Arizona Court of Appeals Addresses Subsequent Homeowner Negligence Claims (Sullivan II)

The Arizona Court of Appeals addressed the question whether a subsequent (i.e., non-original) homeowner may maintain a negligence cause of action against a homebuilder for economic losses arising from latent construction defects unaccompanied by physical injury to persons or other property.

The Court of Appeals in Sullivan v. Pulte Home Corporation, 354 P.3d 424 (July 28, 2015) upheld the dismissal of negligence based claims finding a lack of duty to a subsequent purchaser of a home. This opinion, which is now on appeal to the Arizona Supreme Court, if upheld, will benefit homebuilders, design professionals and contractors in limiting the claims of subsequent purchasers of homes.

History of the Claim

Defendant/Appellee Pulte Home Corporation built homes in a Phoenix hillside community. In 2000, Pulte sold the home at issue in these proceedings to the original homeowners, who, in 2003, sold the property to Plaintiffs/Appellants John and Susan Sullivan. In 2009, the Sullivans discovered problems with the home’s hillside retaining wall. An engineering firm they retained concluded that Pulte had constructed the retaining wall and prepared the home site without proper structural and safety components, including footings, rebar, and adequate drainage and grading. Pulte declined the Sullivans’ request to make repairs.

The Sullivans sued Pulte, alleging eleven separate counts, including several negligence-based claims. Pulte moved to dismiss all counts of the complaint pursuant to Arizona Rule of Civil Procedure 12(b)(6), arguing that the implied warranty claim was barred by the 8 year statute of repose and that the tort claims were impermissible under the economic loss doctrine. The superior court granted Pulte’s motion, and the Sullivans appealed.

This Court affirmed the dismissal of all counts of the Sullivans’ complaint except the negligence claims. Sullivan v. Pulte Home Corp., 231 Ariz. 53, 60 (App. 2012), vacated in part, 232 Ariz. 344, 306 P.3d 1 (2013). The Court held that because the Sullivans were not in privity with Pulte and had no contract with the homebuilder, the economic loss doctrine did not bar their negligence claims. The Arizona Supreme Court vacated the portion of the Court of Appeals opinion discussing the economic loss doctrine, but nevertheless agreed that it did not bar the Sullivans’ negligence claims. Sullivan v. Pulte Home Corp., 232 Ariz. 344, 345-47, ¶¶ 7, 11, 15, 306 P.3d 1, 2-4 (2013) (“Sullivan I”). Sullivan I held that the economic loss doctrine “protects the expectations of contracting parties, but, in the absence of a contract, it does not pose a barrier to tort claims that are otherwise permitted by substantive law.” Id. at 346, ¶ 11, 306 P.3d at 3. Instead, courts must “consider the applicable substantive law to determine if non-contracting parties may recover economic losses in tort.” Id. at 347, ¶ 14, 306 P.3d at 4.

On remand to the superior court, Pulte moved to dismiss the negligence claims pursuant to Rule 12(b)(6), arguing “a homebuilder such as Pulte does not owe a duty of care to a subsequent purchaser (such as plaintiffs) to prevent them from economic harm.” The superior court granted Pulte’s motion, and the Sullivans again timely appealed.

Sullivan II

The Court of Appeals accepted jurisdiction to determine whether a subsequent homeowner could maintain a negligence action against a homebuilder for latent construction defects resulting in purely economic losses.

On appeal, the Sullivans argued that Pulte’s duty arose out of public policy principles based in the municipalities’ building codes, Arizona statutes and the Arizona Administrative Code governing contractors. In determining that neither the Building Code, nor Arizona’s statutory or administrative schemes supported the imposition of a public policy-based duty for purely economic loss, the Court of Appeal found that the codes and statutes did not provide a sufficient basis for holding that homebuilders owe public policy-based tort duties to subsequent homeowners for economic loss. The statutes and codes do not delineate a specific class of persons they seek to protect distinguishable from the public. The Court stated that the governance of licensed contractors has a broad, general purpose: “to protect the public health, safety and welfare by licensing, bonding and regulating contractors engaged in construction,” but because the Sullivans had no contract with Pulte, the regulatory provisions did not support imposing a public policy-based tort duty in favor of subsequent property owners asserting only economic loss. As the Sullivans’ claims did not arise out of personal injury or damage to other property, the Court of Appeals found that there was no duty on the part of Pulte to repair a subsequent purchaser’s retaining wall.

Significance of the Ruling

Although Sullivan II is now on appeal to the Supreme Court of Arizona, the Court of Appeals ruling is certainly a positive step toward limiting the liability of homebuilders, contractors, subcontractors and design professionals for claims by subsequent homeowners. The ruling in Sullivan II, if upheld, will limit the bases that plaintiffs can rely on to create a duty.  The hope is that Arizona courts will continue to be active in limiting the liability of homebuilders, design professionals and contractors.

