¶1 Madsen, J. — Petitioner Mary M. Bull sold a house to the respondents, Arturo
and Norma Alejandre. The Alejandres subsequently learned the septic system was
defective and sued Ms. Bull for fraudulently or negligently misrepresenting its
condition. The trial court dismissed the Alejandres' claims after they rested their
case, determining as a matter of law that the Alejandres had failed to prove their
claims and that the claims are barred by the economic loss rule. The Court of
Appeals reversed, concluding that sufficient evidence was presented in support of
the claims and that the economic loss rule did not apply because the parties did not
contractually allocate risk for fraudulent or misrepresentation claims.
¶2 We reverse the Court of Appeals. Under Washington law, the defective septic
system at the heart of plaintiffs' claims is an [*2] economic loss within the scope of
the parties' contract, and the economic loss rule precludes any recovery under a
negligent misrepresentation theory. There is no requirement that a risk of loss must
be expressly allocated in a contract before a tort claim based on that loss will be
precluded under the economic loss rule. Further, although under existing case law
the plaintiffs' fraudulent concealment claim based on Obde v. Schlemeyer, 56 Wn.2d
449, 353 P.2d 672 (1960) is not barred by the economic loss rule, that claim fails
here because the Alejandres cannot meet their burden to show the defect in the
septic system could not have been discovered through a reasonable inspection.
Finally, insofar as the Alejandres assert common law fraud, they have failed to
present sufficient evidence to survive a motion under CR 50.
FACTS
¶3 Ms. Bull owned a single family residence that was served by a septic system. The
year before she put the house up for sale, Ms. Bull noticed soggy ground over the
septic system. She hired William Duncan of Gary's Septic Tank Service to pump the
tank. She also contacted Walt Johnson Septic Service, which emptied the tank and
[*3] patched a broken pipe leading from the tank to the drain field. In April 2000, Ms.
Bull applied for a connection to the city sewer, but when she learned there was a
$5,000 hook-up fee she abandoned the idea.
¶4 Ms. Bull placed her home on the market in June 2000. In September 2001, Ms.
Bull and the Alejandres entered into an earnest money agreement for the sale of Ms.
Bull's home to the Alejandres. This agreement contained Ms. Bull's representation
that the property was served by a septic system and her promise to have the septic
tank pumped prior to closing. The earnest money agreement contained an
addendum providing, among other things, that the sale was contingent on an
inspection of the septic system. It stated that “[a]ll inspection(s) must be satisfactory
to the Buyer, in the Buyer's sole discretion.” Ex. 4. The addendum also provided that
if the buyer disapproved of any inspection report, the buyer had to notify the seller
and state the objection. Ex. 4. If the seller did not receive such notice, the inspection
contingency would be deemed satisfied. Ex. 4.
¶5 As provided in the earnest money agreement, a septic tank service (Walt's Septic
Tank Service) pumped the tank, and the [*4] Alejandres received a copy of the bill.
The bill stated on it that the septic system's back baffle could not be inspected but
there was “[n]o obvious malfunction of the system at time of work done.” Ex. 6. In
addition, prior to closing Ms. Bull provided the Alejandres with a seller's disclosure
statement as required by RCW 64.06.020.n1 She disclosed that the house had a
septic tank system which was last pumped and last inspected in the fall 2000 and
that “Walt Johnson Jr. replaced broken line between house and septic tank,” and
she answered “no” to the inquiry whether there were any defects in operation of the
septic system. Ex. 5.n2 Ms. Bull also disclosed that she was aware of changes or
repairs to the system. The Alejandres reviewed the disclosure statement with their
agent and then signed the section of the disclosure statement headed “BUYER'S
WAIVER OF RIGHT TO REVOKE OFFER.” Ex. 5. See RCW 64.06.030. The
Alejandres thus acknowledged, as expressly explained in the disclosure statement,
their duty to “pay diligent attention to any material defects which are known to Buyer
or can be known to Buyer by utilizing diligent [*5] attention and observation.” Ex. 5.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1
Chapter 64.06 RCW contains requirements for sellers of residential real property to make certain
disclosures unless the buyer has expressly waived the right to receive the disclosure statement or
the sale is exempt from the disclosure requirements under RCW 64.06.010. RCW 64.06.020(1). If
the buyer does not waive the right, the buyer can, in the buyer's sole discretion, rescind the
earnest money agreement within three business days after receipt of the disclosure statement.
