The Limits of the Economic Loss Rule

The Economic Loss Rule has become a salient issue in Washington over the past few years, with a series of cases challenging assumptions about what people can expect when they enter into a contract.  The question, to which our Supreme Court has articulated an answer in several decisions, is to what extent can parties to a contract still look to tort remedies when they are dissatisfied with the outcome of their agreement?

The Economic Loss Rule has been understood to mean parties to a contract must allocate all risk of economic damages in the contract and, if they do not, the parties to the contract will not be able to use non-contract claims (i.e. tort claims) to recover economic damages (e.g. loss of profits, diminished value of item purchased).  Economic damages are to be distinguished, in this context, from actual physical harm.  The rule can become important even in non-commercial contexts; it has had major impacts for people buying a home, where a contract is used to define the terms of the transaction.  The application of the rule prohibiting tort remedies for economic damages, where a contract existed between the parties, was based largely Alejandre v. Bull, a 2007 decision of this state's Supreme Court.

However, in a pair of recent decisions our Supreme Court has clearly limited the application of the rule and shown that tort remedies are more broadly available than we previously thought possible.  Those cases, issued on November 4, 2010, were Eastwood v. Horse Harbor Fdn., Inc., and In re Affiliated FM Insurance Co, v. LTK Consulting Services, Inc.

The new statement of the Economic Loss Rule, put most simply, says that a plaintiff can recover its economic damages by way of a tort (non-contract) claim so long as that tort claim is based on a duty owed independently of any contract.  To avoid confusion, the Supreme Court suggested a new name for the rule: the Independent Duty Doctrine.  In the Eastwood case, that duty arose as a matter of statute in the context of the lease of a horse farm.  The Affiliated FM Insurance case involved a more general duty owed by an engineer performing work on the Seattle monorail.

The newly clarified rule requires a very nuanced application, as the Independent Duty Doctrine is not as simple as the above analysis might suggest.  Attorneys will find themselves making changes to some of the language they include in contracts, based on these recent cases, especially when they are helping clients to sell property or provide services with strictly-limited warranties.  For clients, it means that contract forms they have relied on in the past may need updating in order to provide them the best protection from unexpected claims.  In addition, the newly clarified rule requires attorneys to carefully consider tort duties, and discuss them with their clients, to an extent they may not have felt necessary based on older decisions.

Division I Defines the Limits of Growth Management Hearings Boards' Authority

(Docket No. 64751-2, File Date 12/7/10)

Growth Management Hearings Boards are creatures of statute, without common-law or inherent powers.  Because the Boards' power to fashion a remedy is strictly constrained by the Growth Management Act ("GMA") and because the GMA does not provide a requirement that Boards must invalidate ordinances adopted in violation of the the State Environmental Policy Act ("SEPA"), Boards are not required to invalidate such ordinances, according to the recent decision of the Division I Court of Appeals in Davidson Serles & Assoc. v. Central Puget Sound Growth Mgmt. Hearings Board.  The decision is a victory for efficiency in growth-management planning inasmuch as it clarifies the Growth Management Act.

The action involved a rezone and a comprehensive plan amendment to allow taller building heights in an area of downtown Kirkland.  As part of the process, the City issued an Environmental Impact Statement ("EIS") that lacked any meaningful evaluation of alternative proposals.  Neighboring property owners appealed the City's enactment of the amending ordinances. The Board remanded the SEPA determination to the City for further review and compliance with SEPA, but determined that the goals of the GMA would be undermined by invalidating the ordinance.

Quoting RCW 36.70A.300(4), the court said that "[e]ven upon a Board's finding of noncompliance and order of remand, comprehensive plans and development regulations remain valid "[u]nless a board makes a determination of invalidity as provided in RCW 36.70A.302."  The court found that the necessary elements for invalidations in RCW 36.70A.302(1) were not present..

The court held that while Boards are required to administer the state laws in accordance with SEPA policies, they are not required to always invalidate an ordinance that was enacted based on a noncompliant EIS.  The decision to remand was consistent with SEPA's policies.  In summary, the decision reminds us that the authority of Boards to invalidate an ordinance is neither mandatory nor absolute.

Residential MTCA Liability: Grey v. Leach

The Division I Court of Appeals recently addressed issues of apparent first impression in the area of hazardous substance contamination on residential real property.  This case should impact, among other things, the way buyers and sellers draft their purchase and sale agreements (especially inspection contingencies) whenever there is a possibility of underground storage tanks on a property.

In Grey v. Leach (Docket No. 63221-3, Filed 12/13/10), the Court granted discretionary review of the King County Superior Court's pre-trial rulings on three affirmative defenses to Model Toxics Control Act ("MTCA") claims.  The issue before the court was whether statutory liability exclusions for "innocent purchasers" (RCW 70.105D.040(3)(b)) or "domestic purposes" (RCW 70.105D.040(3)(c)) applied "to former owners of property where heating oil was released from the residential heating system operated by them during their ownership."  The court also reviewed the issue of whether the terms of the parties' real estate purchase and sale agreement ("REPSA") barred the Greys' MTCA claims as a matter of law.  The Leaches were prior owners of the home, from whom the present owners, the Greys, sought contribution for remediation expenses.

The court held that 1) because the Leaches contributed to the release during their ownership, as operators of the heating system, they were not protected by the innocent purchaser defense and 2) the leaking of fuel oil from the return pipes of an underground storage tank is not an excluded "domestic use" under MTCA.  The court further held that the REPSA did not allocate MTCA liability between the parties.

Important to the court's decision on the MTCA affirmative defenses was its interpretation of the word "contributed", under the innocent purchaser defense, which defense is not available where the owner/operator contributed to the release.  The court held that the concept of contribution to the release of hazardous substances does not include a scienter element (i.e. negligence or intentional conduct).  With regard to the "domestic use" defense, the court held that a leaking underground storage tank is not a"domestic use", despite the fact that home heating oil is a common residential fuel, because the statute does not include the leaking of fuel from a malfunctioning tank system as part of such use.

With regard to the REPSA, the court found that it did not expressly allocate MTCA liability.  The court denied the Leaches' argument that they allocated MTCA liability to the Greys by the inclusion in the REPSA of a right to inspect the property to determine the presence of underground storage tanks.  The court found that the REPSA specifically limited the Greys to determining the presence of tanks, rather than the condition of the tanks or the presence of any contamination.  The inspection the Greys got, consistent with the above inspection right, did not disclose facts indicating contamination.  Under those facts, the court held that the REPSA did not allocate MTCA liability between the parties, and affirmed the trial court's dismissal of that affirmative defense.