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OREGON MOLD LITIGATION (cont'd)

C. Oregon law on negligence, breach of contract and the “economic loss rule.”

In Securities-Intermountain, Inc. v. Sunset Fuel Co., 289 Or. 243, 611 P2d 1158 (1980) the question of whether certain construction defect claims sounded in tort or contract was important to a statute of limitations analysis. The first and third counts of the complaint in Securities, alleged breaches of the agreement. The second count alleged breach of the common law duty of workmanship. The court noted that an allegation of breach of this common law standard could state a claim in either contract or tort. “By inclusion of the phrase “unworkmanlike manner," this allegation appears to invoke a negligence standard or general professional duty of due care and skill rather than a contractual standard.” Id at 263. The court then allowed the claim to be construed as a contract claim, and therefore subject to the six year limitations period for contract rather than the shorter two year period for tort claims. Id. Notably, the defendant argued that the allegation of breach of the duty to construct the building in a ” workmanlike manner” sounded in negligence.

Since that case, many defense attorneys have tried to argue that plaintiffs cannot sue a contractor in negligence for construction defects. That battle is frequently fought at the trial level in both Oregon and Washington. In fact, it had become almost routine for Oregon attorneys defending builders in construction negligence claims to argue that plaintiffs must show a “special relationship” between themselves and a defendant in order to proceed. Defense counsel also made that argument in the Haynes case, discussed below. Plaintiffs usually argued that this was also a misperception of the law of negligence, and showed that decisions imposing the special relationship doctrine had gotten off track by confusing a negligence claim (where the elements are duty, breach, causation and damages) with a negligent misrepresentation claim (where the added elements of detrimental reliance on a representation and right to rely must also be shown).

The special relationship doctrine is an offshoot of the old “economic loss doctrine” announced in cases such as Onita Pacific Corp. v Trustees of Bronson, 315 Or 149, 159, 843 P2d 890 (1992). In Onita the question was whether Oregon was going to recognize a negligent misrepresentation claim in a commercial context involving parties dealing at arms length. It was significant to both the court’s approach and the result of that case that the alleged damages were purely economic, as distinguished from property damage or personal injury. The court noted that negligence cases between contacting parties involving purely economic losses are more limited than the latter type of cases, stating that one “ordinarily is not liable for negligently causing a strangers purely economic loss without injuring his person or property. . . .” Id at 159, citing Hale v Groce, 304 Or 281,284, 744 P2d 1289 (1987). (Emphasis added).

The reason that a court will take a different approach to commercial litigation involving pure economic loss is because in most commercial cases a breach of contract theory provides an adequate remedy. For example, if a developer is building a shopping mall and the contractor walks off the job, leaving it unfinished, the developer can hire a replacement contractor and sue for any increase in the cost of completion under a breach of contract theory. The developer’s losses are purely economic and a breach of contract theory provides an adequate remedy as it gives the developer the benefit of his bargain or his “expectation damages.” He may compel the contractor to pay for the result the owner expected when he hired the contractor. Obviously, this same expectation theory does not as neatly fit a situation where a contractor builds negligently and the owner suffers property damage or personal injury to his wife or children due to contamination by toxic mold. In those types of cases the customer could not fairly be said to have “expected” such a terrible result when he signed the contract. Therefore, the remedy must necessarily include any damages flowing from the breach, including medical expenses, pain and suffering and replacement of contaminated personal property. These are the sort of damages that were not contemplated to be precluded in Onita’s economic loss doctrine.

Onita specifically cited Securities-Intermountain and reaffirmed that a “professional or contractual relationships may also give rise to a tort duty to exercise reasonable care on behalf of another's interests” Id. at 160. In fact, the court observed that construction professionals such as architects and engineers “may be subject to liability to those who employ (or are the intended beneficiaries of) their services and who suffer losses caused by professional negligence. . . .” Having acknowledged the tort of negligent misrepresentation, the court then distinguished the tort of negligent misrepresentation, which connotes elements of fraud and detrimental reliance, from general negligence. The tort of negligent misrepresentation depends upon a statement made by another and the receiver’s justifiable reliance on the statement. The court noted that one may rely upon advice given by an agent, realtor, or an insurer engaged in protecting an insured from excess liability, because all of those actors are seeking to further the economic interests of the client. The court distinguished these fiduciary like relationships from one involving parties in an arms length commercial dealing governed by principles of caveat emptor. The court noted that one commercial party ordinarily would not have a right to rely upon a statement made by the adverse party in an arms length contract without some basis upon which the right to rely could be established.