RCW 64.06.030.2 The Alejandres maintain that Ms. Bull knew that the disclosure statement was
wrong in stating that the tank was last pumped in the fall, rather than in May 2000, and that a
broken pipe was replaced between the house and the tank, rather than between the tank and the
drain field. At trial, Ms. Bull was unsure why she said “fall” rather than “May” and she testified that
the line was not broken between the house and the tank. The Alejandres also maintain that Ms.
Bull failed to disclose that she had to do her laundry outside the home because of the failed
system. Ms. Bull says she did not disclose that she did her laundry outside the home for one month
because the problem with the system was taken care of by the time she filled out the disclosure
form.
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¶6 [*6] Also prior to closing, the Alejandres' lending bank required an inspection of
the property. The resulting inspection report stated that its purpose was to notify the
client of all defects or potential problems. The report indicated that the septic system
“Performs Intended Function” and stated that “everything drains OK.” Ex. 7.
¶7 On December 10, 2001, the sale closed. The Alejandres moved into the house a
week later. In January 2002, the Alejandres smelled an odor inside their home. They
also heard “water gurgling like it was coming back up.” Verbatim Report of
Proceedings at 15. They noticed a foul odor outside the home as well, which they
believed came from the ground around the septic tank, which they said was soggy.
In February, they hired William Duncan of Gary's Septic Tank Service. Mr. Duncan
told the Alejandres that he could pump the tank but could not fix the problem
because the drain fields were not working. He also told the Alejandres that he had
told Ms. Bull that the drain fields were not working and that she needed to connect to
the city's sewer system.
¶8 The Alejandres subsequently hired another company to connect to the city sewer
system. During this work, the company [*7] discovered that the baffle to the outlet
side of the septic system was gone, thus allowing sludge from the septic tank to
enter the drain field and plug it.
¶9 The Alejandres sued Ms. Bull for fraud and misrepresentation, claiming costs and
damages totaling nearly $30,000. After the plaintiffs rested their case, Ms. Bull
moved for judgment as a matter of law. The court granted the motion, ruling that the
economic loss rule bars the Alejandres' claims and that they failed to present
sufficient evidence in support of their claims. The court entered judgment in favor of
Ms. Bull and awarded her attorney fees as provided for in the parties' purchase and
sale agreement.
¶10 The Alejandres appealed. The Court of Appeals reversed, holding that the
Alejandres presented sufficient evidence to take their claims to the jury and that the
economic loss rule does not apply because the parties' contract did not allocate risk
for fraudulent or negligent misrepresentation claims. Alejandre v. Bull, 123 Wn. App.
611, 626, 98 P.3d 844 (2004).
ANALYSIS
[1, 2]¶11 When reviewing a trial court's decision on a motion for judgment as a
matter of law, the appellate court applies the same standard as the [*8] trial court
and reviews the grant or denial of the motion de novo. Davis v. Microsoft Corp., 149
Wn.2d 521, 531, 70 P.3d 126 (2003). “A motion for judgment as a matter of law must
be granted ‘when, viewing the evidence most favorable to the nonmoving party, the
court can say, as a matter of law, there is no substantial evidence or reasonable
inference to sustain a verdict for the nonmoving party.’” Id. (quoting Sing v. John L.
Scott, Inc., 134 Wn.2d 24, 29, 948 P.2d 816 (1997)). “Substantial evidence” is
evidence that is sufficient “‘to persuade a fair-minded, rational person of the truth of
a declared premise.’” Davis, 149 Wn.2d at 531 (quoting Helman v. Sacred Heart
Hosp., 62 Wn.2d 136, 147, 381 P.2d 605 (1963)).
