‘TWELFTH ANNUAL CONFERENCE ON WASHINGTON CONSTRUCTION LAW CLAIMS AGAINST DESIGN PROFESSIONALS LIMITATIONS OF LIABILITY, ECONOMIC Loss [AND OTHER LEGAL ISSUES, [RELATING TO DESIGN PROFESSIONALS By Beth M. Andrus SKELLENGER BENDER P'S. 1301 FIFTH AVENUE. SUITE 3401 SEATTLE, WASHINGTON 98101 (206) 623-6501 bandrusfiskellengerbender.com www. skellengerbender.com (©Skellenger Bender, PS. 2008u. w. ML ‘TABLE OF CONTENTS INTRODUCTION. ECONOMIC LOSS DOCTRINE ‘A, Bar tThid Party Tort Claims B. Barto Client Negligence Clams. C—*Sudden and Dangerous” Exeption. ‘STATUTES OF LIMITATIONS AND STATUTE OF REPOSE A Statute of Limitations 1B. _Discovery Rule CStatte of Repose D.—Bifeet of ROW INDEMNIFICATION A. Antitodemnit Statute Duty to Indemnity = Duty to Defend RESPONSIBILITY FOR SITE SAFETY B, Design Professional Immunity Statute. © OSHAWISHA Violations " 121. INTRODUCTION ‘This paper outlines some of the major legal issues that arise when parties advance claims ‘against design professionals. This paper focuses on Washington case law but refers to federal and out-of-state cases ifno Washington law exists I. ECONOMIC LOSS DOCTRINE Generally, architects, engineers, and environmental consultants, like lawyers and doctors, can be held liable for acts of professional negligence. One major legal doctrine limiting a design professional finm’s liability, however, is the “economic loss doctrine.” A. Bar to Third Party Tort Claims ‘The economic Joss doctrine prohibits @ third party, such as a contractor or subcontractor, ‘om suing the owner's architect or engineer in tort when the only damages sustained are economic losses." In Berschauer/Phillips Contr. Co. v. Seattle School Dist. No. 1, 124 Wn.24 816, 881 P.24 986 (1994), the Washington Supreme Court held that a contractor, who hhad no contractual relationship with the owner's architect, could not maintain a claim of negligence or negligent misrepresentation against the architect to recover economic lasses, ‘The economic loss rule marks the fundamental boundary between the Iaw of contracts, which is designed to enforce expectations created by agreement, and the aw of torts which is designed to protect citizens and their property by imposing a duty of reasonable care on others. 124 Wn.2d at 821, 881 P.2d at 989-90. ‘The holding in Berschauer was based on Stuart v Coldwell Banker Commercial Group, Inc., 109 Wn.2d 406, 745 P.2d 1284 (1987), and Atherton Condominium Ass'n v. Blume Develop. Co., 118 Wn.24 $06, 799 P.2d 250 (1990), In Stuart, the Supreme Court noted “tort law traditionally redressed injuries properly classified as physical harm.” 109 Wn.2d at 420, 745 P.2d at 1291. Similarly, in Atherton, the court stated in a footnote that “economic loss damages are not recoverable under tort Jaw." 115 Wn2d at $34, 0.17, 799 P.2d at 266 n.17, citing R. Cushman and T. Bottum, Architect and Engineer Liability Claims Against Design Professionals, § 7.9 (1987). See ‘also Washington Water Power Co. v. Graybar Elee. Co., 112 Wn.24 847, 774 P.2d 1199 (1989) (the line between tort and contract is drawn by the economic loss doctrine); Hofsteev: Dow, 108 Wn, App. $37, 36 P.3¢ 1073 (2001) (damages arising from buyer's inability 10 sell, breed, or milk cows during 4-month quarantine imposed afler one tested “suspect” for ‘brucellosis constitute economic losses that are not recoverable through tot claim); Carlson. Sharp, 99 Wa, App. 324, 330 994 P.2d 851 (1999) (damage to residence caused by shifting earth constitutes economic loss under Washington law), review denied, 141 Wn.2d 1024 conor lt” bas been defined as 8 “diminution inthe vale of patcler product caused by the product, isef bythe fate ofthe roduc o function as represented, in other words, ofl economic expectations Wausau Paper Mile Co.» Charles T. Main Ine 789 . Sopp 968,971 (W.D, Wis, 1992), Darmges for Aeay remediation, repair aod diminution in value are economie loess. Se East River Steumship Corp.» Transamerica Deloval. ne, 476 US. 858, $70, 106 S.Ct. 2295, 90 LEA24 865 (1986) (economic losses Ince lost rots, repaircot and decreased valve)(2000); Staton Hills Winery Company, Lid, . Collons, 96 Wn. App. $90, 594, 