Summer 2005 Newsletter

WASHINGTON SUPREME COURT TO HEAR FRAUD LAWSUIT
ABOUT FAILURE OF SELLER TO DISCLOSE SEPTIC DRAINFIELD FAILURE.
 
Economic Loss Rule may be applied to Real Estate Transactions

The Washington Supreme Court has accepted review of Alejandre v. Bull, an appeal from Walla Walla County.  In Bull, the buyers, the Alejandres, bought a house from Ms. Bull.  She disclosed nothing wrong with the septic system, and had it pumped before closing.  The Alejandres made their offer contingent upon an inspection, which revealed nothing wrong with the system.  On the Form 17, Ms. Bull stated that the line between the house and the tank had been replaced.
 
Several weeks after closing, the Alejandres noticed the smell of raw sewage, and discovered that the ground over the drainfield was spongy and wet.  The experts they called told them that Ms. Bull had contacted them.  They told her of severe problems with the septic system and advised her that she needed to hook-up to the sewer.  Instead, she had the tank pumped and put her house on the market.
 
The Alejandres sued Ms. Bull for fraud and negligent misrepresentation.  The trial judge took the case from the jury, dismissing the lawsuit after the close of the Alejandres' case, ruling that the Alejandres had failed to meet their burden of proof as to fraud and negligent misrepresentation, and that their claims were barred by the economic loss rule.
 
The Court of Appeals reversed the trial court, finding that the trial court should not have dismissed the Alejandres' claims, which should have gone to the jury, and that the economic loss rule did not bar the fraud claim because the Purchase and Sale Agreement did not allocate risks and future liability.
 
It is anticipated that the Supreme Court will look at the issue of whether the economic loss rule may be used in a real estate transaction to bar a claim for fraud by the buyer against the seller.  This could be a significant decision.  The economic loss rule bars recovery of purely economic damages in a cause of action in tort - like fraud.  Economic loss is limited to remedies provided by contract.  The Court of Appeals in Alejandre v. Bull cited Berschauer/Phillips Construction Co. v. Seattle District No. 1.    In Berschauer, the Washington Supreme Court held:
 
"We . . .maintain the fundamental boundaries of tort and contract law by limiting the recovery of economic loss due to contruction delays to the remedies provided by contract.  We so hold 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.  We hold parties to their contracts.  If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity. . .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."
 
The question is whether the Washington Supreme Court will hold that the economic loss rule applies to fraud in the context of real estate transactions, so that economic loss cannot be recovered for the seller's fraud to the buyer if the Purchase and Sale Agreement is drafted to allocate risks between the parties as well as future liabilities.   If the Court does so, it may have a tremendous impact on the process of negotiating a real estate transaction, because the parties would have to allocate the risk of potential future claims contractually, or the buyer would be barred from recovering economic damages for fraud or negligent misrepresentation.
 
We will watch this case closely.