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Breaking Legal Developments

11-23-2010

Published by:
Peter A. Lynch, Esq.
of Cozen O'Connor
palynch@cozen.com
http://www.cozen.com

 

EXECUTIVE SUMMARY:      This weekly newsletter covers:

  1. Wash Supreme CT Permits Faulty Grounding System Fire Case to Proceed Against Engineers


(1) WASH SUPREME CT PERMITS FAULTY GROUNDING SYSTEM FIRE CASE TO PROCEED AGAINST ENGINEERS

In Affiliated FM Insurance Company v. LTK Consulting, et al, (Nov. 4, 2010) Washington Supreme Court, Case No. 82738-9 http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=827389MAJ, the Supreme Court of Washington reviewed a fire loss case. A fire ignited on the Seattle Monorail System's (Seattle Monorail) blue train in 2004. The monorail's private operating company, Seattle Monorail Services (SMS), suffered millions of dollars in losses. The question presented was whether SMS, which does not own the Seattle Monorail, could bring a tort action against LTK Consulting Services, Inc., an engineering firm that worked on monorail maintenance before the fire, for negligently causing the fire. LTK assumed, for the sake of argument in its motion for summary judgment, that the cause of the fire was the train's faulty grounding system, the design of which LTK had itself suggested. LTK argued, however, that SMS's damages were purely economic losses stemming from repair costs, which SMS was contractually obligated to pay, and from business interruption. LTK believed that SMS's tort claims for such damages were barred under Washington tort law. The court disagreed. By undertaking professional engineering services, LTK bore a tort law duty of reasonable care encompassing safety risks of physical damage to SMS's property interests in the monorail. Hence, SMS's subrogee, Affiliated FM InsuranceCompany (AFM), could bring a claim of negligence against LTK for LTK's tortuous injury of those interests.

The Seattle Monorail is the elevated transportation system that connects Seattle Center with downtown Seattle, Washington. One day in May 2004, after leaving the Seattle Center Station with a load of passengers, the monorail blue train caught fire. The fire started beneath the floor of the passenger compartment of the train's front two cars, but the fire soon pierced the floor and engulfed the seating in both front passenger cars. Smoke from the fire spread to all four blue train cars. On the other monorail track, the red train stopped alongside the blue train, helping passengers escape. The red train was damaged by smoke. The cause of the fire was later found to be electrical: a shaft in the monorail's blue train motor had disintegrated, colliding with an electrically charged collector shoe.

Ten years before the fire, in 1994, the city of Seattle (City) entered a monorail concession agreement with SMS. The agreement granted rights to SMS related to the operation of the monorail:

The City hereby grants to [SMS] . . . the concession right and privilege

to maintain and exclusively operate the Monorail System including the

facilities, personal property and equipment, together with the right to

use and occupy the areas, described in this section, all subject to the

conditions and requirements set forth in this Agreement.

Excerpt of Record (ER) 030, Ex. 1, III.A. The agreement permitted SMS to run concession stands and required SMS to collect fares according to an agreed schedule. In exchange for these rights, SMS promised to pay "concession fees and charges" to the City. ER 034, Ex. 1, V.A.

The agreement allocated responsibility among SMS and the City for maintaining the monorail. ER 053-074, Ex. 1, XI.A-N. LTK and AFM agree that SMS bore the responsibility for emergency maintenance. ER 395. The agreement required SMS to grant the City "access to the Monorail System at all reasonable times to inspect the same and to make any repair, improvement, alteration or addition thereto of any property owned by or under control of the City." ER 095, Ex. 1, XIX.A. To the extent "reasonably required" for such repairs or improvements, the agreement permitted the City to "interfere with the conduct of the business and operations of [SMS]."

The agreement also required SMS to carry an insurance "policy for fire and extended coverage, upset, collision and overturn, vandalism, malicious mischief, and other perils commonly included in the special coverage form," with the City designated as the loss payee. ER 081-082, Ex. 1, XVII.A.1. In the event of damage from a fire for which SMS was not responsible, the agreement gave SMS the right to suspend payments to the City or terminate the agreement altogether, depending on the severity of the damage. ER 097, Ex. 1, XXII.B-C.