¶12 Ms. Bull maintains that the Alejandres’ tort claims are precluded by the
economic loss rule, as the trial court ruled.
[3-6]¶13 The economic loss rule applies to hold parties to their contract remedies
when a loss potentially implicates both tort and contract relief. It is a “device used to
classify damages for which a remedy in tort or contract is deemed permissible, but
are more properly remediable only in [*9] contract. … ‘[E]conomic loss describes
those damages falling on the contract side of “the line between tort and contract”.’”
Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wn.2d 816, 822, 881
P.2d 986 (1994) (citation omitted) (quoting Wash. Water Power Co. v. Graybar Elec.
Co., 112 Wn.2d 847, 861 n.10, 774 P.2d 1199, 779 P.2d 697 (1989) (quoting Pa.
Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1173 (3d Cir. 1981))).
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.’” Factory Mkt., Inc. v. Schuller Int'l, Inc., 987 F. Supp. 387, 395
(E.D. Pa. 1997) (quoting Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d
604, 618 (3d Cir. 1995) and Palco Linings, Inc. v. Pavex, Inc., 755 F. Supp. 1269,
1271 (M.D. Pa. 1990)).
¶14 “Tort law has traditionally redressed injuries properly classified as physical
harm.” Stuart v. Coldwell Banker Commercial Group, Inc., 109 Wn.2d 406, 420, 745
P.2d 1284 (1987). [*10] It “is concerned with the obligations imposed by law, rather
than by bargain,” and carries out a “safety-insurance policy” that requires that
products and property that are sold do not “unreasonably endanger the safety and
health of the public.” Id. at 420, 421. Contract law, in contrast, carries out an
“expectation-bargain protection policy” that “protects expectation interests, and
provides an appropriate set of rules when an individual bargains for a product of
particular quality or for a particular use.” Id. at 420-21. In general, whereas tort law
protects society's interests in freedom from harm, with the goal of restoring the
plaintiff to the position he or she was in prior to the defendant's harmful conduct,
contract law is concerned with society's interest in performance of promises, with the
goal of placing the plaintiff where he or she would be if the defendant had performed
as promised. Detroit Edison Co. v. NABCO, Inc., 35 F.3d 236, 239 (6th Cir. 1994);
see alsoCasa Clara Condo. Ass'n, Inc. v. Charley Toppino & Sons, Inc., 620 So. 2d
1244, 1246-47 (Fla. 1993).
¶15 The economic loss rule maintains the “fundamental [*11] boundaries of tort
and contract law.” Berschauer/Phillips, 124 Wn.2d at 826. 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. If tort and contract remedies were allowed to overlap, certainty and
predictability in allocating risk would decrease and impede future business activity.”
Id. A manufacturer or seller sets prices in contemplation of, among other things,
potential contractual liability. See id. at 827. If tort liability is expanded to include
economic damages, parties would be exposed to “‘liability in an indeterminate
amount for an indeterminate time to an indeterminate class.’” Id. (quoting Justice
Cardozo in Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 179, 174 N.E.
441, 74 A.L.R. 1139 (1931)). “A bright line distinction between the remedies offered
in contract and tort with respect to economic damages also encourages parties to
negotiate toward the risk distribution that is desired or customary.”
Berschauer/Phillips, 124 Wn.2d at 827. [*12] In addition, the economic loss rule
prevents a party to a contract from obtaining through a tort claim benefits that were
not part of the bargain. See, e.g., Daanen & Janssen, Inc. v. Cedarapids, Inc., 216
Wis. 2d 395, 408, 573 N.W.2d 842 (1998).
¶16 In short, the purpose of the economic loss rule is to bar recovery for alleged
breach of tort duties where a contractual relationship exists and the losses are
economic losses. If the economic loss rule applies, the party will be held to contract
remedies, regardless of how the plaintiff characterizes the claims. See Snyder v.
