Cal-Am Properties Inc v. Edais Engineering Inc ( 2022 )

IN THE
SUPREME COURT OF THE STATE OF ARIZONA
CAL-AM PROPERTIES INC,
Plaintiff/Appellant,
v.
EDAIS ENGINEERING INC,
Defendant/Appellee.
No. CV-21-0129-PR
Filed May 23, 2022
Appeal from the Superior Court in Maricopa County
The Honorable Timothy J. Thomason, Judge
No. CV2017-012518
AFFIRMED
Memorandum Decision of the Court of Appeals,
Division One
No. 1-CA-CV 20-0279
Filed April 15, 2021
AFFIRMED
COUNSEL:
Stephen E. Richman, Bennett Evan Cooper (argued), Vail C. Cloar, Emily
G. Jeffries, Dickinson Wright PLLC, Phoenix, Attorneys for Cal-Am
Properties, Inc.
Christopher D. Hossack (argued), Clark Hill PLC, Scottsdale, Attorneys for
Edais Engineering, Inc.
John R. Jefferies, Justin A. Robles, Fennemore Craig P.C., Phoenix; Michael
J. Holden, Barry A. Willits, Holden Willits PLC, Phoenix; D. Kim Lough,
Jennings Haug Cunningham, Phoenix; Richard A. Friedlander, Lang &
Klain, PC, Scottsdale; Robert F. Roos, Frances J. Haynes, Lewis Roca,
Phoenix; Melvin C. Cohen, Bernardo M. Velasco, Mesch Clark Rothschild,
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
Tucson; Richard B. Murphy, Murphy Cordier PLC, Phoenix; James J.
Sienicki, Amanda Z. Weaver, Snell & Wilmer L.L.P., Phoenix; and Stephen
E. Jackson, Chris R. Baniszewski, Warner Angle Hallam Jackson &
Formanek PLC, Phoenix, Attorneys for Amicus Curiae ABA/Arizona
Builders Alliance
Jacqueline Pons-Bunney, Brian P. Roteliuk, Martha L. Bringard, W & D Law
LLP, Phoenix, Attorneys for Amici Curiae American Council of
Engineering Companies of Arizona and Arizona Chapter of American
Institute of Architects
JUSTICE LOPEZ authored the opinion of the Court, in which CHIEF
JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and JUSTICES
BOLICK, BEENE, MONTGOMERY, and KING joined.
JUSTICE LOPEZ, opinion of the Court:
¶1 Today we revisit our holding in Donnelly Construction
Company v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 187 (1984), which held that
a design professional’s duty to use ordinary skill, care, and diligence in
rendering professional services extends both to persons in privity with the
professional and to persons foreseeably affected by a breach of that duty.
We hold that under Arizona’s post-Gipson framework, which repudiated
foreseeability as a basis for duty, design professionals lacking privity of
contract with project owners do not owe a duty to those owners to
reimburse them for purely economic damages.
BACKGROUND
¶2 Cal-Am Properties, Inc. (“Cal-Am”) is a developer and
operator of RV and mobile-home parks. In 2014, Cal-Am leased the
Sundance RV Resort in Yuma, Arizona, from its owner, intending to
construct a new banquet and concert hall on the property. Although the
owner of the property provided the funding for the construction of the new
hall, Cal-Am managed the project. Cal-Am hired a contractor, VB Nickle,
to design and construct the hall, who then hired Edais Engineering, Inc.
(“Edais”) to survey the property and place construction stakes to mark the
permitted location of the hall. This arrangement created two contracts: Cal-
Am’s with VB Nickle and VB Nickle’s with Edais; no contract existed
between Edais and Cal-Am. Edais concedes that its placement of the stakes
2
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
was defective. As a result, the hall was constructed ten feet north of the
planned location, and Cal-Am was forced to adjust its site plan accordingly
which eliminated eight RV parking spaces planned near the hall.
¶3 Cal-Am sued Edais for various claims including the
negligence claim at issue here. The trial court granted summary judgment
for Edais on the negligence claim finding that Cal-Am could not recover its
purely economic damages. The court of appeals held that Edais did not
owe a duty to Cal-Am and affirmed the trial court. Cal-Am Props. Inc. v.
Edais Eng’g Inc., No. 1 CA-CV 20-0279, 2021 WL 1422738, at *3 ¶¶ 15, 18
(Ariz. App. Apr. 15, 2021) (mem. decision). We granted review to
reexamine our holding in Donnelly—that design professionals may be liable
to third parties who suffer purely economic damages resulting from the
professionals’ negligence—under Arizona’s current duty framework as
described in Quiroz v. ALCOA Inc., 243 Ariz. 560 (2018). This is an issue of
statewide importance over which we have jurisdiction pursuant to article
6, section 5(3) of the Arizona Constitution.