980 P.2d 784 (1999) (damaged wine caused by defect in wine storage tanks constitutes pure economic loss under Washington la). While other jurisdictions have carved out an exception to the economic loss doctrine for claims of negligent misrepresentation, the Berschauer court clearly rejected any such exemption: ‘We acknowledge that § 552 provides support for the recovery of economic damages in the construction industry for negligent mistepresentations. See § 552 emt. n, ills. 9. The Restatement is equivocal in its support, however. ‘See Restatement (Second) of Torts § 766C emt. e (§ 766C may not apply if §552 applies). We also acknowledge that the tort of negligent misrepresentation is recognized in Washington. We hold that when parties have contracted to protect against potential economic liability, as is the case in the construction industry, contract principles override the tort principles in {§ 552 and, thus, purely economic damages are not recoverable. 124 Wn.2d at $28. Accord SME Indus., Ine. v. Thompson, Ventulet, Stainbeck & Assoes., 28 P.3d 669 (Utah 2001) (following Berschauer to preclude contractor from asserting negligent imistepresentation claim to recover economic losses from design professional with whom it hhad no contractual privity); Cty Express, Inc. v. Express Partners, 87 Haw. 466, 959 P.2d 836 (1998) (same). Rissler & McMurray Co. v. Sheridan Area Water Supply Joint Powers Board, 929 P.24 1228 (Wyo. 1996) (same). B. Bar to Client Negligence Claims Although Berschauer involved a plaintiff who had no contractual privity with the design professional, the holding in Berschaver was extended to preclude a tort claim in a case in ‘which contractual privity existed between the parties to the lawsuit. In Griffith v. Contex Real Estate Corp, 93 Wn. App. 202, 969 P.24 486 (1998), review denied, 137 Wn.2d 1034 (1999), several homeowners sued a home builder/vendor for negligent misrepresentation ‘based on statements made to them by the builder about the cedar siding used on the homes. ‘The court of appeals dismissed the mistepresentation claim based on the economic loss rule, even though there was a contractual relationship between the homeowners and the builder, 93. Wn. App. at 212, Griffith stands for the proposition that tort claims are not available to any party, including, ‘owners in contractual privity with the design professional, when the only loss sustained is economic in nature. See also Atlantic Pacific Corp. v. Associated Earth Sciences, Inc, 2002 Wash. LEXIS 1717 (2002) (unpublished) (owner's negligence claim against engineer for failing t0 properly report soil compaction tests barred by ELD); Norris v. Church & Co, 2001 Wash. App. LEXIS 2450 (2001) (homeowners’ negligence claims against contractor ‘with whom they were in privity are barred by the economic loss doctrine); Griffiths ». Trustees of Carpenters Local Union No, 98, 2000 Wash. App. LEXIS 57 (2000) (building ppurehaser could not sue seller in tort when only damages being sought are economic); Kelly et al. ». AGRA Earth and Environmental, 16 Fed. Appx. 695, 2001 WL. 873828 (9! Cir, 555500112 hg 36003,2001) (economic loss doctrine bars gross negligence claim by development owners against design professional, despite contractual privity) ‘There are reported cases from other jurisdictions in which parties with contractual privity have not been allowed to recover in tort for purely economic losses. See Aas v. Superior Court, 24 Cal. 4° 627, 12 P.3d 1125, 101 Cal. Rptr. 2d 718 (2000) (economic loss rule barred homeowners’ negligent construction claims against developer, contractor and subcontractors when only damage suffered was economic); City Express, Inc. v. Express Partners, 959 P.2d 836 (Hawaii 1998) (economic loss rule barred developer's negligence ‘claim against architect despite privity of contract). C. “Sudden and Dangerous” Exception An exception to the economic loss rule may ameliorate this harsh result and work to allow such a tort claim to proceed. This exception arises when the plaintiff has suffered economic damage caused by a “sudden and dangerous” event as described in Toucher Valley’ Grain