Division 2 today joins Division 1's recent decision in Carlile v. Harbour Homes holding that claims for fraudulent misrepresentation are barred by the Economic Loss Rule.
Copy of opinion also available here Download file
A classic economic loss scenario:
The City of Seattle owns the Monorail between downtown and Seattle Center and has a contract with a JV who operates the Monorail. In 1999, the City hired a design firm (LTK) under a separate contract to identify and repair problems with the Monorail trains. The JV had no contractual relationship with LTK. In 2004, one train caught fire. The JV's insurance company paid the claim then blamed LTK for causing the fire.
Got it?
Into the thicket of Washington's economic loss doctrine now comes the 9th Circuit in this recent case certifying a question of state law to the Supreme Court, specifically:
May party A (here, SMS, whose rights are asserted in subrogation by [carrier]), who has a contractual right to operate commercially and extensively on property owned by non-party B (here, the City of Seattle), sue party C (here, LTK) in tort for damage to that property, when A (SMS) and C (LTK) are not in privity of contract?
At first blush, this issue might appeared to have been cleanly resolved by Berschauer/Philips v, Seattle School District (1994), but wait: the 9th Circuit thinks there are unresolved issues lurking in that case that need to be addressed:
Stay tuned...the Supreme Court is not bound by the 9th Circuit's framing of the issue and could use this case as an opportunity to significantly revise the scope of the economic loss doctrine in Washington.
In this case, 10 homeowners who bought homes from the original purchaser-occupants of a Harbor Homes project in Snohomish County sued the original developer (Harbor) for construction defects. Each claim (save the Consumer Protection Act claim) was mowed down by Division One as follows:
Copy of opinion also available here Download file
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.
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.
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