Washington Supreme Court Re-Examines Economic Loss Rule

The Economic Loss Rule plays an important part in construction disputes, but it has not been clearly defined or understood, or so the Washington Supreme Court has recently stated. The Economic Loss Rule has been generally described as applying to “economic damages” in cases where the plaintiff has a contract that addresses or could reasonably address the risk of those economic damages. The Economic Loss Rule has been applied in Washington to disputes relating to product liability and construction matters.

The Washington Supreme Court revisited the Economic Loss Rule in two cases issued on November 4, 2010, Eastwood v. Horse Harbor Fdn., Inc., and In re Affiliated FM Insurance Co, v. LTK Consulting Services, Inc. The court concluded that the Economic Loss Rule had been misunderstood. The nature of damages is not determinative (since many kinds of damages can be stated in monetary terms), and the presence of a contract is also not determinative. Instead, the key issue is really whether the plaintiff can identify a duty owed independently of any contract. The court said that the Economic Loss Rule should be renamed the Independent Duty Doctrine. 

In Eastwood, the court ruled that a tenant’s duty to avoid waste was independent of a similar duty stated in the lease, and so the plaintiff in that case could pursue claims in tort and for breach of contract simultaneously. In Affiliated FM Insurance, the court held that an engineer hired by the City of Seattle to make recommendations about repairs to the Seattle Monorail owed a duty of care to the company that operated the Monorail, independent of its contractual duty to the City. As a result, the operating company could pursue a claim against the engineer for negligence after a Monorail train caught fire.

Both Eastwood and Affiliated FM Insurance include multiple opinions, concurring and dissenting, that discuss various aspects of the old Economic Loss Rule, now renamed the Independent Duty Doctrine. All of the opinions should be examined to understand the status of the law in this area.

Two results of interest to construction litigators should survive the restatement of the rule. In Washington, a contractor given faulty plans by its client/owner may not sue the owner’s architect for negligence in preparing those plans. And Washington does not recognize a cause of action for negligent construction. Any case needs to be analyzed on its particular facts, however.

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