Washington Construction Law Blog

Today's economic loss decision from the Supreme Court is significant. 

As readers of this site know, the economic loss doctrine states that a plaintiff may not sue in tort for recovery of purely economic losses (rather than personal injury or property damage).  Instead the plaintiff is limited to whatever remedies might be available under the written contract between the parties.  The purpose of the doctrine is to induce parties to pay attention to what they sign -- and if they don't like the contract as is, negotiate additional provisions to make the contract acceptable.  Freedom of contract, in other words.

But what happens when a contract exists but doesn't speak to the issue of who is liable for what -- or even what the standard of care should be?  What if the contract is instead silent in key issues such as whether a warranty exists or whether the builder is required to install the work per approved plans and specifications?  In such a case, can the plaintiff resort back to tort law because the contract contains no governing clauses?

As we predicted back in October, the answer is no.  The Court's message in the industry seems pretty clear: if you want something from the other party, put it in the contract.  Don't ask the courts to make new remedies under tort law for purely economic loss.  And by the way, while the Supreme Court goes out of its way to stress that residential homeowners are also covered by this rule, the pending legislation summarized on this site on February 20th would abrogate the doctrine for residential buyers.

Here's a good reason not to designate Oregon law as the controlling law in your next contract -- at least if you are a contractor or owner who wants to invoke the protection of the economic loss doctrine (ELD).  At its most basic, the ELD means that a plaintiff may not sue in tort to recover purely "economic loss" as opposed to personal injury or property damage losses.  The sole remedy is instead to sue on the contract -- an option that is often not available to remote plaintiffs who claim injury due to some act or omission of a party with whom no contract exists.

In this Oregon case, for example, a builder built an apartment complex for its customer.  The customer subsequently sold the complex to a third party.  Upon discovering dry rot damage in the complex, the third party sued the original builder for negligent construction.  The Court of Appeals held that ELD did not bar the negligence claim.  Specifically, the Oregon court held that damage to the complex itself was not purely "economic loss" but instead constituted property damage.

The Oregon holding is at odds with Washington law in one clear respect - and possibly a second.  First, Washington does not recognize a theory of negligent construction.  Therefore, the third party could not possibly have made this claim in Washington against the remote builder regardless of the ELD.  Second, Washington courts are far more likely to hold that damage to the project itself is purely "economic loss" in any event. 

The economic loss doctrine (in a nutshell) means you can't sue in tort for purely economic loss (in contrast to personal injury or property damage).  Here, Division 2 dismisses an owner's claim that a builder negligently misrepresented the quality of synthetic stucco applied to a home, holding the owner's remedies are limited to the contract under the economic loss doctrine.  Division 2 distinguished contrary Division 3 authority on this same issue.

WCL brings you the latest dispatch from the "economic loss doctrine" front: a Division II decision that allows a home buyer to proceed, in tort, against the developer of a lot to recover for property damage caused by water intrusion. As the Court dryly summarized the evidence: "They [owners] eventually discovered that water up to five inches deep had accumulated in the home's crawl space and would not drain. They also discovered mold in the home and the crawl space below."
"We decline to hold that the mere existence of a REPSA, by itself and without more, is sufficient to trigger the economic loss rule that would bar virtually every real estate purchaser from seeking relief in tort for property damage..."

The case the Supreme Court heard on September 29, 2005 is not exactly a construction case. But its impact on one of construction law's most formidable doctrines -- the "economic loss doctrine" -- could be significant indeed.

The Supreme Court is reviewing the decision in Alejandre v. Bull, 123 Wn. App. 611, 98 P.3d 844 (2004), which arose from the purchase and sale of a home where the septic tank wasn't to the buyer's satisfaction. The buyer sued for damages. The trial court ruled for the seller, holding that the "economic loss doctrine" barred the claim. The Court of Appeals disagreed.