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Washington Supreme Court Reassesses Economic Loss Rule

By Kent A. Lambert, Litigation News Associate Editor – January 31, 2011

Courts around the nation continue to struggle to define the scope and proper application of the “economic loss rule.” The Washington Supreme Court’s en banc decision in Eastwood v. Horse Harbor Foundation [PDF] illustrates resistance in many courts to a broad application of the economic loss rule. The court held that the term “economic loss rule” was a “misnomer” and adopted “independent duty doctrine” as the more “apt term.”


Origins of the Economic Loss Rule
Commonly said to have its origins in products liability law, the traditional version of the economic loss rule speaks to whether purely economic losses caused by a defective product are recoverable under tort law. Here, there is a reasonable degree of agreement that, absent personal injury or damage to other property, purely pecuniary losses normally should not be recoverable.


In many jurisdictions, however, the rule has been expanded into other areas. For example, in a number of states the economic loss rule is said to bar recovery in tort for economic damages when there is any sort of contract between the parties that allocates, or could have allocated, the risks of economic loss. Thus, in some jurisdictions, conduct that breaches a purely contractual duty will not be actionable in tort if the only consequences are economic losses. Stated somewhat differently, a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent the existence and breach of an independent duty of care in tort. Other courts have gone further, applying the rule to bar recovery for economic losses attributable to the disappointment of any bargained-for expectation.


Washington Supreme Court Reverses Course
Until a few months ago, the Washington Supreme Court appeared to have adopted an expansive approach to the economic loss rule. In a 2007 decision, Alejandre v. Bull, the court held that the rule flatly barred tort liability for economic losses between contracting parties because they could have allocated the risk for such losses in their agreement. In Eastwood, the same court appears to have made a dramatic change in course.


Adopting a far more measured approach, the court insisted that the proper analysis should focus not on the type of damage suffered, but rather on whether some separate duty of care exists independent of the parties’ contractual relationship. Stressing the point, the court goes so far as to effectively erase the term “economic loss rule” from the state’s legal lexicon in favor of a reformulated rule now dubbed the “independent duty doctrine.”


The occasion for the court’s change of heart was a lease dispute over a tenant’s maintenance of a horse farm. The trial court found the tenant had failed to maintain the property as required by the lease and committed tortious waste of the property. In addition, the trial court found that an individual employee and two members of the nonprofit’s board of directors had been grossly negligent, subjecting them to individual liability. On appeal, the intermediate appellate court, citing to Alejandre, invoked the economic loss rule to limit the owner to damages for breach of the lease and to bar any liability on the part of the individual defendants. The Washington Supreme Court reversed, concluding that the appeals court had improperly applied the economic loss rule.


The Independent Duty Doctrine
“The holding that tort claims between contracting parties must be evaluated only under the ‘independent duty doctrine’ effectively ends application of the [economic loss] rule in Washington,” according to Mark S. Davidson, Seattle, cochair of the ABA Section of Litigation’s Business Torts Litigation Committee. “Rather than jettison the economic loss rule entirely, the Eastwood court could have and probably should have reaffirmed Alejandre, with the limitation that the rule is implicated only when the parties are in a contractual relationship and did or could have allocated the risks in question because they are associated with the subject matter of their agreement.”


The significance of the change in the court’s approach is apparent, according to Davidson, when viewed in terms of its practical consequences. Davidson notes that one [PDF] of the concurrences “accurately observes that Eastwood will require an ad hoc determination in every case as to whether a tort duty should survive.” Not only is such a fact-intensive approach “inherently unpredictable,” says Davidson, but it is also openly exposed to result-oriented manipulation.


While sharing some of the same concerns, Elizabeth T. Timkovich, Charlotte, NC, cochair of the Section of Litigation’s Commercial and Business Litigation Committee, feels that the change in focus from the type of damages at issue to whether an independent duty may have been breached was necessary to preserve the underlying rule. “Although the majority opinion in Eastwood did reign in the appeals court’s broad interpretation of the economic loss rule, it did not throw out the rule altogether.” Indeed, Timkovich suggests that the decision adopts a standard that is much more objective in its application than one that would ask whether an alleged tort injury concerns the subject matter of the parties’ contractual relationship.


Stressing “a real-life point of view,” Timkovich maintains that “the majority gets it right when it acknowledges the inherent difficulty of drawing a line between economic loss and property damage.” The proper inquiry, Timkovich suggests, needs to focus on differentiating between those cases where a plaintiff seeks tort recovery for what is nothing more than an allegedly negligent failure to perform a purely contractual duty and those cases where considerations of fault, deterrence, and compensation justify the imposition of liability irrespective of the existence of some ancillary contractual relationship.


Protecting Predictability and the Freedom of Contract
The Eastwood court specifically noted that it was not “disturb[ing] ‘[t]he general rule … that a party to a contract can limit liability for damages resulting from negligence.’” This ensures that the expectations of contracting parties can be protected without sacrificing an objective standard for determining whether an additional tort-based recovery may be appropriate, explains Timcovich. Trying to draw distinctions between the type of damages sought or to ascertain whether a particular risk concerns the subject matter of a contract between the parties is, for Timcovich, a far more nebulous enterprise.


Despite the Eastwood court’s nod to freedom of contract, Davidson remains concerned by the ad hoc nature of Washington’s new duty-based analysis. “Asking if a particular contract effectively displaces tort remedies,” Davidson points out, “is itself a highly fact-specific inquiry.” The more efficient approach, Davidson argues, is simply to maintain existing exceptions to a broader economic loss rule, as in cases involving construction contracts or some fiduciary-type relationship between the parties. “It is much easier to determine if a particular tort claim falls within one of these categories than it is to evaluate whether a duty exists under the myriad of facts that could arise in any given case.”


Keywords: litigation, economic loss, independent duty doctrine


 
Related Resources

  • » Eastwood v. Horse Harbor Found., Inc., 241 P.3d 1256 (2010).

 

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