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Economic Damages and Contractual Privity Pt. II: Have Donnelly Negligence Claims Survived Cal-Am?

June 13, 2022 General News

Our last post, Economic Damages and Contractual Privity: Cutting Out the Middle-Man, discussed two cases seemingly reaching different outcomes when claimants lacking privity asserted negligence claims against designers. In the Donnelly case, the lack of privity posed no obstacle, while in the Cal-Am case, lack of privity was fatal. The Cal-Am court adopted a different framework for finding a duty than the foreseeability test used in Donnelly. Would the facts in Donnelly satisfy the duty test now required by Cal-Am?

First, some background. The foreseeability framework used in Donnelly to support the claim died in Gipson v. Kasey, 214 Ariz. 141 (2007). There, the Arizona Supreme Court rejected foreseeability of harm as the test for finding a duty of care. This holding was reinforced in Cal-Am, with the court repeating that duties are only created by (a) special relationships or (b) public policy. So, does a designer owe a duty, stemming from a special relationship or public policy, to a contractor with which it lacks privity to not cause economic harm?

Cal-Am held special relationships are narrowly defined as legally recognized common law relationships, contractual relationships, family relationships, or joint undertakings. The court concluded architect-contractor relationships did not fall within an existing special relationship previously recognized by Arizona courts, and that Donnelly did not establish a new special relationship between architects and contractors. Similarly, the court held the statutes regulating designers did not trigger a duty under the public policy branch of the Cal-Am duty framework.

However, in dicta Cal-Am stated there are situations where a public policy duty between contractor claimants and designers can arise out of § 6 Restatement (Third) of Torts. Specifically, the court determined negligent performance of services under § 6 Restatement (Third) of Torts is applicable where, like in Donnelly, a contractor relies on negligent work by the owner’s designer. Negligent performance of services is defined as an actor’s failure to exercise reasonable care in performing a service in the ordinary course of business causing harm to others who were meant to and did in fact rely upon the service. In comment b, the Restatement affirms the applicability of § 6 to “three-cornered construction disputes” between architects and contractors. The comment explains that where an architect fails to exercise reasonable care resulting in faulty work, the owner’s contractors: (1) are among the group the designer expects to rely, (2) necessarily have to rely on the work to implement it, and (3) suffer increased costs as a result of the mistake.

So, there appears to be a duty stemming from public policy owed by designers to not negligently cause economic harm to contractors who rely on the designers’ conduct.