In the world of construction, Washington has historically been a “chain of contract” state, in which contracts governed the duties and liabilities of those involved in a project, and parties were generally free to limit by contract both their responsibility and their risk for any purely economic damages. Essentially, if nothing broke and no one bled, liability was limited to what the contract said. This week, the Washington Supreme Court declared that those days are gone with the release of its long-delayed decision in Donatelli v. D.R. Strong Consulting Engineers, Inc.
The facts tell a typical “project gone bad” story. A developer (Donatelli) hired an engineering firm (defendant D.R. Strong) to provide engineering services on its project for an estimated fee of $33,150. In the parties’ contract, they agreed that the engineer’s liability for any problems would be limited to the amount of fees paid by the developer. The engineer even offered to waive that limitation of liability if the developer paid it an extra $1,650, but the developer elected not to incur that extra expense.
As often happens in construction jobs, problems arose, estimates were exceeded, and delays occurred. So the developer sued his engineer, claiming damages in excess of $1.5 million in alleged lost profits and expenses, and alleging not just breach of contract, but also claims for negligence and negligent-misrepresentation. Predictably, the engineer moved to dismiss the negligence and negligent misrepresentation claims as being barred by Washington’s “economic loss rule,” which generally limits contracting parties to their contractual remedies in the case of purely economic losses (i.e., losses that do not stem from something broken or someone bleeding).
Pity the poor engineer’s counsel who took on this case, no doubt confident that Berschauer/Phillips Construction Co. v. Seattle School District No. 1, 124 Wn.2d 816, 881 P.2d 986 (1994)—a case that was factually almost indistinguishable from this case, and in which the supreme court affirmed dismissal of similar tort claims—should decide the issue. In Berschauer, a unanimous supreme court held that a general contractor could not sue design professionals in negligence for purely economic losses, and would be limited solely to contractual remedies:
The economic loss rule marks the fundamental boundary between the law of contracts, which is designed to enforce expectations created by agreement, and the law of torts, which is designed to protect citizens and their property by imposing a duty of reasonable care on others. . .
. . . .
We hold parties to their contracts. If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity. The construction industry in particular would suffer, for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract. The fees charged by architects, engineers, contractors, developers, vendors, and so on are founded on their expected liability exposure as bargained and provided for in the contract.
But while the Donatelli case was wending its way through the courts, the Washington Supreme Court decided to abandon 20 years of precedent and venture into uncharted territory with its adoption of the “independent duty doctrine” in 2010, which replaced the economic-loss rule’s clear line of demarcation with a fuzzy, feel-good focus on whether creative counsel could conjure up a “duty” that might exist independent of the contract.
The Donatelli case may have represented the last chance to put some brakes on the independent-duty doctrine’s runaway liability train. The Donatelli majority opinion (written by Justice Fairhurst and joined in by Justices Stephens, Gonzalez, Owens, and Chambers) amply demonstrates the dangers of this new approach. Despite having a signed, written contract in front of it, the Donatelli majority finds that it cannot tell what was actually agreed to by the parties such that the engineer may have assumed additional duties not reflected in the contract—simply because one party to the contract (i.e., the plaintiff) says so. With no hint of irony, Justice Fairhurst complains that “this case makes obvious the inability of the independent duty doctrine to provide an analytical framework when the scope of contractual duties [is] in dispute.” Because of that “ambiguity” regarding the scope of the contract, the negligence claim survives.
Perhaps even more amazingly, the Donatelli majority then holds that there is a free-floating, precontractual duty not to “mislead” the other party by suggesting things in negotiation that do not end up in the final contract (but that perhaps induced the other party to enter into the contract). Here, the disappointed developer claimed that the engineer had misrepresented (in precontractual negotiations) that the project would be finished sooner than projected and cost less than it actually did. But finish dates and costs of completion are central elements of a construction contract, and are routinely dealt with through the use of substantial-completion dates, not-to-exceed clauses, liquidated-damages clauses, and the requirement for written change orders to increase the contract amount.
Moreover, all precontractual negotiations are necessarily “independent” of the contract, since no contract exists when the parties are negotiating. Similarly, every breach of a contract is also potential evidence that the breaching party misrepresented its precontractual intent, since no one would ever enter into a contract that he or she knew the other party would ultimately breach. While Justice Fairhurst suggests that the result might be different if the contract specifically disclaimed the alleged misrepresentation, the Donatelli contract quite clearly limited damages recoverable from the engineer to the amount of the contractual fee paid, but such an explicit limitation is evidently not sufficient to defeat a damages claim for 50 times the amount of that fee. In short, according to the Donatelli majority a party in Washington State is now free to sue its contract partners for “negligent misrepresentation” when the contract does not turn out exactly the way the party anticipated and, by doing so, avoid any limitations of liabilities or other terms contained in the contract.
Justice Madsen’s well-written and well-reasoned dissent points out these flaws and more in the majority’s reasoning. Although Justice Madsen was joined by three of her colleagues, her dissent is ultimately just that—a dissent. Under Justice Fairhurst’s majority opinion, a party disappointed in its contract need only allege that it relied on something said or done by the other party—regardless of whether that “something” contradicts the actual words of the contract—to circumvent contractual limitations and sue for unlimited economic damages using a claim of negligence or negligent misrepresentation. Perhaps contracts are not yet completely dead in Washington State, but this decision certainly leaves them gasping for breath.