The Economic Loss Rule And The Independent Duty Doctrine

The economic loss rule, also referred to as the independent duty doctrine[1], may bar recovery in tort where the duties implicated arose from contract.  In 2007, the Washington Supreme Court said “The economic loss rule maintains the fundamental boundaries of tort and contract law. Where economic losses occur, recovery is confined to contract to ensure that the allocation of risk and the determination of potential future liability is based on what the parties bargained for in the contract.”[2] 

Put another way, “The economic loss rule serves to limit parties to their contract remedies when a loss potentially implicates both tort and contract relief. The rule prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract because tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.”[3]

Where damages are only economic (as opposed to, e.g., personal injury) and the parties have allocated the risk of such damages via contract, a tort action will only lie when there is an independent tort duty that arises outside of the contract.  The reasoning for this was put succinctly by the United States Supreme Court: [in such cases there is] “no reason to intrude into the parties' allocation of the risk.”  [4]

Thus, there is a two-part inquiry to determine whether the economic loss rule/independent duty doctrine bars recovery in tort: 1) are the damages complained of economic in nature? and 2) is the injury traceable to a breach of a tort law duty arising independently of the contract?  If the damages are economic in nature and there is no independent tort duty, the action sounds only in contract.

[1] The Washington Supreme Court recently opined “the term ‘economic loss rule’ has proved to be a misnomer. In its place we adopted the nomenclature independent duty doctrine.” Jackowski v. Borchelt, 174 Wash. 2d 720, 730, 278 P.3d 1100, 1105 (2012)(internal quotes and citations omitted).

[2] Alejandre v. Bull, 159 Wash. 2d 674, 682–83, 153 P.3d 864, 868 (2007) (internal quotes and citations omitted).

[3] Poulsbo Grp., LLC v. Talon Dev., LLC, 155 Wash. App. 339, 346, 229 P.3d 906, 910 (2010) (citing Alejandre, internal quotations omitted).

[4] E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 873, 106 S. Ct. 2295, 2303, 90 L. Ed. 2d 865 (1986).