Alejandre v. Bull

¶38 (concurring in result) — I agree with the majority in result but write separately to suggest a different analytical approach to the economic loss rule.

Chambers, J.

f 39 Like the majority, I would reject Arturo and Norma Alejandre’s negligent misrepresentation claim. Once the economic loss rule is applied, this negligent misrepresentation claim is revealed to be a breach of contract claim, not remediable in tort. Like the majority, I would hold that the contract does not control the Alejandres’ fraudulent concealment claim. In this state, fraud is not a contract claim. Like the majority, I would hold that the Alejandres failed to present sufficient evidence on all of their claims and that the trial court properly dismissed them.

f40 Unlike the majority, I do not believe that the best approach to the economic loss rule is to find it bars recovery for any undefined economic loss between parties whose relationship is governed by contract unless an exception applies. Cf. majority at 685-86. The economic loss rule is a misnomer, and the majority mistakes the name of the doctrine for its function.

¶41 Instead, I would approach the economic loss rule in light of what it is: a tool we use to ensure that tort is tort, contract is contract, and that each comes with its own remedies. The distinction between tort and contract matters because our society has made the rational choice to limit contract remedies to the typically efficient remedies laid out by the specific contract signed by the parties or provided by background contract and commercial law. Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 561, 489 A.2d 660 (1985).⁷ Our society has also made the rational choice that tort remedies should make the victim whole and thus often include significant consequential damages, such as pain and suffering, which are generally inappropriate for mere breaches of contract. See Rardin v. T&D Mach. Handling, Inc., 890 F.2d 24, 25-26 (7th Cir. 1989). Only after I determined that there was a potential question as to whether a suit filed in tort should instead sound in contract would I examine whether the loss was, rightly understood, an “economic loss” — that is to say, a “commercial loss,” properly addressed in contract law. Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990). In this case, either approach achieves the same results.

¶42 The majority aptly recites the relevant facts. Mary Bull, an elderly widow, sold her home to a young couple. The house had a septic system that had needed significant repair in recent years. A repairman told her that her system was unrepairably defective and that she should connect to the city’s sewer system. Bull made some initial inquiries about connecting to the sewer system but did not follow through.

¶43 At the time the Alejandres made an offer on the house, the septic system was performing adequately. Bull disclosed that she had had the system repaired recently. She did not disclose (and it appears may not have remembered or understood) the extent of the septic system’s problems or that she had been told to connect to the city’s sewer system.

¶44 Before buying Bull’s home, the Alejandres had her septic system inspected by two different inspectors. Their inspectors reported that the septic system appeared to be working, though one cautioned that he was unable to examine parts of it. Unfortunately, shortly after the Alejandres purchased the home, the system began to fail. By chance, the Alejandres sought help from the very person who had originally told Bull that the system was fatally flawed. In the end, the couple spent around $30,000 to have adequate plumbing in a house they purchased for $115,000.

The Economic Loss Rule

¶45 Bull argues, and the trial court agreed, that the Alejandres’ claims are barred by the “economic loss rule.” Claims for breach of contract and some tort claims, especially products liability claims, often bear great similarity to one another. Tort remedies are often, perhaps always, significantly larger than contract remedies. It appears to me that the economic loss rule is a response to the risk that the tort remedies available in products liability law, if applied in contract law, could gut it. One way we have prevented the death of contract is through the economic loss rule. It prevents one party to a contract from rewriting the damage provisions after a breach by styling the case in tort. As the inimitable Judge Richard A. Posner put it:

The insight behind the [economic loss rule] doctrine is that commercial disputes ought to be resolved according to the principles of commercial law rather than according to tort principles designed for accidents that cause personal injury or property damage. A disputant should not be permitted to opt out of commercial law by refusing to avail himself of the opportunities which that law gives him.

Miller, 902 F.2d at 575; see also Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wn.2d 816, 821, 881 P.2d 986 (1994); E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866, 872-74, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1986) (warning that without some sort of analytical tool to separate them, “contract law would drown in a sea of tort”); Seely v. White Motor Co., 63 Cal. 2d 9, 403 P.2d 145, 45 Cal. Rptr. 17 (1965) (first clearly articulating an economic loss rule to divide tort and contract remedies).⁸

¶46 I say the rule is unfortunately named because describing the “loss” as economic is not particularly helpful and can be positively misleading. Again, as Judge Posner quite aptly noted:

It would be better to call it a “commercial loss,” not only because personal injuries and especially property losses are economic losses, too — they destroy values which can be and are monetized — but also, and more important, because tort law is a superfluous and inapt tool for resolving purely commercial disputes. We have a body of law designed for such disputes. It is called contract law.

