Erosion of the Economic Loss Rule in Washington

A recent Washington Court of Appeals case expanded the right of homeowners to recover damages from contractors whose negligence causes damage to their homes and property. At the same time, the opinion expanded the potential liability of contractors. In Jackson v. Trenchless Construction Services, the homeowner sued a contractor who was under contract with the prior owner to install a waterline on the property. The homeowner alleged that the work was performed negligently and sued in tort.

For years, the mantra in construction law in Washington has been there is no tort of negligent construction. The only remedy had been breach of contract based on the economic loss rule: An economic loss is a defect of quality as evidenced by internal deterioration. But when a loss stems from defects that cause accidents involving violence or collision with external objects, that is a physical injury and tort remedies apply.

This rule has allowed negligence cases to proceed when a contractor’s negligence caused bodily harm. In this recent case, no one was injured. The water pipe did not rupture or explode, rather the homeowner alleged that the manner in which the work was performed caused instability in the slope that in turn caused the landslide. The court found this distinction sufficient to allow the case to proceed in tort.

What ramifications does this have? For homeowners whose property is injured by contractors who worked on the property in years past, this expands the right to recover damages. This is especially critical in light of the fact that homeowners insurance policies typically exclude coverage for land movement. For contractors, not only does it suggest they must exercise due care, but also suggests they need to be properly insured.

Seattle Biotech at a Turning Point

A recent article in the Puget Sound Business Journal (“Biotechs on the Brink” by Clay Houtzman) suggests that 2011 is a turning point for Seattle’s growing biotech and life sciences industries. More optimistically, from my perspective 2010 was the turning point for the positive, and 2011 will put Seattle on the map for this growing industry.

Bristol Myers Squibb’s purchase of Zymogenetics in 2010 led not to the closing of Zymo’s iconic offices in South Lake Union, but instead to a commitment to keep the 280 jobs in Seattle. Dendreon’s continued success as well as that of Seattle Genetics spurs the growth of other companies that support clinical drug trials, including clinical research organizations, biostatistical consultants, data management companies, and independent medical consultants.

Perhaps fostering the growth of the biotech and life science industries in the Puget Sound area is Washington State’s comparatively favorable tort law. Punitive damages are unavailable in Washington, unlike in many other states. Thus, lawsuits seeking damages for adverse drug reactions are relatively rare in this state.

Professional Services and Construction Liens

Can a construction professional file a construction lien for professional services when the services do not actually result in a physical improvement to real property? A recent opinion from the Washington Court of Appeals suggests the answer is “no.”

In Colorado Structures, Inc. v. Blue Mountain Plaza, a contractor drilled core samples at a construction site to determine the feasibility and cost of developing the property. The development did not go forward because of lack of financing, and the contractor filed a construction lien, including a lien for professional services involved in drilling and evaluating the core samples.

The Court first noted there are four key elements to a valid construction lien:

(1) Furnishing services or equipment;
(2) For the improvement of real property;
(3) At a contracted price; and
(4) At the request of the owner.

The court accepted that the drilling of core samples was professional services, but because the core samples did not result in an actual improvement to real property, the court rejected the claim that a valid lien was created.

This would seem to be at odds with the definition of “professional services”, which includes services rendered “in anticipation of providing improvements to real property.” But the lesson is clear: For a construction lien to be valid in Washington, the improvements must be made. This puts contractors at risk when they perform professional services prior to finalization of funding for a project.