Lovercheck, 992 P.2d 1079, 1088 (Wyo. 1999) (“‘when parties’ difficulties arise
directly from a contractual relationship, the resulting litigation concerning those
difficulties is one in contract no matter what words the plaintiff may wish to use in
describing it’” (quoting Beeson v. Erickson, 22 Kan. App. 2d 452, 461, 917 P.2d 901
(1996)). Washington law consistently follows these principles. See Stuart, 109 Wn.2d
at 420-22; Atherton Condo. Apartment-Owners Ass'n Bd. of Dirs. v. Blume Dev. Co.,
115 Wn.2d 506, 799 P.2d 250 (1990); [*13] Touchet Valley Grain Growers, Inc. v.
Opp & Seibold Gen. Constr., Inc., 119 Wn.2d 334, 350-51, 831 P.2d 724 (1992);
Berschauer/Phillips, 124 Wn.2d at 825-26; Staton Hills Winery Co. v. Collons, 96
Wn. App. 590, 595-96, 980 P.2d 784 (1999); Carlson v. Sharp, 99 Wn. App. 324,
994 P.2d 851 (1999); Griffith v. Centex Real Estate Corp., 93 Wn. App. 202, 211-13,
969 P.2d 486 (1998). The key inquiry is the nature of the loss and the manner in
which it occurs, i.e., are the losses economic losses, with economic losses
distinguished from personal injury or injury to other property. If the claimed loss is an
economic loss and no exception applies to the economic loss rule, then the parties
will be limited to contractual remedies.
¶17 The same fundamental approach applies to products liability claims governed by
the Washington product liability actions act, chapter 7.72 RCW (WPLA). The WPLA
does not allow recovery for direct or consequential economic losses under the
Uniform Commercial Code, Title 62A.RCW. RCW 7.72.010(6). Rather, the WPLA
“confines recovery to physical harm of persons [*14] and property and leaves
economic loss, standing alone, to the Uniform Commercial Code.” Touchet Valley
Grain Growers, 119 Wn.2d at 351. The court therefore applies a risk of harm
analysis in the product liability setting under the WPLA to determine the nature of
the damages and whether an economic loss has occurred, id., but, as in other
cases, the focus is on the harm or injury and whether it constitutes an economic loss.
¶18 In Berschauer/Phillips, a general contractor sought to recover economic
damages in tort from an architect, an engineer, and an inspector. We first noted that
the case was not governed by the WPLA and therefore turned to the common law to
determine whether the economic loss rule precludes recovery in tort. We held that
the economic loss rule applies to bar recovery of economic loss due to construction
delays. Berschauer/Phillips, 124 Wn.2d at 825-27. We expressly did so in order to
“align the common law rule on ‘economic loss’ with the Legislature's” application of
the rule under the WPLA to limit purely economic damages to contract claims under
the U.C.C. Id. at 827.
[7, 8]¶19 The Alejandres maintain that the economic [*15] loss rule does not apply
in the context here, i.e., the sale of a residence. However, as Ms. Bull contends, in
this state the economic loss rule applies to tort claims brought by homebuyers.
Stuart, 109 Wn.2d at 417-22; Griffith, 93 Wn. App. at 212-13.n3 And, as in other
circumstances, where defects in construction of residences and other buildings are
concerned, economic losses are generally distinguished from physical harm or
property damage to property other than the defective product or property. The
distinction is drawn based on the nature of the defect and the manner in which
damage occurred. In Stuart, 109 Wn.2d at 420-22, and in Atherton, 115 Wn.2d 506,
we declined to recognize any tort cause of action for negligent construction because
the plaintiffs in each of these cases presented no evidence of personal or physical
injury resulting from the manner in which the condominium complexes in each case
were constructed and instead sought only economic damages.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3
Other courts have applied the economic loss rule to homeowners alleging construction defects. In
Casa Clara, 620 So. 2d at 1247, the court stated:
If a house causes economic disappointment by not meeting a purchaser's expectations, the
resulting failure to receive the benefit of the bargain is a core concern of contract, not tort, law.