DISCUSSION
I.
¶4 We determine the legal issue of whether a duty exists de novo.
Dinsmoor v. City of Phoenix, 251 Ariz. 370, 373 ¶ 14 (2021).
¶5 A negligence claim requires proof of four elements: “(1) a
duty requiring the defendant to conform to a certain standard of care; (2) a
breach by the defendant of that standard; (3) a causal connection between
the defendant’s conduct and the resulting injury; and (4) actual damages.”
Gipson v. Kasey, 214 Ariz. 141, 143 ¶ 9 (2007). The existence of a duty is a
legal issue decided by the court. Id. “Whether the defendant owes the
plaintiff a duty of care is a threshold issue; absent some duty, an action for
negligence cannot be maintained.” Id. ¶ 11.
¶6 In Donnelly, we held that “[d]esign professionals have a duty
to use ordinary skill, care, and diligence in rendering their professional
services” and confirmed that such liability extends to “foreseeable injuries
to foreseeable victims which proximately result from . . . negligent
performance of their professional services.” 139 Ariz. at 187–88. In other
words, the potential liability of design professionals, such as land
surveyors, for negligence extended not only to the entity who contracted
3
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
them, but to other foreseeable plaintiffs which may include property or
project owners.
¶7 Donnelly’s holding controlled on the existence of such a duty
until our decision in Gipson. There, we held that “foreseeability is not a
factor to be considered by courts when making determinations of duty” and
we “reject[ed] any contrary suggestion in prior opinions.” Gipson, 214 Ariz.
at 144 ¶ 15. We have since clarified that “[p]ost-Gipson, to the extent our
prior cases relied on foreseeability to determine duty, they are no longer
valid.” Quiroz, 243 Ariz. at 565 ¶ 12. Indeed, we have noted repeatedly that
Donnelly employed the now-rejected foreseeability framework. See id. at
564 ¶ 10 (citing Donnelly as an example of a prior case that relied on
foreseeability); Gipson, 214 Ariz. at 144 ¶ 14 (same); Flagstaff Affordable Hous.
Ltd. v. Design All., Inc., 223 Ariz. 320, 327 ¶ 35 n.4 (2010) (stating that we
have “rejected Donnelly’s reliance on foreseeability to determine the
existence of a duty of care for purposes of tort law”). To the extent that
Donnelly’s viability remains in question today, we clarify that it is no longer
good law.
¶8 In rejecting Donnelly, however, we do not foreclose the
possibility that a duty may exist between design professionals and those
not in privity with them. Whether a duty arises here or in any other context
must be analyzed under the post-Gipson duty framework.
II.
¶9 In Arizona, duties are based on either special relationships or
on public policy. Dinsmoor, 251 Ariz. at 373 ¶ 14.
A.
¶10 Special relationships that give rise to a duty in negligence
include legally recognized common law relationships and those formed by
contract, familial relationship, or joint undertaking. Id. There are various
recognized categorical relationships that give rise to a duty in Arizona. See,
e.g., Quiroz, 243 Ariz. at 567 ¶ 23 (landowner-invitee, landowner-licensee,
employer-employee); Gipson, 214 Ariz. at 145 ¶ 19 (tavern owner-patron);
Dinsmoor, 251 Ariz. at 373 ¶ 15 (school-student). But, despite Cal-Am’s
contention that Donnelly created a special relationship between design
professionals and project owners and that other jurisdictions have followed
4
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
suit, Arizona does not recognize design professionals as parties to any such
relationship.
¶11 A duty based on a special relationship requires a preexisting,
recognized relationship between the parties, see Quiroz, 243 Ariz. at 565
¶ 15, and here there is none. Cal-Am’s argument that Donnelly recognized
such a relationship is unpersuasive because its holding relied primarily, if
not exclusively, on a foreseeability framework which has since been
rejected. See supra ¶¶ 4–7; Donnelly, 139 Ariz. at 188 (“We only hold here
that design professionals are liable for foreseeable injuries to foreseeable
victims which proximately result from their negligent performance of their
professional services.” (emphasis added)). Therefore, Donnelly did not
recognize a preexisting relationship under Arizona law.
¶12 Cal-Am also relies on other jurisdictions that have recognized
a duty based on the relationship between design professionals and owners.
