Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

Backstory of Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc.

It started when an owner hired an architect to design an affordable housing project.  The United States Department of Housing and Urban Development ("HUD") required the project to comply with accessibility guidelines established under the Fair Housing Act.  When the project failed to comply with those guidelines, HUD sued the owner. 

After the owner and HUD settled, the owner sued the architect for negligence to recover part of the cost of complying with their HUD settlement.  The owner alleged that that the architect's negligent design caused the project's failure to comply with accessibility guidelines, so the architect should pay for at least part of what the owner had to pay to HUD because of that failure to comply.

The architect's asked the trial judge hearing the case to dismiss the owner's lawsuit.  The architect's principal reason: the ELR.  The owner's damages: the cost to retrofit the project and ensure compliance with the accessibility guidelines.  No damages for (a) anyone's death, (b) personal injury to anyone, or (c) injury to property other than the non-compliant project that the architect designed.  Under the ELR the architect argued, retrofitting costs aren't eligible for payment under a negligence claim.

The trial judge initially hearing the case agreed with the architect and dismissed the owner's lawsuit.  But the owner appealed to the Arizona Court of Appeals.  The judges there disagreed with the architect and reinstated the owner's lawsuit.  The architect appealed that decision to the Arizona Supreme Court.

Decision on Appeal

All of the Arizona Supreme Court justices hearing the case together agreed with the architect: the ELR bars the owner's negligent design claim against the architect for the cost to retrofit the project.

Policy Reasons

The judges focused on the ends served by negligence and its jurisprudential cousins in tort law: promoting safety and spreading the cost of accidents when safety measures don't avert injuries.  Paraphrasing the judges explanation for why those ends aren't served by making the architect pay for retrofitting costs:

In construction defect cases involving only repair and replacement of the construction work itself, there are no strong policy reasons to impose common law tort liability in addition to contractual remedies.

The policies of accident deterrence and loss spreading also do not require allowing tort recovery in addition to contractual remedies for economic loss from construction defects. These considerations have less force when parties to a site-specific construction contract have allocated the risk of loss and identified remedies for non-performance in their contract.

The ELR applies in this context because construction contracts typically are negotiated on a project-specific basis and the parties should be encouraged to prospectively allocate risk and identify remedies within their agreements. These goals would be undermined by an approach that allowed extra-contractual recovery for economic loss based not on the agreement itself, but instead on a court's post hoc determination that a construction defect posed risks of other loss or was somehow accidental in nature.

We accordingly apply the ELR and hold that a contracting party is limited to its contractual remedies for purely economic loss from construction defects.

Treat Professional Negligence Differently

The owner urged that whether or not the ELR bars negligence claims for retrofitting costs against a contractor, it shouldn't apply against professional negligence claims against an architect.  Architects aren't the same as contractors the owner argued because:

• The relationship between an owner and their architect is special and should get special treatment from judicial treatment
   
• Architect are license professionals governed by statutorily imposed duties and standard

And because of these difference the owner argued, the ELR shouldn't apply. 

The Justices didn't agree.  They applied the ELR to bar the owner's professional negligence claim for the cost to retrofit the project.

Conclusions

• For Architects and Other Design Professionals: This is a great decision for you.  It says that, at least when it comes to claims for the cost to correct for design defects, your clients must bring their claims under the contract between you and them.  That could benefit you, especially: 
  
  
  • If those contracts include an enforceable limitation of liability clauses
     
  • Because the damages allowed for breach of contract claims (e.g., consequential damages) are more limited than damages allowed for extra-contractual claims (e.g., negligence)
     
  • If the limitations period on breach of contract claims is shorter than extra-contractual claims
     
• For Owners: This decision re-affirms how critical it is to ensure you protect your interests in your contract with your architect, engineer, or other design professional.  This decision suggests that the same applies to your construction contracts too.  If it costs you money to repair or replace work because of a design or construction defect, your contract may provide the only means to recover that money from those responsible for the defect.  That means focusing on things like:
  
  
  • Defining the standard of care in contracts with your architect, engineer, or other design professional and having them promise in the contract to comply with that standard
     
  • Ensuring your contract has robust warranties from your prime contractor in your contract. Focus extra attention on the scope and duration of warranties from subcontractors and material suppliers and get assignments of those warranties to you.  When the ELR applies to bar extra-contractual claims, your only recourse for the cost to repair, replacing, or retrofitting defective work is your warranties.  When defects surface, you'll usually be better off when you can point to warranties in in your contract that haven't yet expired
     
  • When the statutes of limitation and statutes of repose on design and construction defects are set start running and expire.  Consider carefully, with a lawyer, terms in your contract that may start either running earlier or make them expired sooner.    
           
• For Contractors: Even though no contractor was involved here, the Justices' remarks suggest this decision will affect you too.
  
  
  • The good: Dealing with people up the chain from you (e.g., the owners, or, if you're a subcontractor, the prime contractor or upper tier subcontractors), this decision suggests that defective construction claims against asking for repair or replacements costs must be breach of contract claims.  You benefit because the damages available for those claims are more limited and terms in your contract may reduce your exposure (e.g., limitations of liability, warranties with a more limited scope and shorter duration)
     
  • The bad: Dealing with people down the chain from you (i.e., your subcontractors), the tables are turned on all of the good things mentioned just above.  You need to ensure that if a repair or replacement claim comes down to you from up the chain because of defective work by someone down the chain, the terms of your subcontract don't prevent you from passing responsibility down the chain to whomever was actively responsible for the defect.  Limitations of liability and narrow or short warranties could be just the kinds of things that could prevent you from passing that responsibility down.

• For Everyone:  Like most ELR decisions, the reasoning in this one is difficult to follow.  And because it's difficult to follow, it will be difficult for other Arizona judges to decide whether to apply the ELR in other situations.  Odds are good that Arizona will join states like Colorado, Florida, and Wisconsin where the ELR jurisprudence is unclear and unpredictable, regardless of whether it's in the context of design and construction defects or for other defective goods, services, real estate, or intellectual property.  Be prepared for years of protracted ELR litigation in the courts sitting in Arizona.
  
  Uncertainty fostered by, and surrounding, the ELR is a call to everyone to focus on what their contract say, regardless of whether they're inside, or outside, of Arizona.   Contracts, and the warranties within them, often will be the only recourse there is for the cost to repair, replace, or retrofit a project suffering from defective design, material, or construction work.