There are protections for homebuyers, however, such as statutory warranties, the general warranty
of habitability, and the duty of sellers to disclose defects, as well as the ability of purchasers to
inspect houses for defects. Coupled with homebuyers' power to bargain over price, these
protections must be viewed as sufficient when compared with the mischief that could be caused by
allowing tort recovery for purely economic losses. Therefore, we again “hold contract principles
more appropriate than tort principles for recovering economic loss without an accompanying
physical injury or property damage.” Florida Power & Light [Co. v. Westinghouse Elec. Corp.], 510
So. 2d [899,] 902 [(Fla. 1987)]. If we held otherwise, “contract law would drown in a sea of tort.” East
River [S.S. Corp. v. Transamerica Delaval, Inc.], 476 U.S. [858,] 866[, 106 S. Ct. 2295, 90 L. Ed. 2d
865 (1986)].(Foortnotes omitted) (citation omitted).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶20 [*16] Here, the injury complained of is a failed septic system. Purely economic
damages are at issue. See Stuart, 109 Wn.2d at 420 (defects evidenced by internal
deterioration are characterized as economic losses); Griffith, 93 Wn. App. at 213
(same). There is no question that the parties' relationship is governed by contract.
Thus, unless there is some recognized exception to the economic loss rule that
applies, the plaintiffs' claim of negligence cannot stand because they are limited to
their contract remedies. No exception to the economic loss rule has been
established.
¶21 The plaintiffs allege that Ms. Bull made negligent misrepresentations about the
condition of the septic system contrary to the duty of due care under the
Restatement (Second) of Torts § 552 (1977).n4 Both Berschauer/Phillips and Griffith
hold that although Washington recognizes a tort claim for negligent
misrepresentation under the Restatement (Second) of Torts § 552 , this claim is not
available when the parties have contracted against potential economic liability.
Berschauer/Phillips, 124 Wn.2d at 827-28; [*17] Griffith, 93 Wn. App. at 212.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -4
The Alejandres briefing to the Court of Appeals also relies on § 552 for their argument that
alternatively, Ms. Bull made “innocent misrepresentations.” Just as reliance on this tort provision is
foreclosed insofar as alleged negligent misrepresentation is concerned, it is also foreclosed for
alleged innocent misrepresentation.
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¶22 Accordingly, the Alejandres' reliance on § 552 and what must be proven under it
is foreclosed by our precedent. Because the parties' relationship is governed by
contract and the loss claimed is an economic loss, the trial court correctly concluded
that plaintiffs' negligent misrepresentation claim must be dismissed. See, e.g.,
Atherton, 115 Wn.2d at 526-27 (negligent construction claim precluded where
plaintiff sought only economic damages).
¶23 The Court of Appeals held, however, that if the parties fail to specifically allocate
a risk of loss in their contract, the economic loss rule does not apply as to that risk.
[*18] Alejandre, 123 Wn. App. at 626. This holding is inconsistent with the weight of
authority and with Berschauer/Phillips.
¶24 In Berschauer/Phillips, we stated that our holding limiting the recovery of
economic loss due to construction delays ensures “that the allocation of risk and the
determination of potential future liability is based on what the parties bargained for in
the contract. We hold parties to their contracts.” Berschauer/Phillips, 124 Wn.2d at
826. We did not say, however, that the parties will be held to their bargained-for
remedies only if they explicitly addressed any or all potential economic losses and
allocated the risks associated with them.
¶25 Other courts have also rejected this premise. Courts reason, instead, that the
economic loss rule applies where the parties could or should have allocated the risk
of loss, or had the opportunity to do so. In Nextel Argentina, S.R.L. v. Elemar
International Forwarding, Inc., 44 F. Supp. 2d 1306, 1309 (Fla. 1999), the court saw
“‘no reason to burden society as a whole with the losses of one who has failed to
bargain for adequate contractual remedies.’” (quoting Airport Rent-A-Car, Inc. v.
