Carstens v. City of Phoenix

• Decision Date: 09 September 2003
• Docket Number: No. 1 CA-CV 02-0084.,1 CA-CV 02-0084.
• Citation: 75 P.3d 1081,206 Ariz. 123
• Parties: William W. CARSTENS and Deborah Carstens, husband and wife; Deborado, a Colorado limited liability company, Plaintiffs-Appellants, v. CITY OF PHOENIX, a municipal corporation; Richard Ryall; Dale Borger; and Jerry Coke, Defendants-Appellees.
• Court: Arizona Court of Appeals

75 P.3d 1081

206 Ariz. 123

William W. CARSTENS and Deborah Carstens, husband and wife; Deborado, a Colorado limited liability company, Plaintiffs-Appellants, v.CITY OF PHOENIX, a municipal corporation; Richard Ryall; Dale Borger; and Jerry Coke, Defendants-Appellees.

No. -0084.

Court of Appeals of Arizona, Division 1, Department C.

September 9, 2003.

Meyer Hendricks & Bivens, P.A.By Ed Hendricks, Marc Kalish, Phoenix, for Appellants.

Holm Wright Hyde & Hays, PLC By Brad Holm, Alan K. Hyde, Phoenix, for Appellees.

OPINION

WEISBERG, Judge.

¶ 1 William and Deborah Carstens and Deborado, LLC, ("the Carstens") sued the City of Phoenix("City") and three of its building inspectors alleging that the inspectors were grossly negligent because they failed to discover serious construction defects in the house that the Carstens later purchased.The trial court dismissed the tort claims under the economic loss rule because the Carstens had suffered no personal injuries or damage to property other than the alleged construction defects.For the following reasons, we affirm the trial court's judgment.

BACKGROUND

¶ 2 In July 1996, Corwa, Inc. purchased the house at 56 Biltmore Estates.Later that year, Corwa obtained a construction permit from the City to add 3,150 square feet to the kitchen and second story of the house.The remodeling work was done in 1997.Between January 31 and December 12, 1997, City building inspectors Richard Ryall, Dale Borger, and Jerry Coke inspected the house several times to determine whether, among other things, the footings and structural, electrical, and mechanical aspects of the project complied with the City's uniform building codes.Based upon those inspections, the City approved the work done by Corwa.

¶ 3 In May 1999, the Carstens bought the house from Alvarado, Inc., a successor in interest to Corwa, for $2,000,000.Soon thereafter, the Carstens hired a contractor to do some minor remodeling on the house.Because the contractor discovered a few construction defects and building code violations, the Carstens hired engineers to assess the structural, mechanical, and electrical systems of the house.The engineers found numerous defects and code violations, including missing fire blocking, deeply-notched floor and ceiling joists, inadequate beam support, inadequate natural gas piping, and improper and hazardous venting and electrical wiring.Major repairs were necessary to make the house safe for occupancy.

¶ 4 In December 1999, the Carstens filed a notice of claim against the City and the three inspectors pursuant to Arizona Revised Statutes("A.R.S.")section 12-821.01(A)(Supp.2002).They alleged that the City had breached its duty to conduct a proper inspection of the house in accordance with applicable building codes.Thereafter, in January 2000, the Carstens had the house demolished.

¶ 5 In June 2000, the Carstens sued the City and the three inspectors (collectively the "City defendants").¹They alleged that the City defendants were grossly negligent in failing to discover numerous violations of the building codes during the inspections performed in connection with the 1997 remodeling project and that their gross negligence created a substantial risk of physical harm to the Carstens.

¶ 6 The City defendants moved for summary judgment.They argued that, because the alleged construction defects had not caused any personal injury or property damage, the economic loss rule barred the Carstens from maintaining a tort claim against them for the amounts necessary to repair or replace the defects.

¶ 7The trial court granted the motion.It found that the City defendants"did not owe [the Carstens] a duty of care to protect them from the type of harm that they have allegedly suffered in this matter."The court further stated that, although government agencies and employees may be liable for negligent inspection when the negligence causes physical injury and property damage, they could not be liable for the economic losses suffered by homeowners when contractors failed to construct home improvements in compliance with building codes or in a workmanlike manner.The Carstens timely appealed from the judgment.

STANDARD OF REVIEW

¶ 8 On appeal from summary judgment when the facts are undisputed, we review de novo whether the trial court correctly applied the law and whether the appellee was entitled to judgment as a matter of law.SeeTenet Healthsystem TGH, Inc. v. Silver,203 Ariz. 217, 219, ¶ 5, 52 P.3d 786, 788(App.2002).