These cases are unavailing. Most of these jurisdictions rely on foreseeability
to recognize such relationships, see, e.g., E. Steel Constructors, Inc. v. City of
Salem, 549 S.E.2d 266, 274–75 (W. Va. 2001) (citing Donnelly and
acknowledging, without disapproval, the foreseeability rationale used in it
and other related decisions); Beacon Residential Cmty. Ass’n v. Skidmore,
Owings & Merrill LLP, 327 P.3d 850, 862 (Cal. 2014) (factoring in its
conclusion that “[i]t was foreseeable that these homeowners would be
among the limited class of persons harmed by the negligently designed
units”), and negligence actions are governed by state common law, US
Airways, Inc. v. Qwest Corp., 238 Ariz. 413, 418 ¶ 19 (App. 2015), aff’d in part,
depublished in part on other grounds, 241 Ariz. 182 (2016) (per curiam).
Arizona has yet to recognize the relationship between a design professional
and an owner as a categorical, special relationship. We decline to do so
now.
¶13 Here, no contractual or familial relationship exists between
Cal-Am and Edais. And although liability for a joint undertaking may exist
despite a lack of privity between two parties, this concept necessarily
involves conduct a defendant undertook directly with or for a plaintiff, see,
e.g., Stanley v. McCarver, 208 Ariz. 219, 223 ¶ 13 (2004) (finding a duty where
doctor agreed, for consideration, to interpret patient’s medical record and
report results), and no liability exists where, as here, parts of an overall
enterprise were organized by another entity and the defendant’s relevant
undertaking was with and for that entity. Thus, no “special relationship”
gives rise to a duty in this case.
5
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
B.
¶14 Public policy, reflected in state and federal statutes and
embodied in the common law, can also be a source of duty. Quiroz, 243
Ariz. at 565 ¶ 15. The primary source of duties based on public policy in
Arizona is our state statutes. Id. at 566 ¶ 18. For a statute to create a duty:
(1) the plaintiff must be “within the class of persons to be protected by the
statute,” and (2) the harm must be of the type “the statute sought to protect
against.” Id. at 565 ¶ 15 (quoting Gipson, 214 Ariz. at 146 ¶ 26).
¶15 Cal-Am argues that statutes and administrative regulations
governing qualification and minimum standards for design professionals
establish a duty. The stated purpose of the statutes governing the work of
architects, engineers, geologists, home inspectors, landscape architects, and
surveyors is “to provide for the safety, health and welfare of the public.”
A.R.S. § 32-101(A). But this case does not implicate “safety” or “health,”
and as included alongside those interests, “welfare” most reasonably
connotes physical welfare, not economic welfare. See Sullivan v. Pulte Home
Corp., 237 Ariz. 547, 550–51 ¶ 10 (App. 2015) (noting that public safety
statutes supporting tort duties generally involve injuries or death).
Interpreting “welfare” to exclude economic welfare is also consistent with
the general reluctance of courts to recognize tort duties “to exercise
reasonable care for the purely economic well-being of others.” Lips v.
Scottsdale Healthcare Corp., 224 Ariz. 266, 268 ¶ 11 (2010).
¶16 The statutes and regulations governing surveyors and similar
professionals were not designed to protect plaintiffs like Cal-Am—project
owners—from purely economic harm. Instead, their purpose is to protect
the safety, health, and welfare of individuals who enter the buildings and
structures, which regulated professionals construct and maintain, from
injury resulting from poor workmanship. Cf. CVS Pharmacy, Inc. v. Bostwick,
251 Ariz. 511, 517–18 ¶¶ 22–23 (2021) (reasoning that statutes enacted to
control drug abuse were designed to protect drug users and could not be a
source of duty to a hospital). For this reason, Cal-Am’s argument that a
design professional’s duty is analogous to that of accountants and attorneys
with unique professional duties fails: accountants, attorneys, and other
professionals do not owe duties to the world but rather to the small
universe of potential plaintiffs protected by their governing standards. See
Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 523 (1987) (“As a
matter of public policy, attorneys, accountants, and other professionals owe
6
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
special duties to their clients . . . .” (emphasis added)); see also Lips, 224 Ariz.
at 268 ¶ 12 (citing Barmat for this proposition). Cal-Am’s status as the owner
of a project who suffered purely economic injury resulting from a design
professional’s negligence does not implicate the public policy embodied in
Arizona’s current statutory and regulatory scheme. Certainly, the
legislature may amend or enact legislation making its intent to create
liability for such injuries clear, but it has not done so.
¶17 Although “we exercise great restraint in declaring public
policy” in the absence of legislative guidance, our jurisprudence and
Restatement sections consistent with Arizona law can also generate duties
based on public policy. Quiroz, 243 Ariz. at 566–67 ¶¶ 19–20.
