Washington Supreme Court Rejects "Bright-Line" Application Of The Economic Loss Doctrine
April, 2011
The Supreme Court of Washington in Affiliated FM Insurance Company v. LTK Consulting Services, Inc., 170 Wash.2d 442, 243 P.3d 521 (2010) refused to apply the economic loss doctrine as a “bright-line rule of general application” precluding recovery in tort any time there is an economic loss. Instead, the court found that an engineering firm could assume tort law duties beyond its contractual obligations and subject itself to negligence causes of action for economic damages brought by parties with whom it did not contract.
Facts
The case involved Seattle’s monorail system which was operated under a “concession agreement” by Seattle Monorail Services Joint Venture (“SMS”). The City of Seattle hired an engineering firm, LTK Consulting (“LTK”), to identify maintenance and repair issues, and it was one of LTK’s recommendations regarding the grounding system for the monorail that was allegedly faulty and resulted in a fire on one of the trains. Besides damage to the train on which the fire occurred, smoke damaged the cars of another train that assisted escaping passengers. All the damage in question was to the monorail system itself. There was no damage to other property. SMS’ insurer, after paying an agreed-upon allocation of costs to repair the fire and smoke damage, sued LTK for negligent changes in the electrical ground system for the monorail. LTK filed a motion for summary judgment arguing that the losses were purely economic because “they stemmed from business interruptions and SMS’ contractual obligations to repair the City’s monorail trains.” In addition, LTK asserted that SMS did not have a property interest in the monorail system. The motion was granted by the district court.
Question for Washington Supreme Court
On appeal, the United States Court of Appeals for the Ninth Circuit certified to the Washington Supreme Court the following question:
May party A (here, SMS, whose rights are asserted in subrogation by AFM), who has a contractual right to operate commercially and extensively on property owned by non-party B (here, the City of Seattle), sue party C (here, LTK) in tort for damage to that property, when A (SMS) and C (LTK) are not in privity of contract?
Safety Interests of Public Trump “Contractual Expectancies”
Though acknowledging that it had previously adopted the economic loss rule in an attempt to describe the dividing line between the law of torts and the law of contracts, the Washington Supreme Court now concluded that “the term ‘economic loss rule’ has proven to be a misnomer,” because the definition of economic injuries is “broad and malleable,” and economic losses are sometimes recoverable in torts such as interference with contract. In determining whether a plaintiff can seek recovery in tort or is limited to contract remedies, “the court’s task is not to superficially classify the plaintiff’s injury as economic or non-economic. Rather, the court must apply the principle of Washington law that is best termed the independent duty doctrine.” The court must determine under ordinary tort principles whether the defendant had a tort duty that arose independently from the terms of the contract. To resolve the question of duty, the court makes three inquiries: Does an obligation exist? What is the measure of care required? To whom and with respect to what risk is the obligation owed?
In finding that such a duty arose from the engineering services provided by LTK, the court had to distinguish its earlier decision in Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist No. 1, 124 Wash.2d 816, 881 P.2d 986 (1994), where the court held that the architect, structural engineer and inspector could not be sued in tort by the general contractor even if the plans were inadequate and cost the general contractor delays and economic damages of $3.8 million. In that ruling, the Washington Supreme Court found that “the economic loss rule does not allow a general contractor to recover purely economic damages in tort from a design professional.” In explaining its prior decision in Berschauer/Phillips, the court described its “overriding concerns” at that time as protecting “the parties’ contractual expectancies” and allowing the parties to allocate risk through contract negotiations. The court then contrasted its concern for maintaining “private ordering” of risk in complex multiparty transactions with the safety interests of the public. The existence of a fire on the monorail system and the danger it posed to people and property were particularly influential factors in the court’s reasoning. The court found that “…engineers who undertake engineering services in this state are under a duty of reasonable care. The interest in safety is significant.” Although the Supreme Court’s decision suggests engineers may not have liability in tort for “some classes of harm,” it refused to apply the economic loss rule to all cases of harm and all classes of people, particularly where an innocent party did not have an opportunity to negotiate the risk of harm and would be forced to bear the costs of a careless engineer’s work.
Applying the independent duty analysis, the Washington Supreme Court found that such a duty existed to use reasonable care in providing engineering services with respect to physical damage to the monorail, and that LTK’s duties applied to SMS’ interests in operating the monorail system.
Learning Point
In determining whether a tort claim can be defeated based on the economic loss doctrine, the law of the relevant state must be carefully examined, as many states narrow the rule’s application and carve out exceptions. This is particularly the case when the alleged negligence on the part of the design professional results in a safety hazard.
Back to CM Report on Construction (2011) 2011 Spring Table of Contents
