Not So Fast: Not All Fraud Claims are Barred by the Economic Loss/Independent Duty Rule

Since the Washington Supreme Court case of Alejandre v. Bull and the Court of Appeals case of Carlile v. Harbor Homes, it has been commonly understood that parties to contracts in Washington are limited to the remedies they negotiated for themselves in their contracts, and may not generally pursue claims for fraud and misrepresentation against the other contracting parties. This concept is commonly referred to as the “economic loss rule” or (more recently) the “independent duty doctrine.” There are instances, however, in which Washington law still allows such claims for fraud or misrepresentation despite the economic loss/independent duty rule.

One example is a claim for fraudulent concealment in the real estate context. A buyer of residential property can bring such a claim if he or she can prove that a seller knowingly concealed a dangerous defect in the dwelling, such as structural deficiencies.

Another type of fraud that has survived the economic loss/independent duty rule is fraud in the inducement. This is a claim that the injured party would not have entered into the contract at all but for the other’s misrepresentations regarding the subject matter of the transaction. In the construction arena, such a claim may arise, for example, from an owner’s misrepresentations regarding the conditions at the project site, such as known (by the Owner) unstable soils conditions that significantly hinder the contractor’s performance. One limitation on this type of claim, however, is that the representation upon which the claim is based cannot directly contradict the terms of the resulting written contract.

Finally, even if a corporate party to a contract is immune to fraud claims because of the economic loss/independent duty rule, the corporate officers may still be liable if they actively participate in fraud relating to the contract. For example, in the construction context, if the president of a subcontractor induces a general contractor to release progress payments by signing affidavits representing that all of the subcontractor’s suppliers have been paid when they have not, the president himself may be personally liable for those misrepresentations if the general contractor ends up having to deal with liens from unpaid suppliers.

Because fraud claims are not generally dischargeable in bankruptcy, they can provide considerable leverage to an injured contracting party in settlement negotiations. In these economic times, therefore, parties to construction contracts should not assume such claims are completely precluded by the existence of a written agreement.

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