¶18 Cal-Am argues that the Restatement (Second) of Torts
provides a common law source of Edais’ alleged duty here. Section 324A
states, in relevant part, that
[o]ne who undertakes, gratuitously or for consideration, to
render services to another which he should recognize as
necessary for the protection of a third person or his things, is
subject to liability to the third person for physical harm
resulting from his failure to exercise reasonable care to protect
his undertaking . . . .
Restatement (Second) of Torts § 324A (Am. L. Inst. 1965) (emphasis added);
see also Dabush v. Seacret Direct LLC, 250 Ariz. 264, 272 ¶ 36 (2021) (noting
that Arizona has adopted § 324A). But § 324A is inapplicable because the
misplaced staking did not physically harm the land itself. Instead, the
staking affected only the value of Cal-Am’s leasehold interest as the
property could not be used as originally anticipated. Further, § 324A
applies only when “the nature of the services undertaken . . . [is] for the
specific purpose of protecting a third party (or their things) from harm.”
Dabush, 250 Ariz. at 273 ¶ 39 (finding no duty when defendants undertook
to repair a leaky roof, not to protect the plaintiff from falling through a
skylight). Here, Edais was hired to place construction stakes according to
plans furnished by VB Nickle. The contracted surveying services did not
contemplate protecting Cal-Am or its things—i.e., its leasehold interest. We
decline to extend § 324A’s reach beyond what it expressly contemplates:
7
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
liability for physical harm to the people or property that the services sought
to protect.1
¶19 Cal-Am also relies on the Restatement (Third) of Torts:
Liability for Economic Harm § 6 (Am. L. Inst. 2020), which recognizes
liability when “[a]n actor . . . performs a service for the benefit of others . . .
if the actor fails to exercise reasonable care in performing it,” but only if the
loss was suffered by the entity for “whose benefit the actor performs the
service” and “through reliance upon it in a transaction that the actor intends
to influence.” Comment b, which addresses “[t]hree-cornered construction
disputes,” clarifies that “[t]here is no liability in tort . . . when the owner of
a construction project sues a subcontractor for negligence resulting in
economic loss.” Id. cmt. b. A subcontracted design professional, however,
would be liable to another contractor if the design professional’s negligent
work provided a basis for reliance by the contractor. Id.
¶20 The missing element in this case is reliance: Cal-Am did not
rely on Edais’ defective staking, VB Nickle did. Under § 6, Edais would be
liable to VB Nickle for losses it suffered due to its reliance on the defective
staking. Thus, Donnelly’s resolution remains valid given its facts—a
plaintiff-contractor who relied on defective plans prepared by a defendant-
architect and suffered increased construction costs as a result—because its
holding is supported by the plaintiff’s reliance rather than foreseeability.
Donnelly, 139 Ariz. at 185–86.
III.
¶21 Our holding does not render Cal-Am or similarly situated
plaintiffs devoid of a remedy. In general, when a project owner is
economically harmed due to a subcontractor’s negligence, it “is viewed just
as a failure in the performance of [the subcontractor’s] obligations to its
contractual partner, not as a breach of duty in tort to . . . the owner of the
project.” Restatement (Third) § 6 cmt. b. The remedies available to the
project owner sound in contract, not tort. For example, in a case of a
1In Guerra v. State, 237 Ariz. 183, 185–86 ¶ 11 (2015), we “question[ed]” our
decision in McCutchen v. Hill, 147 Ariz. 401 (1985), “to the extent it found a
duty under Restatement [(Second) of Torts] § 323 without discussing
whether that section encompasses economic harm.” Although § 323,
companion to § 324A, contemplated liability not to third parties but to the
entity for which the services were undertaken, we disavow McCutchen to
the extent it interpreted § 323 to encompass purely economic harm.
8
CAL-AM PROPERTIES, INC. V. EDAIS ENGINEERING, INC.
Opinion of the Court
subcontractor’s defective workmanship, as here, the project owner could
sue the general contractor it hired for breach of contract and, perhaps the
subcontractor for breach of contract as a third-party beneficiary, see Nahom
v. Blue Cross & Blue Shield of Ariz., Inc., 180 Ariz. 548, 552 (App. 1994)
(discussing the third-party beneficiary doctrine in Arizona), or obtain an
assignment of liability from the contractor. Consequently, Donnelly’s
demise does not insulate design professionals from legal consequence for
their negligence.
CONCLUSION
¶22 Although Donnelly recognized a design professional’s duty to
project owners for foreseeable economic damages resulting from the
professional’s negligence, we disavow Donnelly because its holding is based
upon foreseeability, a duty framework this Court jettisoned in Gipson
fifteen years ago. Thus, we affirm the trial court’s grant of summary
judgment in favor of Edais and affirm the court of appeals’ memorandum
decision.
9