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Washington Supreme Court rejects “economic loss rule”

Seattle Monorail

It may seem unremarkable that the Washington Supreme Court would approve a claim by an equipment operator, in this case the Seattle Monorail, against an engineering firm that provided services to the monorail’s owner, the City of Seattle. It seems only logical that if an engineer provides engineering work for the City on the monorail, and the faulty work leads to a fire, that the monorail’s operator could sue the engineer’s for damages. But, until this decision was announced, anyone familiar with Washington law would have predicted that the claim would be dismissed.

To understand this, one has to go back in time to a 1994 case, Berschauer/Phillips v. Seattle School District. In that case, the general contractor on a school project claimed that it suffered $3.8 million in damages due to delays in construction. The contractor sued the project architect, engineer, and the inspector, alleging that these parties had contributed to the delays. But the Berschauer/Phillips Court, noting that the contractor only had a contract with the City of Seattle, held that the contractor could not sue these third parties. The Court held that “the economic loss rule does not allow a general contractor to recover purely economic damages in tort from a design professional.”

Except to a lawyer, this must sound like legal gibberish. Even to many lawyers, this was hard to understand. The court reasoned that in the construction world, it is typical for parties to “allocate” risk by contract, and that all remedies for construction problems should be set out in a contract. Thus, if the contractor contracts with the City and suffers losses due to design problems – regardless of what person or entity caused those problems – the contractor could only assert those claims against the City. The City could bring a claim against a design professional it had hired, but the contractor could not.

Even if, for example, an engineer’s mistake in designing roof beams had caused the roof to collapse, the owner could not recover from the engineer unless someone had suffered personal injuries. Or, if an owner discovered that the waterproofing on his decks or roof was defective and allowed water to damage the framing of the house, the rule would have prevented the owner from bringing a direct action against the roofer, unless he had a contract with the roofer. This rule, commonly known as the economic loss rule acted as a complete bar to an owner’s right to recover.

This longstanding holding now appears to have been rejected by the Washington Supreme Court in Affiliated FM Ins. Co. v. LTK Consulting Svcs, Inc., 2010 WL 4350338 (Wash.), decided in November 2010. The Affiliated FM case now requires courts to approach such claims differently. Instead of asking whether the parties have a contract, or whether the injuries are personal or “economic,” we must look at whether the party at fault owed any independent duty to the party who suffered a loss.

To answer that question, the Court said we have to “weigh considerations of logic, common sense, justice, policy and precedent.” And, just what does all of this mean? The Court called these factors “the duty considerations.” “The concept of duty is a reflection of all those considerations of public policy which lead the law to conclude that a plaintiff’s interests are entitled to legal protection against the defendant’s conduct.” If this isn’t a precise guide, and it isn’t, how do we decide? We “balance the interest at stake.” Using our common sense, we ask whether someone should be required to use reasonable care.

Where someone’s work involves issues of safety of persons and property, the Court imposes a duty of greater care. In the Affiliated case, the engineer’s work actually led to a fire, which imperiled the safety of the monorail passengers. Even though there was no evidence of injuries to passengers, the Court considered it important that passengers could have been hurt. Further, the Court found it important that the fire damaged the rail cars. Considering that the engineer knew it was working on passenger rail cars, it was reasonable to expect the engineer should exercise care to protect both the passengers and the monorail cars.

Again, this may seem so elementary that it should not deserve the attention of the Washington Supreme Court. But, this decision is truly revolutionary, and thus evolutionary. Here are some possible extensions of the Court’s reasoning, all of which would be dramatic changes from the previous law.

  1. Homeowner hires an architect to design a new home and a contractor to build the home. The structural engineer, retained by the architect or contractor, makes a design error in calculating the size and strength of the floor beams. The beams begin to sag under the weight of the house. Eventually, the floors crack, then the walls, and maybe even the windows. Can the owner demand that the engineer cover the cost of repairs and related damages such as loss of use? Under previous law, the “economic loss doctrine,” the answer would clearly be “no” because the homeowner did not have a contract with the engineer. However, under the Court’s new reasoning in Affiliated FM, the answer is “maybe.” Certainly, if the design error threatens the safety of the owners, or threatens the safety of the house itself, the Affiliated case would seem to provide the authority to pursue the claim against the engineer.
  1. A general contractor hires a framer to build a new auto dealership. The contractor sends the plans to a lumber supplier, who reads the plans and determines the size and number of pieces to supply. The lumber supplier then delivers the lumber and the contractor builds the dealership. Later, when all the vehicles are in the building, the owner discovers that the beams and posts furnished by the supplier were inadequate. As a result, after the first snow fall, the roof buckles under the weight and threatens to collapse on the cars. Under this new case, the owner might well have a direct claim against the lumber supplier, even though it never spoke to the supplier or bought anything from it.

No doubt engineers, contractors, product suppliers, and even manufacturers, will complain about the court’s latest development of Washington law in Affiliated FM. But over time, as courts apply a common sense approach, they will figure out when an independent duty of care exists, and whether the duty extends to the person who suffers a loss. Some parties will be too remote from the bad actor to recover via a direct claim, while others who are within the range to deserve reasonable care by the bad actor will have suffered a type of damage that is too remote or rare to warrant a direct claim. But, one thing is clear: Washington law will be far more interesting in the coming years than it has been in the preceding 15 years.

Please note that every individual’s case is different, and if you think you may have suffered personal injury or property damage, you should promptly consult with legal counsel. If you have questions about these new cases or would like to discuss your own situation, please feel free to give us a call at 206.626.5444.