The City contracted with LTK in 1999 "to examine the Monorail system and recommend repairs." Resp. Br. of LTK at 3. LTK completed its contractual obligations by 2002.

SMS and the City amended their agreement after the fire to allocate the costs and responsibilities for repairing the fire and smoke damage to the monorail. ER 349-50. SMS's insurer, AFM, paid $3,267,861 to SMS and was subrogated to SMS's rights against LTK. Asserting those rights now, AFM sought to recover damages from LTK for SMS's losses.

AFM brought suit against LTK in King County Superior Court in November 2006, claiming that LTK was negligent "in changing the electrical ground system for the Blue and Red Trains." ER 003, Compl. 4.2. AFM alleges that as part of LTK's contract with the City, "LTK Engineering recommended that the grounding system for the Blue and Red Trains that made up the Seattle Monorail System be changed."ER 002, Compl. 3.1.

LTK removed the suit to the United States District Court for the Western District of Washington and moved for summary judgment. LTK denied that it suggested changes to the trains' grounding system or that these changes were implemented, but for purposes of argument on summary judgment, assumes "that it recommended changes to the City, that those changes were implemented, and that their implementation resulted in a condition where the fault that occurred as a result of the drive shaft disintegration was not prevented." ER 384 n.2 (Def.'s Mot. For Summ. J.). However, LTK argued that SMS's losses were purely economic and that it was not liable in tort for economic losses, at least in this circumstance where it was not in contractual privity with SMS. The losses were purely economic, in LTK's view, because they stemmed from business interruptions and SMS's contractual obligations to repair the City's monorail trains, and SMS did not have a property interest in the Seattle Monorail. The district court granted LTK's motion for summary judgment and denied AFM's motion for reconsideration.

AFM appealed to the United States Court of Appeals for the Ninth Circuit, which certified the following question for this court's review:

May party A (here, SMS, whose rights are asserted in subrogation by

AFM), who has a contractual right to operate commercially and

extensively on property owned by non-party B (here, the City of

Seattle), sue party C (here, LTK) in tort for damage to that property,

when A(SMS) and C(LTK) are not in privity of contract?

The Ninth Circuit indicated it will "affirm the district court's grant of summary judgment in favor of LTK" if we "decide[] the economic loss rule, or some other rule, bars such a suit in tort." The Washington Supreme Court accepted the certified question pursuant to the Federal Court Local Law Certificate Procedure Act, chapter 2.60 RCW, and RAP 16.16.

The federal district court concluded that SMS's injury was "outside the bounds of tort recovery" because it was "strictly economic--i.e., business interruption and the cost of repairing the damaged train." In so holding, the court relied on a doctrine of Washington law termed the "economic loss rule," which is "a doctrine that has attempted to describe thedividing line between the law of torts and the law of contracts." Eastwood v. Horse

Harbor Found., No. 81977-7, slip op. at 4 (Wash. Nov. 4, 2010). However, asthe Court of Appeals in Eastwood stated, the federal district court's "broad reading of this court's jurisprudence on the economic loss rule, while perhaps understandable, is not correct." In Eastwood, the Washington Supreme Court recognized two perils to treating this doctrine as a bright-line "rule of general application" that holds "any time there is an economic loss, there can never be recovery in tort." "First, it pulls too many types of injuries into its orbit" because the definitions of economic injuries are broad and malleable. Second, "[e]conomic losses are sometimes recoverable in tort, even if they arise from contractual relationships." For those reasons, we concluded that "[t]he term 'economic loss rule' has proven to be a misnomer."

In a case like this one, where a court applying Washington law is called to "distinguish between claims where a plaintiff is limited to contract remedies and cases where recovery in tort may be available," the court's task is not to superficially classify the plaintiff's injury as economic or noneconomic. Rather, the court must apply the principle of Washington law that is best termed the independent duty doctrine. Under this doctrine, "[a]n injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract." Using "ordinary tort principles," the court decides as a matter of law whether the defendant was under an independent tort duty.

