Pay Attention to Your Contract Terms and Scope - Recent Washington Supreme Court Decision Reshapes Independent Duty Doctrine
In a recent case, Donatelli v. D.R. Strong Consulting Engineers, Inc., 312 P.3d 620 (Wash. 2013), a sharply divided 5-4 opinion by the Washington Supreme Court provides further evidence that the line between Washington’s “economic loss” rule and “independent duty” doctrine remains quite blurred.
The case arose out of an agreement between property owners, the Donatellis, and D.R. Strong Engineers, Inc. (“D.R. Strong”) for the development of the owners’ property into two short plats. Initially, D.R. Strong orally agreed to help with the county permitting process and to manage the project through recordation of the plats. According to the Donatellis, D.R. Strong told them the project would be completed in 1.5 years. After obtaining preliminary county approval for the project, which would last 60 months, D.R. Strong sent the Donatellis a written contract for engineering services. The contract detailed the engineering services and estimated fee, but was silent as to D.R. Strong’s project management role. The Donatellis alleged that D.R. Strong assumed extensive managerial responsibilities on the project and charged them four times the initial estimate.
The county’s preliminary approval expired with the project incomplete. Before D.R. Strong could obtain a new preliminary approval, the Donatellis suffered financial hardship and the property was lost to foreclosure. The Donatellis then sued D.R. Strong, claiming over $1.5 million in damages and alleging breach of contract, Consumer Protection Act (“CPA”) violations, negligence, and negligent misrepresentation. The trial court granted summary judgment on the CPA claims, but denied summary judgment on the negligence claims, finding that “‘professional negligence claims can be stated even in the context of a contractual relationship.’” Id. at 622 (quoting trial court). The Court of Appeals affirmed the trial court’s ruling under the independent duty doctrine, based on the notion that engineers owe duties to their clients independent of any contractual relationship. See Donatelli v. D.R. Strong Consulting Eng’rs, Inc., 163 Wn. App. 436, 443, 261 P.3d 664 (2011).
The issues for the Washington Supreme Court included whether the independent duty doctrine applied to preserve the owners’ claims for negligence (despite factual questions regarding the scope of D.R. Strong’s work) and negligent misrepresentation (predicated on D.R. Strong’s alleged misrepresentations made to induce the Donatellis to contract). The Supreme Court affirmed the Court of Appeals’ ruling and thus refined application of the independent duty doctrine to extend the reach of tort-based claims beyond any contractual agreement.
In assessing the Donatellis’ negligence claim, the Court revealed that, “[h]istorically, Washington applied the economic loss rule to bar a plaintiff from recovering tort damages when the defendant’s duty to the plaintiff was governed by contract and the plaintiff suffered only economic damages.” Id. at 623 (citing Alejandre v. Bull, 159 Wn. App. 674, 683, 153 P.3d 864 (2007)). However, under Eastwood v. Horse Harbor Foundation, Inc., 170 Wn.2d 380, 389, 241 P.3d 1256 (2010), the Court held that a more aptly named “independent duty” doctrine provides an “analytical framework” to assess whether “[a]n injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.” Id. at 627 (citing Eastwood, 170 Wn.2d at 389). However, the Court stated that this application of the doctrine works only when the terms of the contract are established in the record and clearly indicate what duties were assumed by the parties.
The Court noted that the first step in analyzing a professional malpractice claim is to determine the scope of the professional obligations, which should be set forth in written contracts between engineers and their clients. While a contract may assume an engineer’s common law duty to act with reasonable care, engineers may nevertheless assume additional obligations by affirmative conduct. Thus, the Court agreed with the Court of Appeals that, insofar as D.R. Strong’s scope of work remained unclear under the agreement, which may not have been limited by the written contract, it is impossible to determine what duties D.R. Strong owed to the Donatellis. As fact issues remained as to the scope of D.R. Strong’s work, the Court could not realistically apply the independent duty doctrine and affirmed the denial of summary judgment.
Critical to the Court’s decision was the apparent absence of a merger or an integration clause in the contract. These provisions generally limit the contractual terms to the four corners of the contract and restrict consideration of any prior or contemporaneous oral agreements. Such a provision could have prevented the Donatellis from attempting to explain or enlarge D.R. Strong’s scope of work.
As for the negligent misrepresentation claim, the Court applied the independent duty doctrine to affirm the Court of Appeals’ denial of summary judgment. Notwithstanding earlier economic loss rule cases that barred misrepresentation claims in light of a written contract, the Court agreed that D.R. Strong’s duty to avoid misrepresentations that induced the Donatellis to enter into a contract (i.e., regarding the time to complete the project and the estimated costs for the work) arose independently of the contract. Relying on several appellate cases, the Court acknowledged that, in some circumstances, a negligent misrepresentation claim may be viable even when only economic damages are at stake and the parties contracted against potential economic liability, although the parties can attempt to contract against such claims.
Given the strong dissenting opinion in Donatelli, however, the debate on whether and how to apply the economic loss rule or the independent duty doctrine is not entirely settled. In the meantime, pay careful attention to defining contractual obligations to allocate various risks between all parties to avoid potential tort-based claims outside the contract.