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Economic Damages and Contractual Privity Pt. III: Is Donnelly the Lone Exception to Privity as a Requirement for Duties?

July 27, 2022 General News

Our last post, Economic Damages and Contractual Privity Pt. II: Have Donnelly Negligence Claims Survived?, discussed how Cal-Am dicta stated there are situations where public policy duties between contractor claimants and designers can arise out of Restatement (Third) of Torts § 6 . These situations occur where, like in Donnelly, a designer hired by the owner provides negligently prepared design drawings to the owner’s contractor. In short, Donnelly claims appear to have been spared. But what about negligence claims for economic loss between other actors involved in a construction project, such as direct claims by an owner against a subcontractor—are they viable after Cal-Am?

Section 6 Restatement (Third) of Torts likely won’t create a public policy duty between subcontractors and project owners because comment b expressly excludes those relationships from its scope. The comment states tort claims against subcontractors are different than those against owner hired designers because subcontractors owe no duty to other actors with whom they lack privity. Further, the comment suggests tort liability against subcontractors is impractical because it would disturb the intricate web of contracts and risk shifting so prevalent in construction settings.

Nor is it likely the statutes and regulations governing contractors in Arizona would create a duty arising out of public policy. The owner claimant in Cal-Am made a similar argument— that statutory design regulations and standards governing designers created a duty to project owners—but the court rejected it. For a statute to create a duty, the harm for which recovery is sought and the individual that suffered the harm must be of the types the statute seeks to protect. Statutes and regulations establishing design standards seek to protect the public welfare, not contractors and project owners from economic harm. The same reasoning would presumably apply to regulations governing Arizona contractors, which are predominantly intended to protect public welfare in general, and not owners from economic harm.

Finally, under the Cal-Am interpretation of special relationships, most construction project relationships likely don’t qualify as special. Owner-subcontractor relationships do not fall into any of the preexisting, recognized relationships such as contractual, familial, and employer-employee relationships. The closest Arizona courts have come to recognizing special relationships between contractors and other parties lacking privity is implied warranties of reasonable care in a contractor’s performance. For example, in Lofts at Filmore Condo Assoc. v. Reliance Commercial Construction Inc., the court held a general contractor owed a subsequent purchaser with whom it lacked privity an implied warranty of habitability. 218 Ariz. 574 (2008). However, that same line of implied warranty cases also expressly held subcontractors do not owe an implied duty to owners. Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364 (App. 2013).

In short, it appears actors lacking contractual privity, particularly project owners and subcontractors, generally do not have special relationship duties or public policy duties for conduct causing economic harm. However, claimants retain a few alternatives including: (1) breach of contract claims against subcontractors as third-party beneficiaries, (2) assignments of liability from actors in privity to negligent subcontractors, (3) breach of contract claims against actors in privity for the negligence of subcontractors.