A Rose by Any Other Name: The Economic Loss Rule and the Independent Duty Doctrine

There has been a lot of buzz about the recent Washington Supreme Court decision in Eastwood v. Horse Harbor Foundation, Inc., 241 P.3d 1256 (Wash. 2010) concerning the economic loss rule. Or, rather, what used to be the economic loss rule in the State of Washington, and which has now been re-named and re-vamped as the independent duty doctrine.

As we all know, the economic loss rule bars recovery in tort for purely economic losses caused by a defective product. In other words, without injury to a person or to personal property, there can be no recovery for pecuniary loss. Several jurisdictions, of which Washington used to be one, subscribe to a more liberal interpretation, finding that the rule barred liability in tort cases between parties who had entered into a contract. The theory behind this expansive approach is that the parties could have built the risk of the loss into the contract. That was approach taken by the Washington Supreme Court previously in Alejandre v. Bull, 153 P.3d 864 (Wash. 2007).

Enter Eastwood, which involved the failure of a tenant to maintain a horse farm and centered on the tortious waste of property. Instead of following their own lead, the Washington Supreme Court performed the legal equivalent of a 180 and renamed the doctrine the “independent duty doctrine,” which now focuses on whether some separate duty of care exists independent of the parties’ contractual relationship, rather than focusing on the harm that was suffered:

In sum, the economic loss rule does not bar recovery in tort when the defendant’s alleged misconduct implicates a tort duty that arises independently of the terms of the contract. In some circumstances, a plaintiff’s alleged harm is nothing more than a contractual breach or a difference in the profits, revenue, or costs that the plaintiff had expected from a business enterprise. In other circumstances, however, the harm is simultaneously the result of the defendant breaching an independent and concurrent tort duty. Thus, while the harm can be described as an economic loss, it is more than that: it is an injury remediable in tort. The test is not simply whether an injury is an economic loss arising from a breach of contract, but rather whether the injury is traceable also to a breach of a tort law duty of care arising independently of the contract. The court defines the duty of care and the risks of harm falling within the duty’s scope.

Opinions about the implications of the new rule run the gamut, including speculation whether it is a new rule at all, or simply a narrowing of the interpretation of the economic loss rule. Indeed, the Eastwood court itself, in a footnote, argued that it was not disturbing “[t]he general rule . . . that a party to a contract can limit liability for damages resulting from negligence.” There is also a difference of opinion as to whether the new approach in Washington is a more, or less, fact-intensive inquiry for a court to undertake.

The real question is, given the wide range of interpretations of the economic loss rule across the country, how many courts will follow Eastwood? Will other states continue to narrow the interpretation? For that matter, how many other states will rename the doctrine something else entirely? Furthermore, will this have any immediate effect on the way parties build risk into their contracts and agreements? At least in Washington, that might be a good idea.

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