Post Beacon California Appellate Case Finds No Duty for Designer

In State Ready Mix Concrete v Moffatt and Nichols, 2d Civil No. B253421, the California Court of Appeals found that an engineer did not owe a supplier a duty of care and therefore dismissed the supplier’s cross-complaint.  The course followed the lead of Beacon[1] by applying the Biakanja [2] factors to determine whether a duty existed.

Certainly, the ruling would seem to provide protection to engineers from direct actions brought by contractors and suppliers.  However, as with Beacon itself, the application of the Biakanja factors make it difficult to develop hard fast rules.  While designers would like to argue that they do not owe contractors a duty of care when producing their design, this case will not be particularly helpful.

In State Ready Mix, Moffatt & Nichols did not develop the concrete mix design but only reviewed it for the benefit of the project manager.  More importantly, State Ready Mix produced a non-conforming concrete and failed to test the concrete to make sure it met the specification.  These two factors weighed heavily in the courts analysis.  This decision will be of little value in an instance where the contractor attempts to sue a design professional alleging that the designer’s work caused the contractor increased costs.  The application of Beacon to this scenario and other common situations will be looked at in depth during a panel discussion at West Coast Casualty’s Construction Defect Seminar in Anaheim, California, May 14 & 15, 2015.


[1] Beacon Residential Community Assn. v. Skidmore, Owings & Merrill (2014) 59 Cal.4th 568
[2] Biakanja v. Irving (1958) 49 Cal.2d 647

No Control Equals No Duty in Illinois

The Illinois Appellate Court recently found that where an employer has the power to inspect the work of a contractor, but not to control the manner of such work, that employer does not retain sufficient control over the work to give rise to a duty to the contractor’s employees.

Samuel Escareno v. Terra Cotta Commons Condominium Association, et al., 2014 IL App (1st) 120682-U, involved a construction site injury wherein Escareno, an employee of Sherwin Painters, Inc., was injured after falling off a ladder CONBlog_painterwhile trying to replace a window screen.  The property was owned by Terra Cotta and managed by Kass Management Services, which hired Sherwin to provide paint and labor.  Escareno sued Kass and Terra Cotta for his injuries, claiming that his employer, Sherwin, had sought permission to tie its ladders to the building due to high wind conditions, but the defendants refused, leading to the plaintiff’s eventual fall and injury.

Kass and Terra Cotta moved for summary judgment, arguing, in addition to the plaintiff’s contributory negligence, that because they did not retain control of Escareno’s work, they did not owe him any duty of care.  In support of their motion, the defendants attached deposition testimony supporting the fact that Kass and Terra Cotta, despite their full-time presence on site, never provided Escareno instructions or directions on how to perform his work, nor did they provide him with any equipment.  The trial court granted summary judgment in favor of Kass and Terra Cotta, and the plaintiff appealed.

On appeal, the plaintiff contended that Kass and Terra Cotta retained enough control over the job site sufficient to owe a duty of care to him and his co-workers.  In affirming the trial court’s decision, the Appellate Court cited the Restatement (Second of Torts), which specifies that it is not enough to merely be able to order the work stopped or inspect its progress.  Rather, to retain enough control to owe a duty of care to the plaintiff, Kass and Terra Cotta would have had to supervise the work and Sherwin’s employees — including the plaintiff — would not have had the freedom to perform the work in their own manner.  As such, because no such control was ever exercised by Kass or Terra Cotta, no such duty of care ever arose between the defendants and plaintiff.

The Appellate Court’s April 9 opinion represents a victory for Illinois contractors as it focuses the necessary factors to create a duty of care upon work site conduct as opposed to general — and often boilerplate — language in a contract.

Image courtesy of Flickr by Elvert Barnes

After Beacon: Use of Indemnity Provision in Conjunction With Limitation of Liability Clause

Design professionals in California have often used limitation of liability clauses as an effective risk transfer technique.  Given that a third-party plaintiff’s recovery is not capped by the limitation clause in a contract between the design professional and the developer, we have made it a practice to recommend to our clients that, in addition to the limitation, they attempt to negotiate an indemnity provision in which the owner indemnifies the design professional for any judgment in excess of the limitation of liability.

Even where developers are willing to agree to a limitation of liability provision, they often resist also including indemnification for any judgment in excess of the limitation of liability.   However, the July 3 Supreme Court of California ruling in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP highlights the purpose of an indemnity provision.

For the limitation to be truly effective, the indemnification agreement is necessary.  In the residential context, the developer is strictly liable for design errors.  Therefore an indemnification agreement only confirms that the developer will be responsible for the design exposure above the limitation of liability.

Design professionals should use the Beacon case as an opportunity to explore the risk transfer inherent in a limitation of liability with their clients and hopefully convince them of the appropriateness of using an indemnity provision in conjunction with a limitation of liability.