Growers, Inc. v. Opp & Seibold Const, Ine., 119 Wn.2d 334, 831 P.2d 724 (1992). In Touchet, the owner of a grain storage building sued the general contractor and metal fabricator subcontractor after the building collapsed. Once completed and filled with grain by the owner, the main frame buckled and a large section of the wall collapsed. The Washington Supreme Court allowed the plaintiff to recover economic losses from these defendants under a tor theory of liability based on a “risk of harm” analysis previously adopted by the court in a products liability case, Washington Water Power Co. v. Graybar Elec. Co., 112 Wn.2d 847, 774 P.24 1199 (1989). The Touchet court held that in eases in Which the harm arises out of "sudden and dangerous” or “calamitous” event, a plaintiff will be allowed to seek damages in tor for damages otherwise defined as economic losses. 119 ‘Wn. at 352. ‘This narrow Toucher exception is justified on the theory that “sudden and dangerous” events are most likely to result in bodily injury and property damage, and that the availability of a tort remedy, even when the plaintiff has only suffered economic losses, provides an ‘important incentive for defendants to exercise reasonable care whenever there is potential for this kind of damage. ‘See Economie Loss Doctrine Case Bibliography, attached hereto as Appendix A. TL, LIMITATIONS OF LIABILITY Many design professional agreements contain a clause known as a “limitation of liability” provision. An LOL clause does not shield a design firm from lability in the event of a professional error; it merely serves to cap the potential financial exposure of the design professional inthe evest such liability exists. ‘There is no reported case in Washington addressing the enforceability of LOL clauses in sign firm contracts. The Washington Supreme Court, however, has upheld these provisions in other commercial contexts. See Puget Sound Financial, L.L,C. v. Unisearch, Inc., 146 Wn.24 428, 481, 47 P.3d 940 (2002) (limitation of liability clause in services contract found to be enforceable, in part, because it did not pose undue surprise to 55s on hg6803sophisticated contracting partes). In that case, a factoring company sued Unisearch, a company that provides research services fon UCC filings, for negligence. Puget Sound alleged that it had suffered $100,000 in damages due to its reliance on an inaccurate UCC filing report prepared by Unisearch. Unisearch provided Puget Sound its reporting services pursuant to an oral contract. The invoices Unisearch submitted to its client, however, contained a limitation of lability clause that limited its liability for breach of contract or tort damages to the cost of its services, in this case $25.00. Over the course of their contractual relationship, Unisearch submitted forty-eight invoices containing this limitation of liability clause to its eent Unisearch moved for partial summary judgment arguing that, if found liable, its Liability was limited to $25.00. ‘The trial court granted the motion. On appeal, the Court of Appeals ‘concluded that there was an issue of fact regarding whether the partes had! mutually assented to the clause. Unisearch appealed to the Supreme Court. ‘The Supreme Court held that the limitation of liability provision was enforceable. Citing the partes’ contractual history and undisputed evidence that it was standard practice for UCC research companies o include limitation of liability clauses in invoices accompanying search results the Supreme Court found that the partes’ course of dealing, as well as evidence regarding standard practices inthe trade, were suicient to establish thatthe partes had, as a matter of Jaw, incorporated the limitation of liability clause into their contract. Applying UCC eases by analogy, the Court also rejected arguments thatthe clause was unconscionable and, therefore. unenforceable, concluding that “the totality of the circumstances support the conscionability and enforceability ofthe liability limitation clause.” Unisearch, 146 Wn.2d a 436-444, While the Court's ruling in Unisearch dd no involve a design professional services contact, the Cours