Washington Court of Appeals Reaffirms that 'Economic Loss Rule' Has Been Replaced by the 'Independent Duty Doctrine,' Opening the Doors to Tort Remedies Stemming From Contractual Relationships
- Posted by Paul R. Cressman Jr.
- On July 11, 2013
In Key Development Inv., LLC v. Port of Tacoma,[i] the Port of Tacoma (“Port”) initiated condemnation proceedings against a property owned by Superlon Plastic Company (“Superlon”) as part of the “East Blair Project.” Despite its plan to condemn the Superlon property, the Port wanted to retain Superlon’s jobs in the Tacoma area. In August 2007, the Port approached Key Development Investment (“Key”) about the possibility of selling its nearby property. At the time, Trinity Glass International (“Trinity”) was the only tenant on the property.
During negotiations, the Port represented to Key and Trinity that the Port’s condemnation of the Superlon property was a certainty, and it was committed to purchasing Key’s property to accommodate Superlon’s relocation. In response to a competitor’s letter of intent, the Port told Key that it would be willing to pay $35,000,000 for its property. As negotiations progressed, however, the Port adjusted the estimated cost of acquiring the Superlon Property from $3,300,000 to $7,500,000. By February 2008, the Port’s design team had developed alternatives that avoided the Superlon site altogether.
The Port did not inform Key or Trinity about this potential change of plans. Instead, on March 24, 2008, Key and the Port signed a Letter of Intent. Meanwhile, Key refrained from entering into two separate leases, in part, because the Port had demanded that any lease of Key’s property be short term.
On April 24, 2008, the Port’s Letter of Intent terminated on its own terms, but the parties continued negotiations. The Port again represented that it needed Key’s property for Superlon’s relocation. On May 21, 2008, however, news broke that there was a chance the Superlon property might not be needed for the East Blair Project. This caused negotiations to breakdown, and ultimately, the Port did not buy Key’s property.
Key and Trinity sued the Port alleging various contract and tort claims, including tortious interference with business expectancies, fraudulent misrepresentation, and negligent misrepresentation. The Port moved for summary judgment dismissing Key’s and Trinity’s tort claims, arguing that the tort claims were barred by the economic loss rule. The trial court granted the Port’s motion as to Key, stating that the economic loss rule limits Key to contract remedies because the loss was purely an economic one, and it had entered into a contract with the Port. The trial court denied the Port’s motion as to Trinity, finding that it was not a party to the contract between Key and the Port.
On appeal, the Division II Court of Appeals found that the “trial court understandably ‘misinterpreted’ the economic loss rule because, when it rendered its decision in 2010, our Supreme Court had not yet issued its Jackowski opinion clarifying the economic loss rule and transforming it into the ‘independent duty doctrine.'” The Court reasoned that Eastwood and Affiliated replaced, not supplemented, the former economic loss rule applied in Alejandre, upon which the trial court relied, and that Elcon and Jackowski later refined this new rule. The Court observed that:
[I]n Eastwood we directed lower courts not to apply the [independent duty] doctrine to bar tort remedies “unless and until this court has, based upon consideration of common sense, justice, policy, and precedent, decide otherwise.”
Elcon Constr., Inc. v. E. Wash. Univ., 174 Wn.2d 157, 165, 273 P.3d 965 (2012) (quoting Eastwood v. Horse Harbor Found., Inc., 170 Wn.2d 380, 417, 241 P.3d 1256 (2010)). Furthermore, in Jackowski, the Court held that fraud claims are not barred under this rule because the duty not to commit a fraud is independent of contract obligations. Jackowski v. Borchelt, 174 Wn.2d 720,738, 278 P.3d 1100 (2012).
Based upon their interpretation of these cases, the Court of Appeals reversed the trial court’s decision stating:
The trial court cannot automatically dismiss Key’s tort claims against the Port based solely on the existence of a contract between them; instead, it must determine whether the Port’s alleged breaches of claimed tort duties arose independently of the contract terms and it must do so on summary judgment taking the facts in the light most favorable to Key, regardless of the likelihood that Key would ultimately prevail on those claims at trial.
Furthermore, the Court observed that the Supreme Court has allowed tort claims to proceed based on fraud, negligent misrepresentation, and interference with contract in similar circumstances. Therefore, the Court held “that the independent duty rule does not bar Key’s tort claims against the Port as a matter of law and that dismissal of these tort claims on summary judgment based on the economic loss rule was error.”
[i] 173 Wn. App. 1, 292 P.3d 833 (Division II, January 23, 2013).