Court Focuses on Biakanja Factors in Deciding Homeowner Can Sue Principal Architect for Negligence

The Supreme Court of California issued its ruling in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP on July 3.  Gordon & Rees’s Greg Hanson discussed the Supreme Court hearing on this case in his June 5 blog post.  Greg’s prediction as to the court’s decision turned out to be true.  Certain architects can be sued by a homeowner for defects in a residence.

The court focused on the Biakanja factors in determining that a “principal architect” can be sued in negligence by a homeowner despite the absence of privity.  Interestingly, the court preserved the ruling in the Weseloh matter, which held that a retaining wall designer retained by a second-tier subcontractor could not be sued by the homeowner for a collapse of a retaining wall.

In his blog post, Greg observed that the court suggested it was foreseeable that a defective design would affect eventual purchasers of units; that the Beacon architects were intimately involved with the project; and that the payment of $5 million to the Beacon architects in comparison to the $2,000 payment to the designers in the Weseloh case was significant.  In its ruling, the court used these factors as a major part of its analysis in finding that the Biakanja factors support a finding that the Beacon architects could be sued by the homeowners association in negligence without a contractual relationship.

The following is the court’s summary of its analysis of the Biakanja factors:

  1. The defendants’ work was intended to benefit the homeowners living in the residential units that the defendants designed and helped construct.
  2. It was foreseeable that these homeowners would be among the limited class of persons harmed by the negligently designed units.
  3. The plaintiff‘s members suffered injury; the design defects made their homes unsafe and uninhabitable during certain periods.
  4. In light of the nature and extent of the defendants’ role as the sole architects on the project, there is a close connection between the defendants’ conduct and the injury suffered.
  5. Because of the defendants’ unique and well-compensated role in the project as well as their awareness that future homeowners would rely on their specialized expertise in designing safe and habitable homes, significant moral blame attaches to the defendants’ conduct.
  6. The policy of preventing future harm to homeowners reliant on architects’ specialized skills supports recognition of a duty of care. Options for private ordering often are unrealistic for typical homeowners, and no reason appears to favor homeowners as opposed to architects as efficient distributors of loss resulting from negligent design.

While the ruling itself is not surprising to most observers, an in-depth reading of the opinion creates an open question as to when a designer’s connection to the project is enough to create liability in negligence.  Where does the line ultimately get drawn between the architects in Beacon and the designers in Weseloh?

It should also be noted that we can expect to hear more from the appellate court regarding Beacon as the court is presently deciding whether the HOA has standing to bring a class action on behalf of the unit owners.

For a more detailed discussion of the case, click here.

California Supreme Court to Address Design Professionals and Duty of Care to Third-Party Purchasers

On May 7, the California Supreme Court heard oral arguments in Beacon Residential Community Assn. v. Skidmore, Owings, & Merrill LLP, a case that will have a huge impact on design professional liability in California when third-party purchasers sue a designer alleging defective designs.

The Beacon is a mixed-use project consisting of 595 condominium units and some commercial and office space.  Plaintiff Beacon Residential Community Association (the HOA) sued the initial developer, a subsequent developer, the architects, the general contractor and subcontractors asserting SB 800 and common-law causes of action.  The architects demurred to the HOA’s Third Amended Complaint asserting they owed no duty of care to the HOA.

The trial court sustained the demurrer, reasoning that the architects had not asserted direct “control” over construction decisions, and thus, under the Biakanja ((1958) 49 Cal. 2nd647), Bily ((1992) 3 Cal. 4th 370) and Weseloh ((2004) 125 Cal. App. 4th, 152) line of decisions, ruled the architects owed no duty to the HOA.

The HOA appealed and in December 2012, the California Court of Appeal, First Appellate District, reversed the trial court ruling in Beacon (2012) 211 Cal.App.4th 1301. The Court of Appeal reasoned that in analyzing the various factors elucidated in Biakanja and Bily, and distinguishing those and the Weseloh facts from those in Beacon, design professionals do owe a duty of care to eventual third-party purchasers.  The architects appealed to the California Supreme Court asserting that the rulings in Weseloh and Beacon are inapposite.

During the Supreme Court oral arguments, the justices focused on: 1)  the foreseeability of harm to the plaintiff; 2) the closeness of connection between the defendant’s conduct and the injury suffered; and 3) the potential imposition of liability out of proportion to fault.  The court distinguished Beacon from the former line of cases in that: 1) it was imminently foreseeable that a defective design of residential units would affect eventual purchasers of the units; 2) the architects were directly responsible for the alleged design defects given their “intimate involvement” with construction value-engineering decisions and project observation (i.e., they did not simply draw plans, hand them over, then leave the project); and 3) unlike Weseloh, where the retaining-wall designers provided only $2,000 in services relative to a $6 million claim, Beacon architects provided $5 million worth of services in a $45 million claim.

The Supreme Court has 90 days from May 7 to issue an opinion.  Given the Supreme Court’s comments and analysis at oral argument, it looks like it may agree with the Court of Appeal and rule that in the context of residential-unit design, design professionals do owe a duty of care to eventual third-party purchasers regardless of lack of privity.