July 24, 2020

The Effect of the Economic Loss and Independent Duty Doctrines on Construction Disputes


By Brent Carpenter, Construction Attorney

This article was originally published in the July 24, 2020 edition of the Daily Journal of Commerce Oregon.

Typically, in construction disputes the parties are arguing about money, and the legal theory to recover money is through a claim for breach of contract. However, can a contractor recover money when the other party’s negligent or intentional acts (e.g., fraud, misrepresentation)—acts which are referred to as “torts”—result in damage to the other party?

This can be an important question as claims for negligence are potentially covered by the other party’s insurance.

The answer to the question of whether a contractor can recover money in tort depends on whether the other party’s tortious acts led to property damage or whether the damages are purely economic. The answer also depends on whether the project is located in Oregon or Washington, as the law in the two states on this issue differs.

If a party’s acts or omissions result in property damage, the answer is fairly clear—a party may recover for such damages even though there is a contract between the two parties.

The classic example in this region is a construction defect claim, in which the owner sues the general contractor for negligent construction which has resulted in water intrusion and resultant property damage. However, if there is no property damage and the damages are purely economic, recovery may be barred by what is known in Oregon as the economic loss doctrine and in Washington as the independent duty doctrine. The two doctrines differ in what claims they allow.

In Oregon, a party may not recover from another party for purely economic losses in tort unless there is a “special relationship” between the parties. A special relationship is one such as the attorney/client or agent/principal relationship in which a heightened duty is owed to the other party. An arm’s-length transaction, such as those typically entered into on construction projects, do not give rise to a special relationship. In Washington, a party may pursue an action in tort even when there is a contract between the parties when the defendant’s alleged misconduct implicates a tort duty that arises independently of the terms of the contract.

The following example is a typical scenario which illustrates how the doctrines affect claims on construction projects in Oregon and Washington. A general contractor and a subcontractor enter into a written subcontract. The subcontractor executes a conditional lien waiver, as a condition of payment to it by the general contractor. The waiver states that the sub has paid all of its second-tier subcontractors and suppliers. The general pays the sub and then later discovers, which liens are recorded on the project, that the sub never paid its subs and suppliers. The general is forced to pay the lien claimants and then sues the sub for breach of contract and fraud in order to recover the amounts it was forced to pay the lien claimants.

If the project is in Oregon, the sub could argue that because its alleged tortious acts (i.e., not paying its subs and suppliers) did not result in property damage, the general’s damages were purely economic, and there was no special relationship between the general and the sub, the economic loss doctrine bars the general’s fraud claim. This argument would likely prevail and a court would likely dismiss the fraud claim.

If the project is in Washington, the same argument may not be successful. As stated above, under the independent duty doctrine, a party may pursue an action in tort, even when there is a contract between the parties and the damages are purely economic, if the duty breached is independent of the contract. In the case of fraud, Washington courts have held that the duty to not commit fraud is a duty that is independent of the contract. Therefore, it seems likely that a Washington court would not dismiss the general’s claim.

Thus, where the project is located matters. As the above illustrates, a claim on a project in Portland may be dismissed, while the same claim on a project in Vancouver probably would not. Therefore, it is key that a contractor analyze the law of the jurisdiction in which the project is located before initiating costly litigation.

Brent Carpenter is a shareholder at Jordan Ramis PC and focuses his practice on construction law. Contact him at 503-598-7070 or brent.carpenter@jordanramis.com.  

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