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November 2010

Washington Supreme Court Clarifies Scope of Economic Loss Rule

Court Adopts "Independent Duty Rule" in Claims Implicating Both Contract and Tort Damages

Washington courts have consistently rejected tort-based claims in contract disputes.  This rule was founded on a broad application of the economic loss rule, which prohibited the recovery of damages for economic losses under tort theories.  In the construction context, Washington courts have held claims for negligent construction/design, lost profits, delays, and repairs for construction defects were "economic," and therefore contained within the scope of common-law contract remedies.  The Washington Supreme Court refined the scope and application of the economic loss rule in two recent decisions. 

Eastwood v. Horse Harbor Foundation, Inc., No. 81977-7 (November 4, 2010)

The owners of a horse farm (Eastwood) entered into a written lease with a nonprofit organization, which cares for abused and abandoned horses (Horse Harbor).  Horse Harbor broadly failed to maintain the property as required by the terms of the lease.  Eastwood filed suit for breach of contract, negligence, and the tort theory of "waste."  The trial court found Horse Harbor breached the lease and committed waste.  Although not argued by the parties, the Court of Appeals characterized Eastwood's claims as "economic losses" and limited recovery for breach of lease under the economic loss rule. 

The Supreme Court reversed, finding "the economic loss rule does not bar recovery in tort when the defendant's alleged misconduct implicates a tort duty that arises independently of the terms of the contract."  To determine whether an independent tort duty exists requires a "case-by-case" analysis by the trial court and "depends on mixed considerations of logic, common sense, justice, policy, and precedent."  Although recognizing the difficulties in distinguishing harms only implicating contract remedies, the court noted the issue is a question of proximate cause to be determined by the jury. 

Affiliated FM Ins. Co. v. LTK Consulting Servs., Inc., No. 82738-9 (November 4, 2010)

In the first application of the Independent Duty Rule, the Supreme Court permitted a third party to pursue a tort claim against an engineering firm for alleged design failures.  The dispute arose out of a 2004 fire on a Seattle monorail train.  An engineering firm (LTK) performed design services related to the train's grounding system under an agreement with the City of Seattle.  The monorail's private operating company (SMS) was not party to LTK's design services agreement. 

SMS suffered in excess of $3 million dollars in damages following an electrical fire.  SMS's concession agreement with the City allocated responsibility among SMS and the City for maintaining the monorail.  SMS's insurer paid for necessary repairs and pursued its subrogation rights against LTK.  In the ensuing lawsuit, LTK argued SMS's damages were purely economic because they stemmed from business interruptions and SMS's contractual obligation to repair the train.  LTK also noted SMS had no property interest in the monorail.

The Supreme Court held an engineering firm providing design services assumes a tort duty of reasonable care independent of its contractual obligations.  Although the court noted it was unclear if the fire caused personal injuries, or physical damage to property beyond the monorail, engineers "are in the best position to prevent harm caused by their work."  The Court restated the commonly accepted rule that "an engineer does not and cannot insure or in any sense guarantee a satisfactory result."  However, the scope of an engineer's duty "extends to safety risks of physical damage to the property on which the engineer works."  The court extended the duty to "persons who hold a legally protected interest in the damaged property."

Construction

Ryan G. Foltz



Construction