Prevost Car, Inc., 660 So. 2d 628, 630 (Fla. 1995)). [*19] The court held that the
“economic loss rule prevents recovery in tort for risks that should have been
allocated in a contract.” Nextel, 44 F. Supp. 2d at 1309 (emphasis added). If the
party could have allocated its risk, the rule applies; all that is required is that the
party had an opportunity to allocate the risk of loss. Mt. Lebanon Pers. Care Home,
Inc. v. Hoover Universal, Inc., 276 F.3d 845, 852 (6th Cir. 2002); Lexington Ins. Co.
v. W. Roofing Co., 316 F. Supp. 2d 1142, 1148 (D. Kan. 2004); Nat'l Steel Erection,
Inc. v. J.A. Jones Constr. Co., 899 F. Supp. 268, 274 (N.D. W. Va. 1995); Nigrelli
Sys., Inc. v. E.I. DuPont de Nemours & Co., 31 F. Supp. 2d 1134, 1138 (E.D. Wis.
1999);BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 73 (Colo. 2004); Nw. Ark.
Masonry, Inc. v. Summit Specialty Prods., Inc., 29 Kan. App. 2d 735, 744-45, 31 P.3d
982 (2001); Neibarger v. Universal Coops., Inc., 439 Mich. 512, 521, 486 N.W.2d
612 (1992) (quoting Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 579-
80, 489 A.2d 660 (1985)). [*20]
¶26 Further, where allocation of risk occurs, it can occur directly or indirectly. For
example, parties might allocate risk through express contract terms, such as the
inclusion of warranties, or through the procuring of insurance, or risk might be
reflected in a lower price obtained by the buyer in exchange for the risk falling on the
buyer. Maersk Line Ltd. v. CARE & ADM, Inc., 271 F. Supp. 2d 818, 822 (E.D. Va.
2003). As one court stated: “‘Courts should assume that parties factor risk allocation
into their agreements and that the absence of comprehensive warranties is reflected
in the price paid. Permitting parties to sue in tort when the deal goes awry rewrites
the agreement by allowing a party to recoup a benefit that was not part of the
bargain.’” Daanen & Janssen, 216 Wis. 2d at 408 (quoting Stoughton Trailers, Inc. v.
Henkel Corp., 965 F. Supp. 1227, 1230 (W.D. Wis. 1997)); see Nigrelli Sys., 31 F.
Supp. 2d at 1138.
¶27 In fact, if a court permits a tort claim on the ground that the parties have not
expressly allocated a particular risk, it interferes with the parties' freedom to contract.
Rich Prods. Corp. v. Kemutec, Inc., 66 F. Supp. 2d 937, 968-69 (E.D. Wis. 1999),
[*21] aff'd, 241 F.3d 915 (7th Cir. 2001); see also Maersk Line, 271 F. Supp. 2d at
822 (“‘to permit a party to a broken contract to proceed in tort where only economic
losses are alleged would eviscerate the most cherished virtue of contract law, the
power of the parties to allocate the risks of their own transactions’” (quoting Princess
Cruises, Inc. v. Gen. Elec. Co., 950 F. Supp. 151, 155 (E.D. Va. 1996), rev'd on
other grounds, 143 F.3d 828 (4th Cir. 1998))); Snyder, 992 P.2d at 1087 (“‘[t]he
effect of confusing the concept of contractual duties, which are voluntarily bargained
for, with the concept of tort duties, which are largely imposed by law, would be to
nullify a substantial part of what the parties expressly bargained for—limited liability’”
(quoting Isler v. Texas Oil & Gas Corp., 749 F.2d 22, 23 (10th Cir. 1984))).
¶28 In accord with the overwhelming weight of authority from other jurisdictions and
under our decision in Berschauer/Phillips, the economic loss rule applies regardless
of whether the specific risk of loss at issue was expressly allocated in the parties'
[*22] contract.
