It seems like a simple question. What claims and damages are available when the parties to a contract have a dispute related to the subject matter of that contract? In the past, the answer was fairly simple in most cases. If the subject of the dispute was within the scope of the contract and implicated both contractual and tort claims, the aggrieved party was limited to remedies laid out in the contract. The idea was that parties could or should allocate risks and liabilities among themselves during the contracting process, and courts should not allow remedies that the parties have not contemplated and elected to include in their contract. This concept was labeled the “economic loss rule” and was intended to preserve the often hazy border between contract and tort law, with tort law historically governing claims for physical harm and contract law governing economic harm.
The “economic loss rule” reached a high water mark in the case of Alejandre v. Bull, 159 Wn.2d 674, 153 P.3d 864 (2007). There, a couple who purchased a house learned the septic system was defective and sued the seller for fraudulently or negligently representing its condition. The Washington Supreme Court held that the negligent misrepresentation claim was barred by the economic loss rule because the defective septic system was an economic loss within the scope of the parties’ contract. Although the court recognized that the rule does not bar tort claims of fraudulent inducement or common law fraud, it ultimately held that the home buyers had not established either type of fraud by the seller.
The rule was sent into a tailspin in late 2010 in the Washington Supreme Court’s opinions in Eastwood v. Horse Harbor Found., Inc., 170 Wn.2d 380, 416, 241 P.3d 1256 (2010), and Affiliated FM Ins. Co. v. LTK Consulting Servs., Inc., 170 Wn.2d 442, 243 P.3d 521 (2010). The court there indicated the name “economic loss rule” was a misnomer and instead adopted a new name, the “independent duty rule,” because it more accurately captured the principle behind the rule: “An injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.” Eastwood, 170 Wn.2d at 389. According to the court, “mixed considerations of common sense, justice, policy, and precedent” govern whether a tort claim arises independently from the contract. In Eastwood, those considerations led the court to conclude that a tenant who failed to properly maintain a rented horse farm had violated an independent tort duty not to commit waste even though the lease had expressly required the tenant to maintain the property for the owner in exchange for a lower rental price.
The existing case law left lawyers and contractors guessing how a particular court’s notions of “common sense, justice, policy, and precedent” might apply in a given case. Many perceive the cases as opening the door to tort-based claims for lost profits, incidental and consequential damages, etc., that might have previously been barred under a strict reading of the original rule.
The Supreme Court’s latest pronouncement on this issue, Elcon Construction, Inc. v. Eastern Wash. Univ., No. 83690-6 (Wash. March 29, 2012), confirms that any simple bright line answer that might have previously existed is out the window. In that case, the court allowed a contractor to pursue tort claims of “fraud in the inducement” and “tortious interference with contractual relations” against a project owner even though the contractor had previously arbitrated and resolved claims for breach of contract (it appears the contractor brought the tort claims because it neglected to pursue prejudgment interest and attorneys’ fees in the contract arbitration).
Galvanizing the “independent duty rule’s” new name, the court concluded with little in-depth analysis that there was “no compelling reason, whether based on common sense, justice, policy, or precedent, to bar Elcon’s fraud or tortious interference claim under the independent duty doctrine.” Although the tort claims were not barred by the independent duty rule, the court nevertheless held the contractor had insufficient evidence to prevail on the merits of its claims. Of note to the court in rejecting the fraudulent inducement claim was that the bidding instructions had directed the contractor to ascertain the nature and location of the work (drilling), including the conformation and conditions of the ground, so the contractor could not reasonably rely on the owner to provide information about the conditions, and the owner’s withholding of a hydrology report therefore could not carry the claim.
The bottom line here is that the court has opened the door to potential tort claims for damages that might not otherwise be available under contract, but the determination of what constitutes an “independent” tort claim will remain up for reasoned debate unless and until the high court decides to provide additional clarity.