More Confusion Over Independent Duty Doctrine – Washington Supreme Court Deeply Divided

In a suit by landowners against an engineering firm hired to help develop their real property, the Washington Supreme Court affirmed the trial court and Court of Appeals’ refusal  to dismiss the landowners’ claims for negligence and negligent misrepresentation, holding that (1) to determine whether a duty arises independently of the contract, the Court must first know what duties have been assumed by the parties within the contract; and (2) the Court could not say whether the engineering firm had an independent duty to avoid professional negligence because there were genuine issues in dispute, but that the engineering firm did have a duty to avoid misrepresentation that arose independent of any contract.[i]

In this case, the Donatellis hired D.R. Strong Consulting Engineers, Inc. (“Engineers”) to help them develop their real property into two short plats.  Before the development of the property could be completed, the Donatellis suffered substantial financial losses and lost the property in foreclosure.  The Donatellis sued Engineers for breach of contract, violation of the Consumer Protection Act, negligence, and negligent misrepresentation.  Engineers moved for partial summary judgment on the CPA and negligence claims, arguing that the negligence claims must be dismissed under the “economic loss rule” because the relationship between the parties was governed by contract and that the damages claimed by the Donatellis were purely economic.  Read more about the “economic loss rule” here.

According to the Donatellis, Engineers represented that it would be able to finish the project within approximately one and one-half years and that the project should not take more than $50,000 to complete.  The Donatellis alleged they retained Engineers to handle the project based on these representations.

On October 4, 2002, King County granted preliminary approval of the project, noting that preliminary approval was valid for 60 months. On October 11, 2002, Engineers sent the Donatellis a written contract for engineering services entitled “Revised Proposal for Engineering Services.”  In the contract, Engineers agreed to perform six phases of engineering services in exchange for an estimated fee totaling $33,150.  The contract did not reflect whether Engineers agreed to provide managerial services or to oversee the day-to-day operation of the project.  The contract limited Engineers’ professional liability to $2,500 or its professional fee, whichever was greater.  Steve Donatelli signed the contract on October 31, 2002.

According to the Donatellis, between October 2002 and October 2007, Engineers assumed the managerial role over the project and worked closely with other contractors, builders, and vendors involved with the project.  Although Engineers’ estimated its fee would be $33,150, Engineers allegedly charged the Donatellis approximately $120,000 over the course of the project.

In October 2007, the preliminary approval expired and the project was not complete.  Engineers began the process of obtaining a new preliminary approval, but before it could be obtained, the Donatellis suffered substantial financial losses and lost the property in foreclosure. The Donatellis sued Engineers claiming damages in excess of $1.5 million.

The trial court denied Engineers’ motion to dismiss the Donatellis’ CPA and negligence claims, finding that professional negligence claims could be stated even in the context of a contractual relationship.  The Court of Appeals affirmed, holding that the “independent duty doctrine,” previously known as the “economic loss rule,” did not bar the Donatellis from bringing negligence claims against Engineers because professional engineers owe duties to their clients independent of any contractual relationship.

In a 5-4 decision, the Washington Supreme Court affirmed, finding that it was unclear from the record what professional obligations Engineers assumed toward the Donatellis based on oral representations, the written contract, and Engineers’ affirmative conduct.  The Court agreed with the Court of Appeals that the duty to avoid misrepresentations that induce a party to enter into a contract arises independent of the contract.  As a result, the independent duty doctrine did not bar the Donatellis’ negligent misrepresentation claim.

I. Majority Opinion

The Court found that the first step in the analysis of a professional negligence claim is to determine the scope of the professional obligations.  The Court further noted that the scope of an engineer’s common law duty of care extends at least as far as the duties assumed in its contract with the owner, but that Engineers may also assume additional professional obligations by their affirmative conduct.  In this case, because the record did not reflect what the Donatellis and Engineers agreed to and what duties Engineers assumed through its affirmative conduct, it was impossible to say at this point what professional obligations Engineers owed to the Donatellis – contractually or otherwise.

Because the Court did not know the scope of Engineers’ contractual obligations, it could not determine if any of Engineers’ duties to the Donatellis arose independently of the contract. The Court noted in a footnote that the contract did not contain a merger or integration clause providing that the contract superseded any prior agreements between the parties.  Such a clause would diminish the likelihood of the Donatellis establishing the existence of additional duties.