In the law of negligence, a duty of care "is defined as 'an obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct toward another.'" Transamerica Title Ins. Co. v. Johnson, 103 Wn.2d 409, 413, 693 P.2d 697 (1985) (quoting William L. Prosser, Handbook of the Law of Torts 53, at 331 (3d ed. 1964)). The duty of care question implicates three main issues--"its existence, its measure, and its scope." Dan B. Dobbs, The Law of Torts 226, at 578 (2000). So the duty question breaks down into three inquiries: Does an obligation exist What is the measure of care required To whom and with respect to what risks is the obligation owed?

LTK seems to put at issue every aspect of its tort duty--the existence, measure, and scope. LTK argues, "LTK's duty of care was created by its contract with the City, and that contract created no independent duty to avoid SMS' or AFM's economic loss."

At issue first is the existence of a duty of care independent of LTK's contract with the City. Viewed within the framework of our duty analysis, the question is this: Do the duty considerations dictate that engineers who provide services be required by law to use reasonable care An initial policy consideration is the usefulness of private ordering. The court assumed private parties can best order their own relationships by contract. The law of contracts is designed to protect contracting parties' expectation interests and to provide incentives for "parties to negotiate toward the risk distribution that is desired or customary." Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wn.2d 816, 827, 881 P.2d 986 (1994).

In contrast, "tort law is a superfluous and inapt tool for resolving purely commercial disputes." Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990). If aggrieved parties to a contract could bring tort claims whenever a contract dispute arose, "certainty and predictability in allocating risk would decrease and impede future business activity." Berschauer/Phillips, 124 Wn.2d at 826.

In Berschauer/Phillips, the court considered how this preference for private ordering affects an engineer's obligations under the law of torts. In that case, the general contractor for a school construction project sued three defendants for negligence--the project's architect, structural engineering company, and construction inspector. Id. at 819-20. As a result of the defendants' inadequate design plans and faulty inspection work, the contractor claimed that it spent more money than expected and also endured delays in construction, with $3.8 million in losses.

The contractor conceded these were economic losses. Id. The court held that "the economic loss rule does not allow a general contractor to recover purely economic damages in tort from a design professional." Id. at 823. The court's overriding concerns were protecting all of the parties' contractual expectancies and giving an incentive to negotiate risk. In the context of complex multiparty transactions, at least, the preference for private ordering suggests that an engineer does not operate under extracontractual tort obligations.

But this case reminded the court that a fire can ignite as a result of an engineer's work, imperiling people and property. An interest the court must consider is the safety of persons and property from physical injury, an interest that the law of torts protects vigorously. See Dobbs, supra, 1, at 3 ("Legal rules give the greatest protection to physical security of persons and property."). The record before the court did not indicate whether any passengers on the monorail were injured or, if the fire caused damage to property beyond the Seattle Monorail. But the parties agree that the fire caused damage to the monorail trains themselves. And, in Washington, it is common knowledge that the monorail trains carry thousands of people every year between Seattle Center and downtown Seattle. A fire on these trains is a severe safety risk, highlighting the interest in safety that is at stake when engineers do their work.

Imposing a duty of care on engineers could be an effective way to guard against unreasonable curtailments of the safety interest in freedom from physical injuries. Because engineers occupy a position of control, they are in the best position to prevent harm caused by their work. Tort liability would force negligent engineers to internalize the costs of their unreasonable conduct, making them more likely to take due care. Further, engineers have ample training, education, and experience, and can use their professional judgment about the design needs of a particular project. By deterring unreasonable behavior before it occurs and placing responsibility in the hands of the persons who can best mitigate the risks, a duty of reasonable care could reduce the overall social costs.

The court held engineers who undertake engineering services in this state are under a duty of reasonable care. The interest in safety is significant. Although Berschauer/Phillips makes engineers not liable in tort for some classes of harm, extending that case to all classes of harm and all classes of people would be unjust. Even in a calamity, an innocent party who never had the opportunity to negotiate the risk of harm would be forced to bear the costs of a careless engineer's work.