DISCUSSION

¶ 9 The Carstens argue that the trial court erred in concluding that no duty existed due to the nature of the injury suffered.They also maintain that the trial court erred by ruling that their claim against the City was barred by the economic loss rule.Because the City's duty in these circumstances is clear, the only question here is whether the economic loss doctrine precludes tort recovery when the Carstens have alleged no physical injury or property damage resulting from construction defects.SeeDaggett v. Maricopa County,160 Ariz. 80, 85, 770 P.2d 384, 389(App.1989)(governmental regulations requiring inspections may create a duty to protect public from physical harm).

¶ 10 The economic loss rule bars a party from recovering economic damages² in tort unless accompanied by physical harm, either in the form of personal injury or secondary property damage.Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L.Rev. 891, 895-96(1989).The rule stems from the principle that contract law and tort law each protect distinct interests.Generally, contract law enforces the expectancy interests between contracting parties and provides redress for parties who fail to receive the benefit of their bargain.Id. at 894-95, 901-02.Its focus, therefore, is on standards of quality as defined by the parties in their contract.Id. at 901.Tort law, in contrast, seeks to protect the public from harm to person or property.Id. at 901-02.To this end, it evaluates the objective reasonableness of a person's conduct and compensates victims for their actual harm resulting from that conduct.Id.The economic loss rule thus "serves to distinguish between tort, or duty-based recovery, and contract, or promise-based recovery, and clarifies that economic losses cannot be recovered under a tort theory."Calloway,993 P.2d at 1264.In the construction defect setting, "[i]f a house causes economic disappointment by not meeting a purchaser's expectations, the resulting failure to receive the benefit of the bargain is a core concern of contract, not tort, law."Casa Clara Condo. Ass'n v. Charley Toppino & Sons, Inc.,620 So.2d 1244, 1247(Fla.1993).

¶ 11 In Arizona, it is well-established that a homeowner may not recover in tort against a contractor for economic losses attributable to defective construction when the negligence has not caused personal injury or damage to property other than the defective structure itself.Our supreme court first recognized the applicability of the economic loss rule in construction defect litigation in Woodward v. Chirco Constr. Co.,141 Ariz. 514, 687 P.2d 1269(1984).In Woodward, homeowners sued the builder of their house for both breach of the implied warranty of workmanlike performance and habitability and negligence after large cracks developed in the house walls and foundation, the fireplace separated from the wall, a family room wall shifted forward, the kitchen ceiling began to bow, and the floor warped.Id. at 515, 687 P.2d at 1270.The trial court dismissed both claims.On appeal, this court affirmed the dismissal of the negligence claim, but reversed the court's ruling on the implied warranty claim because the six-year statute of limitation on that claim had not expired.Woodward v. Chirco Constr. Co.,141 Ariz. 520, 526, 687 P.2d 1275, 1281(App.1984).

¶ 12 On review to our supreme court, the builder argued that, because the implied warranty is imposed by law, it did not arise out of contract, and therefore the statute of limitations for tort claims applied.Woodward,141 Ariz. at 515, 687 P.2d at 1270.The supreme court, however, disagreed, holding that a claim based on the implied warranty was contractual in nature and distinct from a tort claim based upon a builder's breach of the common law duty of care.Id. at 515-16, 687 P.2d at 1270-71.Thus, the Woodward court recognized that an injury resulting from negligent construction may give rise to claims sounding in both contract and tort.Specifically, the court stated that the homeowners could claim damages in contract for defects in the structure that rendered the home less than the purchaser bargained for, and, further, that the homeowners could also sue in tort for injuries sustained due to the contractor's breach of its duty of care.Id. at 516, 687 P.2d at 1271.To illustrate the distinction between these claims, the court explained that "if a fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural defects and sue in tort for damage to personal property or personal injury caused by the collapse."Id.The supreme court thereby established the applicability of the economic loss rule to construction defect claims.

¶ 13 Applying Woodward's reasoning, this court, in Nastri v. Wood Bros. Homes, Inc.,142 Ariz. 439, 444-45, 690 P.2d 158, 163-64(App.1984), held that, absent property damage or personal injury, plaintiffs could not maintain a negligence claim against a homebuilder.In Nastri, the subsequent purchasers of a house sued the builder for latent construction defects that caused severe damage to the house, including cracks in the cement pad, walls, ceilings, a joist, and bricks in a front archway.Id. at 440-41, 690 P.2d at 159-60.The trial court dismissed the action, and on appeal, this court noted that the plaintiffs' damage claim involved only the structure...