Miller, 902 F.2d at 574.

¶47 “Economic loss” (for which I suggest we read in our heads “commercial loss”) includes “ ‘the diminution in the value of [a] product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.’ ” Christopher Scott D’Angelo, The Economic Loss Doctrine: Saving Contract Warranty Law from Drowning in a Sea of Torts, 26 U. Tol. L. Rev. 591, 592 (1995) (quoting Comment, Manufacturers’ Liability to Remote Purchasers for “Economic Loss” Damages — Tort or Contract?, 114 U. Pa. L. Rev. 539, 541 (1966)). It “is called in law an ‘economic loss,’ to distinguish it from an injury to the plaintiff’s person or property (property other than the product itself), the type of injury on which a products liability suit usually is founded.” Miller, 902 F.2d at 574.

¶48 Thus, merely because a loss can be expressed in economic terms, it is not necessarily an “economic loss” triggering application of the unfortunately named “economic loss rule.” See id. at 575. I recognize that this is the sort of linguistic perversity that gets lawyers laughed at. Nonetheless, I point it out because I fear the majority may be misunderstood as holding that we start from the position that any damage, or at least any property damage, that can be expressed in a dollar figure is presumptively an economic loss and the economic loss rule will keep a case out of tort (whether or not a contractual relation that could give rise to relief exists) unless an exception applies. While in most cases, that will get us to the right type of law, it is a needlessly complicated way to approach the problem.

¶49 In my view, we should start by recognizing that the “economic loss rule” is the analytical tool we use to determine whether a dispute implicates tort or contract law in those cases that could potentially sound in either. Cf. Berschauer/Phillips, 124 Wn.2d at 826; see also Factory Mkt., Inc. v. Schuller Int’l, Inc., 987 F. Supp. 387, 395 (E.D. Pa. 1997).⁹ Once the choice is made, then the applicable measure of damages, either in tort or contract, may be applied. This approach empowers contracting parties to negotiate remedies just like any other contract term, while recognizing the tort duties of care all owe to all. Berschauer/Phillips, 124 Wn.2d at 821-28. It also gives appropriate deference to the legislature’s decision to impose different statutes of limitations in different areas of law. See generally Spring Motors Distribs., 98 N.J. at 561. Especially in products liability, an area of law that had its origins in contracts before finding its home in tort, the economic loss rule can be very helpful in deciding whether a particular “products liability” case is really a breach of contract claim in disguise. See generally E. River, 476 U.S. at 871; Miller, 902 F.2d 573.

¶50 We have used the economic loss rule in residential purchase and sale disputes already. Atherton Condo. Apartment-Owners Ass’n Bd. of Dirs. v. Blume Dev. Co., 115 Wn.2d 506, 526-27, 799 P.2d 250 (1990); Stuart v. Coldwell Banker Commercial Group, Inc., 109 Wn.2d 406, 417-21, 745 P.2d 1284 (1987); Griffith v. Centex Real Estate Corp., 93 Wn. App. 202, 213, 969 P.2d 486 (1998). Often in the real property context, the breach of contract is revealed when the property suffers damage. Property damage often invokes tort remedies, but “[incidental property damage, however, will not take a commercial dispute outside the economic loss doctrine; the tail will not be allowed to wag the dog.” Miller, 902 F.2d at 576 (citing Chi. Heights Venture v. Dynamit Nobel of Am., Inc., 782 F.2d 723, 726-29 (7th Cir. 1986)).

¶51 This demonstrates why understanding “economic loss” to mean “commercial loss” would be helpful. When a piece of property is bought that is worth less because of a property defect, that is easily understood to be a commercial loss. But that exact same damage caused by a trespass or nuisance, or occurring in a products liability context, may well sound in tort. In those cases, the “loss,” properly understood, is not a commercial loss and does not arise from a breach of contract. While the loss can be expressed in economic terms (and what cannot be in these days?), the damage should properly be understood to be a property damage, potentially giving rise to relief in tort.

¶52 While negligent misrepresentation may sound in tort, see Restatement (Second) oe Torts § 552 (1977), in this case, the claim falls under the contract these parties signed. The remedies available to the parties are controlled by the contract between the parties.