¶29 Finally, on this issue, a cautionary note is added. There is some suggestion that
the economic loss rule applies only if the contract is between two sophisticated
parties. However, we observed in Berschauer/Phillips, 124 Wn.2d at 827, that the
“unsophisticated consumer” is deprived of economic damages under the WPLA. Just
as the economic loss rule applies under the WPLA to “unsophisticated” parties, the
same “bright line distinction between the remedies offered in contract and tort with
respect to economic damages,” Berschauer/Phillips, 124 Wn.2d at 827, may apply to
“unsophisticated” parties who enter a contract on essentially equal footing.n5 If there
is significant disparity in bargaining power, likely accompanied by some other
contractual infirmity, then there may be an issue as to enforceability of the contract—
a different question from whether tort remedies should be available.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5
Exact parity in bargaining power is not required. Mt. Lebanon, 276 F.3d at 852.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶30 [*23] The Alejandres' negligent misrepresentation tort claim is precluded under
the economic loss rule for the reasons explained above.
[9]¶31 The plaintiffs also assert a claim of fraudulent concealment. In Atherton, we
rejected the plaintiff's claim of negligent construction as barred by the economic loss
rule but, in the same opinion, held that there was an issue of fact as to whether the
defendant had fraudulently concealed construction practices violating the building
code, and therefore the trial court had erred in dismissing the plaintiffs' claim for
fraudulent concealment on a motion for summary judgment. Atherton, 115 Wn.2d at
523-27. Thus, under Atherton, the Alejandres' fraudulent concealment claim is not
precluded by the economic loss rule.
[10]¶32 However, the fraudulent concealment claim fails because, as the trial court
ruled, the Alejandres failed to present sufficient evidence to support the claim. Under
Obde, 56 Wn.2d 449, and similar cases, the vendor's duty to speak arises (1) where
the residential dwelling has a concealed defect; (2) the vendor has knowledge of the
defect; (3) the defect presents a danger to the property, health, or life [*24] of the
purchaser; (4) the defect is unknown to the purchaser; and (5) the defect would not
be disclosed by a careful, reasonable inspection by the purchaser. Atherton, 115
Wn.2d at 524. The Alejandres failed to meet their burden of showing that the defect
in the septic system would not have been discovered through a reasonably diligent
inspection. In fact, the Alejandres accepted the septic system even though the
inspection report from Walt's Septic Tank Service disclosed, on its face, that the
inspection was incomplete because the back baffle had not been inspected. The
testimony at trial showed that this part of the septic system was relatively shallow and
easily accessible for inspection. A careful examination would have led to discovery of
the defective baffle and to further investigation.
[11, 12]¶33 Next, insofar as the Alejandres have asserted common law fraud
theories, they have failed to present sufficient evidence of the nine elements of fraud.
SeeWilliams v. Joslin, 65 Wn.2d 696, 697, 399 P.2d 308 (1965). In particular, they
have failed to present sufficient evidence as to the right to rely on the allegedly
fraudulent representations about the condition [*25] of the septic service. The “right
to rely” element of fraud is intrinsically linked to the duty of the one to whom the
representations are made to exercise diligence with regard to those representations.
Id. at 698; Puget Sound Nat'l Bank v. McMahon, 53 Wn.2d 51, 54, 330 P.2d 559
(1958). As explained, the Alejandres were on notice that the septic system had not
been completely inspected but failed to conduct any further investigation and,
indeed, accepted the findings of an incomplete inspection report. Having failed to
exercise the diligence required, they were unable to present sufficient evidence of a
right to rely on the allegedly fraudulent representations.n6
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The Alejandres urge the court to hold that the economic loss rule does not apply to claims of fraud
in the inducement, and they argue their fraud claims are claims of fraud in the inducement. We are
aware that some courts recognize a broad exception to the economic loss rule that applies to
intentional fraud. E.g., First Midwest Bank, N.A. v. Stewart Title Guar. Co., 218 Ill. 2d 326, 337, 843
N.E.2d 327, 300 Ill. Dec. 69 (2006) (citing Moorman Mfg. Co. v. Nat'l Tank Co., 91 Ill. 2d 69, 88-89,
435 N.E.2d 443, 61 Ill. Dec. 746 (1982)). Other courts recognize a limited exception to the
economic loss rule for fraudulent misrepresentation claims that are independent of the underlying
contract (sometimes referred to as fraud in the inducement) but only where the misrepresentations
are extraneous to the contract itself and do not concern the quality or characteristics of the subject
matter of the contract or relate to the offending party's expected performance of the contract. See, e.
