Clarifying its case law, the Arizona Supreme Court further limited when foreseeability can establish a tort liability in its recent Cal Am opinion. Key for contractors and design professionals, while the ruling could restrict certain causes of action for project and building owners, Cal Am does not protect design professionals from legal action for their negligence. Instead, it clarifies (1) who is the appropriate party to sue if there are purely economic damages, and (2) what type of claim to bring.
Cal Am featured a developer (essentially acting as an owner) suing the project’s design professional under a theory of negligence. He did so, at least in part, because there was no direct contractual relationship between the two. It is important to note that 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 requiring a defendant to conform to a standard of care, (2) a breach of that standard, (3) a nexus 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 an integral part of a negligence claim. In the old framework described in Donnelly, design professionals in Arizona had this duty of care for foreseeable injuries to foreseeable victims. This meant that the potential liability of design professionals extended not only to the party that contracted with them, but to other parties such as property or project owners. However, after Donnellythe Arizona Supreme Court in Gipson v. Kasey rejected the use of foreseeability as a determining factor of law.
With predictability and application Gipson’s homework framework, Cal Am The court determined that there are two possibilities for a plaintiff to establish his obligation: special relations or public order. Special relationships that give rise to liability in negligence claims include a legally recognized relationship formed by contract, a family association, or a joint venture. Arizona already recognizes many of these relationships such as owner-guest, owner-licensee, and employer-employee. The Court in Cal Am rejected the idea that in the absence of a binding contract, there is a special relationship between design professionals and clients that creates an obligation. According to the Court, an obligation based on a special relationship requires a pre-existing relationship, which it did not find to exist between the two parties in this case. Cal-Am, effectively the owner of the project, argued that Donnelly recognized a special relationship. But with predictability no longer the norm, that argument was dismissed. Thus, the Court concluded that there was no particular relationship giving rise to an obligation. Similarly, the idea that a joint venture establishes a special relationship has been rejected on the grounds that the legal relationship 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 client (Cal-Am). Thus, the Court found that there was no joint venture between Cal-Am and Edais.
In the absence of a special relationship, public policy reflected in state and federal laws may establish an obligation. The primary source of public policy obligation stems from the Arizona state statutes. Therefore, for a statute to create a duty, (1) an injured plaintiff must belong to a class of persons the statute was intended to protect, and (2) the injury must be of the type against which the statute sought to protect. . Cal-Am argued that various statutes and administrative regulations governing qualification standards for design professionals establish an obligation. The bylaws upon which Cal-Am relied affect design professionals, but the purpose and provisions of the bylaws focus on protecting the safety, health and welfare of the public. Here, the court targeted the second prong and held that the articles of association were not designed to protect parties like Cal-Am from purely economic harm. Instead, the purpose of the laws is to protect the public who might enter a building or structure and suffer physical injury due to improper 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 has not left owners like Cal-Am without recourse against design professionals. When the damages are purely economic, the parties may rely on remedies for breach of contract to obtain compensation (if there is a contract between the parties). In general, when a project owner suffers economic damage due to the negligence of a subcontractor, this is simply considered as a breach of its obligations towards its co-contractor, and not as a breach of a tort obligation. . In this case, Cal-Am might have been able to sue VB Nickle, the general contractor, for relief, and VB Nickle could then turn to the downstream party they had a contract with (Edais) so that VB Nickle get redress.
Take away food
There are several takeaways from the decision in Cal Am. This is a reminder of the importance of the contractual relationship as Cal-Am may have avoided this litigation had it either contracted directly with Edais or had Cal-Am sued VB Nickle. Also, this case does not preclude a tort claim because it is always possible to bring a tort claim when there is also personal injury caused by negligent third party services or work. This means that project and property owners could still be protected against negligent services or work performed by third parties with whom they are not in contract with respect to personal injury or wrongful death claims.