¶53 Turning briefly to whether there is potential relief in contract, under the inspection addendum to the contract, the Alejandres were authorized to inspect the septic system and required to notify Bull if they found it unsatisfactory within 10 days. Fairly read, that contractual language put a duty of due diligence on the Alejandres to take steps to protect themselves and to anticipate that Bull might not have complete knowledge of the workings of an underground system. Cf ex. 5 (“Buyer acknowledges the duty to pay diligent attention to any material defects which are known to Buyer or can be known to Buyer by utilizing diligent attention and observation.”). Thus, it was the Alejandres’ duty, under the purchase and sale agreement, to exercise due diligence and to satisfy themselves that the septic system was acceptable. If, upon a reasonably diligent inspection, they discovered the septic system was not in good working order, their remedy under the purchase and sale agreement was to rescind the contract or seek other contract remedies. I conclude under the facts of this case that the contract controls, and this claim properly sounds in contract, not tort. To recover, they must prove that the contract they signed was breached. They have not done so. I agree with the majority that the economic loss rule takes this case to contract and, under the contract, they have no claim.¹⁰

Fraud

¶54 The majority is correct that the economic loss rule does not preclude the Alejandres’ fraudulent concealment claim. Majority at 689 (citing Atherton, 115 Wn.2d at 523-27). Whether we see this as an exception to the economic loss rule or simply that we recognize that in this state, being defrauded is a dignitary injury, not a commercial one, we reach the same result. I concur with the majority that the Alejandres have not submitted sufficient evidence to go to the jury with this claim or on their common law fraud theories. I also agree with the majority that Bull is entitled to her attorney fees.

CONCLUSION

¶55 A house was purchased with a defective septic system. I do not wish to minimize the significant injury the Alejandres have suffered because of this. The cost of repair was close to a third of the purchase price of the house. I too would be outraged and looking for someone to sue.

¶56 But the Alejandres’ claim for negligent misrepresentation was primarily a claim for a commercial loss, stemming from an alleged breach of contract. To recover in tort, “ ‘there must be a showing of harm above and beyond disappointed expectations evolving solely from a prior agreement.’” Factory Mkt., 987 F. Supp. at 396 (quoting Sun Co., 939 F. Supp. at 371). They have not shown this, nor have they proved breach of contract. While a fraud claim is not barred by the economic loss rule, they have not submitted sufficient evidence to take theirs to the jury. I concur with the majority in result.

Sanders, J., concurs with Chambers, J.

Reconsideration denied April 23, 2007.

7 As the New Jersey Supreme Court noted:

[A] seller’s duty of care generally stops short of creating a right in a commercial buyer to recover a purely economic loss. Thus viewed, the definition of a seller’s duty reflects a policy choice that economic losses inflicted by a seller of goods are better resolved under principles of contract law. In that context, economic interests traditionally have not been entitled to protection against mere negligence.

Spring Motors Distribs., 98 N.J. at 579.

8 Over the years, the economic loss rule has been applied in cases where there was no privity of contract between the parties. This is because there are types of injuries for which the law gives no remedy, and injuries to third parties stemming from someone else’s breach of contract are often (though not always) of that type. Properly used, the economic loss rule can be a useful tool to tell us if the claim is also of that type. Cf. Spring Motors Distribs., 98 N. J. at 561. None of this is before us today. See generally Berschauer/Phillips, 124 Wn.2d 816.

9 As the Pennsylvania District Court noted:

In general, the economic-loss doctrine “prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract.” “The rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.” Compensation for losses suffered as a result of a breached agreement “requires an analysis of damages which were in the contemplation of the parties at the origination of the agreement, an analysis within the sole purview of contract law.” “In order to recover negligence, there must be a showing of harm above and beyond disappointed expectations evolving solely from a prior agreement. A buyer, contractor, or subcontractor’s desire to enjoy the benefit of his bargain is not an interest that tort law traditionally protects. ”

Factory Mkt., 987 F. Supp. at 395-96 (internal quotation marks omitted) (quoting Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995); Palco Linings, Inc. v. Pavex, Inc., 755 F. Supp. 1269, 1271 (M.D. Pa. 1990); Auger v. Stouffer Corp., No. CIV.A.93-2529, 1993 U.S. Dist. LEXIS 12719, at *9, 1993 WL 364622, at *3 (E.D. Pa. Aug. 31, 1993); Sun Co. v. Badger Design & Constructors, Inc., 939 F. Supp. 365, 371 (E.D. Pa. 1996)).

10 I disagree slightly with the majority that “the economic loss rule applies regardless of whether the specific risk of loss at issue was expressly allocated in the parties’ contract.” Majority at 688. Rather, I would say that whether or not a claim sounds in tort or contract is not dependent upon whether or not the parties have allocated the risk. The contractual risk allocation goes to whether a contractual term has been breached, not to whether a case sounds in tort or contract.