Although we have not held so specifically until now, we think engineers' common law duty of care has long been acknowledged in this state. For example, in Seattle Western Industries, Inc. v. David A. Mowat Co., 110 Wn.2d 1, 10, 750 P.2d 245 (1988), implicitly recognizing the duty exists, the court held that the scope of the "engineer's common law duty of care" is not necessarily always limited to the engineer's contractual obligations. The Court of Appeals has explicitly recognized a common law duty of care, holding in G.W. Construction Corp. v. Professional Service Industries, Inc., 70 Wn. App. 360, 366, 853 P.2d 484 (1993), that the defendant engineer performing an inspection under contract had an independent "duty to exercise reasonable engineering skill and judgment." Nationally, it is the same. See, e.g., Jay M. Feinman, Professional Liability to Third Parties 11.3.1, at 228 (2000) ("Most courts have extended liability to architects and engineers by applying the ordinary law of negligence."); 4 Stuart M. Speiser et al., The American Law of Torts 15:117, at 852 (1987) ("It is well settled, in the modern law, that architects or engineers may be subject to liability for property loss or damage resulting from defective designs, specifications, plans, drawings, supervision and administration, and the like.").

LTK argued it had no obligation with respect to risks of harm to the business expectancies of third parties. LTK argued that SMS was in a position to negotiate better contract terms with the City, but SMS accepted the risk that the City could hire an engineer whose negligence would cause extensive property damage to the monorail and business losses. LTK suggested that SMS made a deal, and the court should hold SMS to its bargain. As LTK has framed it, the issue is whether the duty of care assumed by an engineering firm extends to the business expectancies of a company with a commercial interest in the property on which the engineering firm worked.

However, the question here is whether an engineer's duty of care extends to safety risks of physical damage to the property on which the engineer works. The court held it does. The harm in this case exemplifies the safety-insurance concerns that are at the foundation of tort law. A fire broke out suddenly on the Seattle Monorail's blue train, endangering people and causing extensive physical damage to property. Given the safety interest that justifies imposing a duty of care on engineers, LTK was obligated to act as a reasonably prudent engineer would with respect to safety risks of physical damage.

When a defendant is under a duty of care with respect to certain risks of harm and admits breach, as LTK assumes here, "the connection between the breach and the plaintiff's injury becomes a factual question of proximate cause." Eastwood, slip op. at 24. The court decides whether a reasonable juror could conclude that "the plaintiff's injury was within the scope of the risks of harm, which the court has held the defendant owed a duty of care to avoid." Id. at 18. Here, the court held an engineer, such as LTK, had a duty of care with respect to safety risks of physical damage. Because no reasonable jury would find a risk of fire fell outside the scope of LTK's duty of care, proximate causation is not disputable. The simultaneous realization of a risk of harm to SMS's business expectancy is irrelevant. By itself, a breach of LTK's tort duty with respect to safety risks is sufficient to state a claim.

A duty's scope can be limited to designated classes of persons. See, e.g., ESCA Corp. v. KPMG Peat Marwick, 135 Wn.2d 820, 832, 959 P.2d 651 (1998). The issue is whether a duty of care respecting damage to property extends only to the persons who hold an ownership interest in that property.

LTK argued that regardless of whether SMS's property interest can be classified as a lease, a license, or some other property interest, only the owner of property can sue in tort for damage to the property. LTK's understanding of the relationship between ownership and the scope of tort duties would lead to absurd results. SMS would not be able to sue for trespass if someone occupied the monorail stations or trains without SMS's permission. SMS would not be able to sue for damages if an arsonist intentionally set the trains or stations afire. SMS would not be able to recover in a negligence suit if a truck driver on the Seattle Center grounds negligently fell asleep, lost control, and rammed into the monorail station and trains parked there. In these examples, under LTK's proposed rule, only the City, as owner, would be protected by tort law.

The court rejected LTK's argument and hold that the scope of an engineer's duty of care extends to the persons who hold a legally protected interest in the damaged property. "'Property' is made up of an infinite collection of 'interests' that may be held, separated, divided, transferred, restricted--combined and recombined like jack-straws." 17 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Property Law 1.1, at 3 (2d ed. 2004). Accordingly, more than one person can "own" or "hold" an interest in property. See id. The law protects a wide range of property interests from harm. A license, a privilege to use property, is entitled to legal protection against interference by a third person if the license is not terminable at will or grants possession to the exclusion of the third person. Restatement of Property 521(2)-(3) (1944).6 An easement is a right to enter and use property forsome specified purpose. 17 Stoebuck & Weaver, supra, 2.1, at 80. A cousin of easements, a profit a prendre, "is the right to sever and to remove some substance from the land." Id. "Profits are typically to remove minerals, gravel, or timber." Id.

