Flagstaff Affordable Housing LP v. Design Alliance, Inc.
223 P.3d 664, 2010 Ariz. LEXIS 11 (Ariz. Feb. 12, 2010)

In 1995, the Owner of a low income housing project, Flagstaff Affordable Housing Limited Partnership contracted with Design Alliance, Inc. (“Architect”) for the design of the Project. The design had to comply with the Federal Fair Housing Act’s (“FFHA”)accessibility guidelines. The Owner also contracted with Butte Construction Company (“Contractor”) for the construction of the apartments. The Project was completed in 1996.

In 2004, HUD filed a complaint against the Owner alleging the apartments violated FFHA accessibility guidelines. HUD and the Owner settled, and the Owner subsequently commenced an action against the Architect and the Contractor, alleging they breached their respective contracts and acted negligently. The Contractor was later dismissed from the case.

The Architect moved to dismiss Owner’s complaint arguing, among other things, that the contract claim was barred by the statute of repose and that the negligence claim should be dismissed because the economic loss doctrine precludes tort recovery of economic losses in the ‘construction defect setting’. The Owner voluntarily dismissed the contract claim, but argued the economic loss doctrine should not bar the professional negligence claim. The Arizona Court of Appeals held that the economic loss doctrine does not bar negligence claims against design professionals. The Architect appealed and the Arizona Supreme Court held that the economic loss doctrine does apply in construction defect cases, reasoning that in the construction context, the expectations of the parties, liability, and remedies are often expressly addressed in contracts, and the Court respects the parties’ contracts.

The Court also found that the parties can contractually agree to preserve tort remedies for solely economic loss, just as they may otherwise specify remedies that modify common law recovery. However, if the parties do not provide otherwise in their contract, they are limited to contractual remedies for any loss of the bargain resulting from construction defects that do not cause personal injury or damage to other property.

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