, for a statute to create a duty, (1) an injured plaintiff must be within a class of persons the statute was designed to protect, and (2) the harm must be of the type the statute sought to protect against. Cal-Am argued that various statutes and administrative regulations governing qualification standards for design professionals established a duty. The statutes Cal-Am relied on affect design professionals, but the statutes’ purpose and provisions focus on protecting the safety, health, and welfare of the public. Here, the Court took aim at the second prong and reasoned that the statutes were not designed to protect parties like Cal-Am from purely economic injuries. Instead, the statutes’ purpose is to protect the public who might enter a building or structure and suffer physical injury from inadequate design. The Court further rejected Cal-Am’s public policy arguments based on Arizona common law and the Restatement (Third) of Torts.

However, the Arizona Supreme Court did not leave owners like Cal-Am devoid of remedy against design professionals. When damages are purely economic, parties can rely on breach of contract remedies for relief (if a contract between the parties exist). In general, when a project owner is economically damaged due to a subcontractor’s negligence, it is viewed simply as a failure in the performance of obligations to its contractual partner, not as a breach of duty in tort. In this case, Cal-Am may have been able to sue VB Nickle, the general contractor to obtain relief, and VB Nickle could then look to the downstream party it had a contract with (Edais) in order for VB Nickle to obtain relief.

Takeaways

There are several takeaways from the decision in Cal-Am. It’s a reminder of the importance of the contractual relationship as Cal-Am may have side stepped this legal dispute if it had either entered into contract directly with Edais, or if Cal-Am had sued VB Nickle. Additionally, this case does not foreclose a tort claim as it is still possible to bring a tort claim when there is also physical injury caused from the negligent third-parties’ services or work. This means that project and property owners could still be protected against negligent services or work performed by third parties whom they are not in contract with regarding personal injury or wrongful death claims.