What is Arizona’s Economic Loss Rule? It seems the more the courts attempt to define the boundaries of the economic loss rule in Arizona, the less defined the rule becomes. Referring to it as a “rule” implies a certainty that does not follow.
The core of the economic loss rule is the idea that parties may not sue in tort for only economic losses. In Flagstaff Affordable Housing v. Design Alliance, Inc., 223 Ariz. 320, 323, 223 P.2d 664, 667 (2010), the court reaffirmed the “common law rule limiting a contracting party to contractual remedies for the recovery of economic losses unaccompanied by physical injury to persons or other property.” In Cook v. Orkin Exterminating Co., Inc., 227 Ariz. 331, 334, 258 P.3d 149, 152 (App. 2011) the Court applied the rule from Flagstaff Affordable Housing to uphold dismissal of plaintiffs’ negligent misrepresentation and fraud claims.
The difficulty with the rule is that many torts exist only in circumstances where economic loss is the only loss. In Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865, 875 (9th Cir. 2007) the court wrote “torts such as fraud and conversion exist to remedy purely economic losses.” In Evans v. Singer, the Arizona district court noted that “[i]t is easy to see, however, that the economic loss rule cannot simply be applied as a blanket restriction precluding tort-based lawsuits by plaintiffs who have suffered solely economic loss. . . . In the overwhelming majority of situations, business torts, including legal malpractice and fraud, among others, exist solely to redress pure economic loss.” 518 F. Supp. 2d 1134, 1139 (D. Ariz. 2007).
Arizona has historically recognized torts where economic loss is the only likely loss. For example, where a seller knows of facts materially affecting the value of the property and knows that the facts are not known to the buyer, the seller has a legal duty to disclose such facts. Hill v. Jones, 151 Ariz. 81, 84-85, 725 P.2d 1115, 1118-19 (App.1986). Conversely, where a buyer’s agent knows the buyer does not have the means or ability to close, the buyer’s agent can be held liable for fraud and negligent misrepresentation for failing to disclose that fact to the seller. Lombardo v. Albu, 199 Ariz. 97, 100, 14 P.3d 288, 291 (2000). This “duty to disclose” was affirmed in the 2012 decision Lerner v. DMB Realty, LLC, 231 Ariz. 297, 294 P.3d 135, 142 (App. 2012), a year and a half after Cook.
Another rule that would have been overruled is the language that a party “can not free himself from fraud by incorporating [an integration clause] in a contract.” Formento v. Encanto Bus. Park, 154 Ariz. 495, 499, 744 P.2d 22, 26 (App. 1987). Also, since 1936, Arizonans have understood that if a “promise to perform a future act was made with a present intention on the part of the promisor that he would not perform it . . . such a case . . . is a basis for action of fraud.” Law v. Sidney, 47 Ariz. 1, 5, 53 P.2d 64, 66 (1936).
Surely, three separate and distinct legal theories that are tightly woven into Arizona’s common law cannot be overturned merely by adoption of an “economic loss rule.” Other areas of the law would also be impacted: defamation, misappropriation of trade secrets, consumer fraud, breach of fiduciary duty, fraudulent transfer and tortious interference with contractual relations claims almost always all result in economic loss only.
If your possible Arizona civil litigation involves economic loss, contact the Mesa, Maricopa County civil litigation attorneys at Udall Shumway PLC.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Arizona’s Economic Loss Rule, or any other commercial litigation matters, please feel free to contact Joel E. Sannes at 480.461.5307, or log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.