g., Huron Tool & Eng'g Co. v. Precision Consulting Servs., Inc., 209 Mich. App. 365, 532 N.W.2d
541 (1995) (leading case); Marvin Lumber & Cedar Co. v. PPG Indus., Inc., 223 F.3d 873, 884-87
(8th Cir. 2000); Rich Prods., 66 F. Supp. 2d at 977; Indem. Ins. Co. of N. Am. v. Am. Aviation, Inc.,
891 So. 2d 532, 537 (Fla. 2004). We need not address the question whether any or all fraudulent
representation claims should be foreclosed by the economic loss rule because we resolve the
Alejandres' fraudulent representation claims on other grounds.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶34 [*26] Accordingly, the trial court correctly determined, as to the Alejandres'
fraudulent conveyance and fraudulent representation theories, that Ms. Bull was
entitled to judgment as a matter of law under CR 50 because the Alejandres failed to
present sufficient evidence in support of these theories.
[13]¶35 Finally, we turn to Ms. Bull's request for attorney fees. The parties purchase
and sale agreement provides that attorney fees and costs shall be awarded to the
prevailing party in any dispute relating to the transaction. Ex. 4; see RCW 4.84.300.
Accordingly, Ms. Bull is entitled to attorney fees as the prevailing party, at trial, as
the trial court ruled, and on appeal and discretionary review, to be awarded pursuant
to RAP 18.1.
CONCLUSION
¶36 In this case involving the sale of a residence with a defective septic system, we
hold that the economic loss rule applies and forecloses the buyers' claim that the
seller negligently misrepresented the condition of the septic system. The buyers'
claim of fraudulent conveyance is not subject to the economic loss rule. However,
the buyers failed to present sufficient evidence [*27] on this claim and on their
claims of fraudulent misrepresentation to take these issues to the jury. The trial court
properly dismissed all of the claims under CR 50 at the close of the plaintiffs-buyers'
case.
¶37 We reverse the Court of Appeals and reinstate the trial court's judgment,
including the award of attorney fees and costs, and we award attorney fees and
costs to Ms. Bull for the appeal and this discretionary review, as provided for in the
parties' contract.
Alexander, C.J., and C. Johnson, Bridge, Owens, Fairhurst, and J.M. Johnson, JJ.,
concur.
CONCUR BY: Tom Chambers
CONCUR
¶38 Chambers, J. (concurring in result) — I agree with the majority in result but write
separately to suggest a different analytical approach to the economic loss rule.
¶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 [*28] 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.
¶40 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 -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). [*29] n7 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.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -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
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶42 [*30] 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 [*31] 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 [*32] 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.) n8
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -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
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶46 [*33] 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)). [*34] 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 Miller, 902 F.2d 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
[*35] 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 alsoFactory Mkt., Inc. v. Schuller Int'l, Inc., 987 F. Supp. 387, 395
(E.D. Pa. 1997).n9 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. [*36]
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -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 (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., 1993 U.S.
Dist. LEXIS 12719, at *9, No. CIV.A.93-2529, 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)).
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
¶50 [*37] 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 “[i]ncidental 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, [*38] 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)
of 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 that 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 [*39] 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.n10
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -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 . 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.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
[*40] 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 [*41] 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.
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| Alejandre v. Bull Washington State Supreme Court 2007 Decision (Seller Misrepresentation & The Economic Loss Rule) |
| Arturo Alejandre et al., Respondents, v. Mary M. Bull, Petitioner. No. 76274-1 SUPREME COURT OF WASHINGTON 159 Wn.2d 674; 153 P.3d 864 September 29, 2005, Argued March 1, 2007, Filed OPINION BY: Barbara A. Madsen |