Such nonpossessory interests are entitled to legal protection against "actual or threatened harm." 2 American Law of Property 8.106, at 312 (A. James Casner, ed. 1952). The holder of a nonpossessory interest does not have to hold title to the servient estate in order to sue for damage to the nonpossessory interest. See 28A C.J.S. Easements 243, at 466 (2008) ("The owner of an easement whose right has been invaded and injured or destroyed has a right of action therefor."). As this discussion shows, property interests falling well short of a full fee simple estate are worthy of legal protection.

In this case, the court did not need to label SMS's property interest as a lease, a license, a profit, or an easement. It is plain that the City granted to SMS "the concession right and privilege to maintain and exclusively operate the Monorail System including the facilities, personal property and equipment, together with the right to use and occupy the areas, described in this section." ER 030, Ex. 1, III.A (emphasis added). These are property interests in using and possessing the Seattle Monorail, and thus SMS was within the scope of LTK's duty of care. To be sure, the City reserved "access to the Monorail System at all reasonable times to inspect the same and to make any repair, improvement, alteration or addition thereto of any property owned by or under control of the City." ER 095, Ex. 1, XIX.A. But a "landlord's retention of the right to enter, inspect and repair is not inconsistent with a full surrender of possession to the tenant." 49 Am. Jur. 2d Landlord and Tenant 386 (2006).

Still, LTK asked the court to view the agreement through the prism of contract. LTK argues that "SMS' obligation to pay some of the repair cost . . . was a commercial obligation it undertook by contract, not the reflection of any ownership interest in the damaged property." Resp. Br. of LTK at 17. In a narrow sense, this is true. In Washington, commercial leases usually contain a "contractual duty for either the landlord or tenant to make repairs or apportioning repair duties between the parties." 17 Stoebuck & Weaver, supra, 6.39, at 367.

But SMS's property interest derives not from the repair provisions, but from section III.A of the agreement, which granted the "right and privilege to maintain and exclusively operate the Monorail System including the facilities, personal property and equipment, together with the right to use and occupy the areas, described in this section." ER 030, Ex. 1, III.A (emphasis added). That the City conveyed these enumerated property interests in a contract is unexceptional, because almost all property interests must be conveyed in writing. Oftentimes, these writings include contractual obligations that define the relationship between the parties with an interest in the property and allocate responsibilities among them for caring for the property. See, e.g., 17 Stoebuck & Weaver, supra, 6.4, at 316 ("[T]he act of leasing land is a conveyance, a transfer of an estate, and the various conventional undertakings that are practically always made, including the covenant to pay rent, are contractual promises."). Despite LTK's attempts to portray SMS's rights differently, SMS is not a simple third-party contractor hired by the City to maintain the monorail whenever necessary.

Because LTK's duty of care extended to SMS as holder of the property interests in using and possessing the Seattle Monorail, AFM properly seeks damages for the harm to property interests of SMS. Standing in SMS's shoes, AFM may claim the damages necessary to return SMS as nearly as possible to the position it would have been in, and any claimed damages for SMS's lost profits might be recoverable as damages consequential to LTK's negligence. See 16 DeWolf & Allen, supra, 5.3-5.4, 5.9, at 174-77, 186.8

Applying the independent duty doctrine here, the court held that SMS may sue LTK for negligence. LTK, by undertaking engineering services, assumed a duty of reasonable care. This obligation required LTK to use reasonable care, as the court has defined it, with respect to risks of physical damage to the monorail. SMS enjoyed legally protected interests in the monorail, and LTK's duty encompassed these interests. By subrogation to SMS's rights, AFM may pursue a claim for negligence against LTK. Consistent with this opinion, the answer to the Ninth Circuit's certified question was yes.

Mr. Lynch can be reached at Cozen and O'Connor, 501 West Broadway, Suite 1610, San Diego, California 92101, 800-782-3366 (voice), 619-234-7831 (fax), palynch@cozen.com (e-mail), http://www.cozen.com. Follow us on Twitter at @firesandrain.

Please direct comments, suggestions, stories, and other items to the author by e-mail at palynch@cozen.com

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