Summary: Many states recognize some version of the economic loss rule, which provides that losses that are merely economic in nature must be recovered in a breach of contract action, not in tort (negligence). Breach of contract claims generally require a direct contractual relationship between the two parties. The common adjunct to the economic loss rule is that injury, death, and property damage claims may be pursued in tort. The Pointe at Westport case provides that in the state of Washington, claims based on the risk of injury or property damage (safety risks), where no actual injury or damage has yet occurred, may also be pursued in tort.
Engineers Northwest, Inc. (ENW) provided structural engineering services to the architectural firm that designed an upscale condominium building. Later, the building’s homeowners’ association (HOA) asserted that the building was “dangerously unsafe” primarily because the lateral force resistance system was not adequate to handle a large seismic event. ENW’s structural calculations and designs were alleged to be the primary cause of the flaws. The HOA brought a claim against ENW for negligent design, seeking compensation for the cost of modifications to make the building safer in earthquakes.
ENW moved for summary judgement based on Washington’s independent duty doctrine, which bars negligence claims for economic loss. The trial court denied the motion, and the case proceeded to trial. The jury found that ENW was 97.5% at fault and the framing contractor 2.5% at fault. Damages were $1.1 million. ENW appealed.
Decision: On appeal ENW asserted that the HOA’s action should have been dismissed because the need to make building modifications was a mere economic loss claim, and as such could only be pursued as a contract claim. ENW requested a ruling that it did not have an independent duty to the HOA, because the HOA’s losses were not for injury or property damage.
The court’s opinion noted that although the “foundation of any liability analysis for design professional[s] rests in contract” (citing a treatise by Chicago attorney Kevin Sido), design professionals also sometimes have tort duties to their clients and the public that are independent of the contract. Although many previous Washington independent duty cases had focused on actual injury or physical damage to property situations, the court observed that a 2010 Washington Supreme Court decision had concluded that an engineer has a duty of care with respect to “safety risks of physical damage.” The Pointe court therefore held that:
- An engineer’s duty of care encompasses the prevention of
safety risks.
- The safety risk itself constitutes an injury to the
- If an engineer’s design services result in an unsound
structure, the engineer has breached its duty of care.
- ENW owed an independent duty to the developer (first owner) and the HOA (subsequent owners) to design a building that did not present safety risks to the residents or their
Comment: The economic loss rule is laudable when it forces commercial disputes over money to be decided under the controlling contracts (and contractual risk transfers) rather than under negligence law. The rule has always been subject to a sizable exception for claims that involve injuries and property damages. Such claims have historically been within the province of tort law.
The Point case looks at a situation on the border between rule and exception. Given the paramount importance of the safety of the public, it is no surprise that the Washington court of appeals held in favor of allowing a tort claim to proceed. As a matter of public policy, the decision encourages proactive safety improvements, rather than forcing building owners to wait for an actual failure before being able to obtain recourse based on a flawed design. At the same time the case does not abandon or reject contract-based analysis, pointing out that the relevant contract provisions are fundamental to a liability analysis in every case against a design professional.