The Court noted that since adopting the independent duty doctrine, it has emphasized that a negligent misrepresentation claim may be viable even when only economic damages are at stake and the parties contracted against potential economic liability, citing Jackowski v. Borchelt, 174 Wn.2d 720, 738, 278 P.3d 1100 (2012).  The Court found that, in Washington, a negligent misrepresentation claim might exist “to the extent the duty to not commit negligent misrepresentation is independent of the contract.”  This rule is narrower than the rule adopted in some jurisdictions where the duty to avoid negligent misrepresentation always arises independently of the contract.  The Court further noted that one circumstance where the duty to avoid negligent misrepresentation might arise independently of the contract is where one party, through its misrepresentations, induces another to enter into a contractual relationship.

The Court also noted that the duty to avoid negligent misrepresentation can be assumed in a contract.  By way of example, a real estate contract may be written to assume the seller’s duty to avoid misrepresentation to the buyer, thus precluding the buyer from later bringing a negligent misrepresentation claim against the seller.  The Court used Alejandre v. Bull, 159 Wn.2d 674, 679, 153 P.3d 864 (2007), as an example.  In that case, the buyer’s negligent misrepresentation claim against the seller was barred when the seller disclosed all known defects and the buyers acknowledged their own duty to “pay diligent attention to any material defects” when such defects could be discovered through “diligent attention and observation.”  The Court also referred to a Wyoming case, Snyder v. Lovercheck, 922 P.2d 1079, 1083 (Wyo. 1999), in which a purchaser’s negligent misrepresentation claim against the seller was barred, when the purchase agreement contained an “‘as is’ clause, a merger clause, a liberal inspection clause, … a specific objection procedure,” and provided, “Purchaser is not relying on any representations of the Seller.”

II. Dissenting Opinion

Four members of the Court dissented, finding that summary judgment should have been granted in favor of Engineers on both of the Donatellis’ negligence claims.  Justice Madsen wrote the dissenting opinion, which indicates that many differences of opinion on the independent duty doctrine and its reach still remain.

The dissent found that the negligence claims should have been dismissed as a matter of law because (1) under the controlling precedent, Berschauer / Phillips, the tort claims should not go forward because they do not involve personal injury or damage to property, (2) the claims asserted arose from the contract and contract remedies alone are implicated and appropriate, and (3) the professional liability limitation in the written contract bars the negligence claims.  The dissent also found that even under the independent duty approach, no independent tort duties are implicated and proof of additional professional services would be inconsequential.

First, the dissent argued that the case is in all relevant respects indistinguishable from Berschauer / Phillips Construction Co. v. Seattle School District No. 1, 124 Wn.2d 816, 881 P.2d 986 (1994), which has not been overruled and is controlling precedent. In Berschauer / Phillips, the contractor had been assigned the rights of the school district against the engineering firm.  The relief sought was purely economic, not injury to persons or physical damage to property.  The Court held that tort remedies are not available in the circumstances present in the instant case, and therefore, Berschauer / Phillips should control on the issue whether tort duties may be pursued. The dissent specifically noted that in Affiliated FM Insurance Co. v. LTK Consulting Services, 170 Wn.2d 442, 450, n.3, 243 P.3d 521 (2010), the lead opinion stated that “decisions in Eastwood and Affiliated FM leave intact our prior cases where we have held a tort remedy is not available in a specific set of circumstances.”  The dissent maintained that Berschauer / Phillips was such a case.

Second, the dissent contended that the Donatellis’ claims were founded on a breach of contract and the remedies, if any, should be limited to contractual remedies.  The Donatellis did not assert property damage or personal injury, the kind of harm that should be remedied outside the contractual arrangement. Thus, the dissent maintained that the case involved a straightforward claim of breach of contract, despite the Donatellis’ efforts to show actionable negligence.

Finally, the dissent argued that, regardless of any other analysis, the Donatellis tort claims are precluded by the limitation of professional liability in the parties’ contract.  The dissent noted that the limitation of liability applied to “any injury or loss on account of any error, omission, or other professional negligence.” The dissent maintained that the negligent misrepresentation claim should be treated no differently than any other negligence claim.  The Donatellis’ negligence claim and negligent misrepresentation claim both alleged failure to perform the engineering services in a cost-effective and timely manner, which the dissent found were both subject to the limitation of professional liability provision.

[i] Donatelli v. D.R. Strong Consulting Engineers, Inc., ____Wn.2d ___, 312 P.3d 620 (November 14, 2013).

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