conclusion regarding the enforceability of limitation of liability clauses in services contracts (as opposed to contracts for goods) is consistent the Ninth Cireut’s ruling in an unpublished decision, Kelly etal.» AGRA Earth and Environmental, 16 Fed. Appx 695, 2001 WL 873828 (9" Cir, August 2, 2001). In that cas, the Ninh Circuit upheld a summary judgment in fvor of the enginecring firm, finding a limitation of lability clase of| $50,000 tobe valid and enforeeable under Washington law. The Ninth Circuit's ruling is consistent with the majority of foreign jurisdictions that have addressed the enforceability of limitation of liability clauses in design professional service contracts. Pratt Central Park Ltd. Partnership v. Dames & Moore, In., 60 F 34 350 (7* Cit. 1995) (applying llinois law); Vathal Corp. v. Sullivan Associates, in., 44 F.3d 198 (34 Cit 1995) (applying Pennsyivania law); Florida Power & Light Co. v. Mid-Valley, Ine 763 F.2d 1316 (11 Cir. 1985) (applying Florida law); AGIP Petroleum Co., Ine. v. Gulf Island Fabrication, Inc, 920 F. Supp. 1330 (SD. Tex. 1996) (applying maritime and Louisiana law); Georgetoun Steel Corp. v: Union Carbide Corp., 806 F. Supp. 74 (D.C. 1992) {applying South Caroling law), overruled on other grounds, 7 F.3d 223 (table, unpublished ‘op.), 1992 WL 78830 (4" Cir. 1992); Long Island Lighting Co. v.IMO Delaval, Inc, 668 F. Supp. 237 (S.D.N.Y. 1987) (applying New York law); Markhorough California, Inc, »: Superior Court, 27 Cal. App. 34.705, 277 Cal. Rpt. 919 (1991) (applying California law); 5555001126903,Moler v. Melzer, 24 Kan. App. 643, 942 P.2d 643 (1997) (applying Kansas law); CBI NA. CON, Ine. v. UOP, Ine., 961 $.W.2d 336 (Tex. App. 1997) (applying Texas law); Marbro, Inc. ¥. Borough of Tinton Falls, 297 N.J. Super. 411, 688 A.2d 159 (NJ. Super. Law Div. 1996) (applying New Jersey law). But see City of Dillingham v. CH2M Hill, 873 P 24 1271 (Alaska 1994) (limitation of liability clause violates Alaska’s anti-indernity statute); Rocky Point Properties, Inc. Sear-Brown Group, Inc, 744 NY.S.2d 269 (Sup. Ct, App. Div. 2002) (factual issues relating to whether contracting parties agreed to incorporate limitation of liability clause into an implied-in-fact contract for design professional services defeat summary judgment motion tw enforce clause). ‘An LOL clause may be unenforceable in a situation involving gross negligence. Courts in ‘other jurisdictions have held that contract clauses that cap a design professional's liability ‘will not apply to damages caused by that design professional's grass negligence. See Sear- Brown Group ¥. Jay Builders, Inc, 665 N.YS.24 162 (N.Y. App. 1997) (real estate ‘developers claim of gross negligence against engineer not affected by contractual limitation ‘of remedy clause). Division IM ofthe Washington Court of Appeals appears to have held, in Liberty Furniture: ‘Sonitrol, 83 Wn, App. 879, 770 P.2d 1086, review denied, 113 Wn 2d 1003 (1989), that @ contractual LOL clause will not be enforced to limit a business from liability for gross negligence. In Liberty Furniture, a company hired Sonitrol to monitor its warehouses for fire. The contract limited Sonitro’s liability for any loss to a sum equal to ten percent of the annual service charge or $250, whichever was greater. Liberty Furniture subsequently lost a ‘warehouse full of furniture when its sprinkler system activated without Sonitrol notifying the company of the problem with the system. The trial court instructed the jury that Sonitrol's ‘oss negligence would invalidate this clause. 1d, at 880. The court of appeals affirmed this jury instruction. See Limitation of Liability Case Index, attached as Appendix B. IV. _ STATUTES OF LIMITATIONS AND STATUTE OF REPOSE A. Statute of Limitations Under Washington law; the statute of limitations for negligence actions is three years. RCW 4416.080(2). The statute of limitations for breach of an oral agreement is similarly three years. RCW 4.16.080(3), The statute of limitations for breach ofa written agreement is six years, RCW 4.16.040, To determine which of these limitations periods applies to a particular claim, one must