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A Claim for Rescission Based on Misrepresentation Survives the Economic Loss Rule and Alejandre

Division Two of the Court of Appeals recently issued an opinion on yet another suit for negligent misrepresentation and fraud by the purchaser of a home against the seller. Jackowski v. Borchelt, 151 Wn. App. 1, 209 P.3d 514 (2009). With two notable exceptions, the opinion predictably follows the precedent established by the Supreme Court in Alejandre v. Bull, 159 Wn.2d 674, 153 P.3d 864 (2007).

Architecture_frameworkJackowski confirms that the economic loss rule holds a party to its contract remedies and affirmed dismissal of the purchaser’s negligence claim against the seller. The opinion further affirmed dismissal of the purchaser’s fraud claim for failure to disclose that the property was in a landslide area where a reasonable inspection prior to closing would have disclosed the landslide risk. Each of these results seems obvious based on Alejandre. The decision therefore underscores a purchaser’s need to either perform a thorough inspection prior to purchasing a home or to insist upon contractual terms detailing the seller’s responsibility for representations as to the condition of the home (or both).

Jackowski dealt with two issues that were not addressed in Alejandre, though: the purchaser’s claim for rescission and claims against the real estate agents involved in the transaction. Jackowski successfully argued that the economic loss rule applies to economic damages, not to equitable relief. Division Two ruled that although the economic loss rule bars recovery, rescission is avoidance of a contract, not recovery. Accordingly, the purchaser’s claim for rescission based on negligent misrepresentation was not barred as a matter of law, despiteAlejandre and the economic loss rule.

Similarly, the economic loss rule did not apply to bar the purchaser’s statutory and common law claims against the real estate agent. The economic loss rule bars tort claims for losses suffered as a result of a breach of duties assumed only by contract. Alejandre, 159 Wn.2d at 682. However, the real estate agent had duties to the purchaser based on common law and on statute (specifically, RCW 18.86), in addition to any duties assumed by contract. The statutory and common law claims were not barred by the economic loss rule, and those claims were improperly dismissed on summary judgment.

After Alejandre, the legal prospects for home buyers who had been the victims of negligent misrepresentation were bleak. The standard contracts used for the majority of residential sales provided no relief for issues with the condition of a home, and it is never easy to prove fraud or fraudulent concealment, even if there is some indication that it may have occurred. The opinion inJackowski might give buyers some hope. It is at least possible to ask for rescission of the contract, and there is a chance of recovery against real estate agents involved in the transaction. Of course, the best advice for buyers is still to take diligent steps prior to closing, rather than to rely on the tenuous claims that may be available to them post-closing.

Economic Loss Rule blocks “negligent representation and fraudulent representation” causes of action when a contract controls

In Cox v. O’Brien, No. 37194–4–II the Court of Appeals Div. II reinforced the economic loss rule:

Rumson, New Jersey“Citing Alejandre v. Bull, 159 Wn.2d 674, 682, 153 P.3d 864 (2007), both parties appear to concede that the economic loss rule applies and that the loss at issue here is the structural damage within the walls of the home, undiscovered until after the home sale closed and the Coxes moved in.  In Alejandre, our Supreme Court discussed the economic loss rule as maintaining the fundamental boundaries of tort and contract law.   Alejandre, 159 Wn.2d at 682 (citing Berschauer/Phillips Constr. Co v. Seattle Sch. Dist. No. 1, 124 Wn.2d 816, 826, 881 P.2d 986 (1994)). 

       Where economic losses occur, recovery is confined to contract 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.  Alejandre, 159 Wn.2d at 683.  A seller sets a price in consideration of potential contractual liability.  Id. The economic loss rule prevents a party to a contract from obtaining through a tort claim benefits that were not part of the contractual bargain.  Id.

In short, the purpose of the economic loss rule is to bar recovery for alleged breach of tort duties where a contractual relationship exists between the parties and the losses are economic in nature.  If the economic loss rule applies, a party will be held to the contractual remedies, regardless of how the plaintiff characterizes the claims.  Id. at 684.” Cox at 8–9. 

For those readers who are not attorneys and don’t understand some of the intricacies of the economic loss rule, if there is a contractual relationship between the parties, the court will look to the contract and NOT tort law to govern how damages are determined.  Consequently, negligence in representing the condition of the home are controlled by the selling contract, and not general tort law.