Washington Supremes Abandon "Economic Loss Doctrine" for the "Independent Duty Rule"
One of the basic principles of product liability law is that where a defective product injures itself (requiring repair or replacement) or creates only economic loss and the sales transaction was governed by a contract, there is no cause of action in tort. Instead, the remedy lies, if at all, in contract. The reason is because where the issue is not personal injury or property damage, but merely financial loss, the parties had the ability to allocate the risk of loss between themselves in contract, and allowing recovery under a tort theory would undermine the parties' agreed-upon risk allocation.
But apparently not in the state of Washington. See Eastwood v. Horse Harbor Foundation, Inc., 2010 WL 4351986 (Wash. Nov. 4, 2010).
Eastwood was not a product liability case; instead, it involved a lessor's attempt to recover from the lessee for the common law tort of waste outside of the lease's provisions requiring the lessee to repair and maintain the property and return it in the same condition it was tendered at the beginning of the lease. The intermediate appellate court, on its own, had invoked the economic loss doctrine to reverse the judgment on the common law waste theory. So the Washington Supreme Court took review of the case. It could have simply held that the economic loss doctrine does not apply outside of the product liability context. But it did not. Instead, it chose to rewrite Washington law on the economic loss doctrine.
The court explained its rejection of the term "economic loss doctrine" this way:
The term 'economic loss rule' has proved to be a misnomer. It gives the impression that this is a rule of general application and any time there is an economic loss, there can never be recovery in tort. This impression is too broad for two reasons. First, it pulls too many types of injuries into its orbit. When a contractual relationship exists between the parties, any harm arising from that relationship can be deemed an economic loss for which the law of tort never provides a remedy. . . .
Second, and most importantly, the broad application of the economic loss rule does not accord with our cases. Economic losses are sometimes recoverable in tort, even if they arise from contractual relationships. For instance, we recognize the torts of intentional and wrongful interference with another's contractual relations or business expectancies, wrongful discharge in violation of public policy, failure of an insurer to act in good faith, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of an agent's fiduciary duty to act in good faith, and negligent real estate appraisal. Thus, the fact that an injury is an economic loss or the parties also have a contractual relationship is not an adequate ground, by itself, for holding that a plaintiff is limited to contract remedies.
Id. at *3-*4 (citations omitted).
The court then reasoned that the real question was whether there should be a tort duty or a party should be limited to his remedy in contract, and engaged in revisionist history to recharacterize its prior economic loss doctrine jurisprudence:
Where this court has stated that the economic loss rule applies, what we have meant is that considerations of common sense, justice, policy, and precedent in a particular set of circumstances led us to the legal conclusion that the defendant did not owe a duty. When no independent tort duty exists, tort does not provide a remedy.
Id. at *4. The court proceeded to explain a number of its cases -- and the U.S. Supreme Court's decision in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) -- as cases examining whether tort law imposed a legal duty independent of contract, concluding that "the economic loss rule does not bar recovery in tort where the defendant's alleged misconduct implicates a tort duty that arises independently of the contract." Id. at *8. The court then abandoned the term "economic loss rule" altogether, in favor of the "independent duty rule." Id.
Of course, the problem with the rule, as explained by the court, is that one can never know until after the fact whether a cause of action in tort exists and whether the parties' contractual risk allocation will, in fact, be honored. This is complicated even further by the court's suggestion that in nearly every case, this is going to be a jury question:
Although we find clarity in thinking of the problem in terms of an independent duty, we see potential difficulty, when a defendant has obligations under both the contract terms and an independent tort duty, in distinguishing between a harm that implicates only the contract and a harm that implicates the independent duty as well. It is a factual question of proximate causation. As a matter of law, the court defines the duty of care and the risks of harm falling within the duty's scope. As a matter of fact, the jury decides whether the plaintiff's injury was withing the scope of the risks of harm, which the court has held the defendant owed a duty of care to avoid.
Id. at *8 (citations omitted).
The irony of all of this is that, by deferring to the parties' contractual risk allocation, the economic loss doctrine is supposed to create more -- not less -- predictability. The Washington Supreme Court's new rule fosters anything but predictability.
Whatever you may opine from a products liability defense standpoint, the issuance of Eastwood v. Horse Harbor Foundation is blessed relief for we Washington lawyers dealing with wrongdoing arising in the midst of contractual relationships, such as real estate transactions. Courtesy of the defense bar here and the arguments it has pushed in intermediate appeals cases following the Alejandre decision, we were starting to get the sinking feeling that there would never be tort remedy in an case of a loss less than, say, dismemberment or a horrific building collapse or the like. I never thought that the Washington Supreme Court's prior decision, Alejandre, went that far and the Court has thankfully reeled-in the provocateurs of the courts of appeal. I find its reasoning to be nuanced and fair.