Cases following Onita have been inconsistent. Some decisions have noted the pure economic loss rule while permitting cases to proceed because the claims also involved property damage or personal injuries. Most decisions have ignored the Onita distinction between the types of damages suffered altogether and have focused on the fact that the claim was based on a duty outside of the contract as in Securities, supra, or Georgetown Realty v. The Home Ins. Co., 313 Or 97, 106, 831 P2d 7 (1992).

Georgetown noted that the law had long allowed an “action on the case” for what now is called negligence. The existence of the contract “is laid as mere inducement” establishing the background for the duty the defendant violated. The duty itself, however, emanates from the common law of negligence which “is the gravamen of the action.” Id. at 102-103. The court noted the irony that in most cases raising the issue, it was the defendant that asserted that it committed a tort, because it hoped to impose a shorter statute of limitations period (2 years) instead of the longer period for a contract claim (six years). The court noted that the context in which a dispute arises does not control, but rather it was the wrong or breach of the duty that gave rise to the claim. The court in Georgetown Realty then reaffirmed the holding in Securities-Intermountain v. Sunset Fuel, 289 Or 243, 611 P2d 1158 (1980) and explained the state of the law as follows:

The lesson to be drawn from this court's cases discussing the choice between contract and tort remedies is this: When the relationship involved is between contracting parties, and the gravamen of the complaint is that one party caused damage to the other by negligently performing its obligations under the contract, then, and even though the relationship between the parties arises out of the contract, the injured party may bring a claim for negligence if the other party is subject to a standard of care independent of the terms of the contract. If the plaintiff's claim is based solely on a breach of a provision in the contract, which itself spells out the party's obligation, then the remedy normally will be only in contract, with contract measures of damages and contract statutes of limitation. That is so whether the breach of contract was negligent, intentional, or otherwise. In some situations, a party may be ableto rely on either a contract theory or a tort theory or both.

Georgetown Realty emphasized that an insurer who controls the defense could be subject to liability for bad faith for how it handled the defense. Defense attorneys seized upon that part of the decision as imposing some kind of extra requirement in negligence cases – a requirement that a defendant be in control or stand in a fiduciary capacity to plaintiff in order for a negligence claim to lie. The defense bar portrayed the decision as establishing some kind of new brand of immunity based on contracting status. According to many defense attorneys, if you have a contract with your victim you are immune from being sued in negligence unless the contract imposes some kind of “special relationship” akin to a fiduciary duty. This ignored the fact that the special relationship doctrine arose out of negligent misrepresentation cases because one must prove a right to rely upon statements made to hold the speaker liable in such cases.

Because liability in a negligent misrepresentation case depends on whether you have a right to rely on advice given by trusted insiders, the duty to avoid causing foreseeable injury cited in Fazzolari v. Portland School Dist. No. 1J, 303 Or 1, 17, 734 P.2d 1326 (1987), is replaced in those cases by seeing if the injured party had a right to rely upon the negligent statement because of the special relationship between speaker and his victim.

The court in Conway v Pacific University, 324 Or 231, 924 P2d 818 (1996). reaffirmed the special relationship doctrine from Onita but found no such relationship in an arms length negotiations for an employment contract. Conway actually reaffirmed previous cases finding liability for negligence if the duty arose outside of the contract terms. Id. at 238. The Conway court stated that the “duty in tort does not arise from the terms of the contract, but from the nature of the parties' relationship.” This was a true statement because any legal duty arises from the relationship between the parties and the obligation to avoid causing another foreseeable harm. But this comment was taken out of context and led to later cases in the Oregon Court of Appeals erroneously scrutinizing the nature of the relationship as an immunizing factor instead of recognizing, as cases had for a century before, that the existence of an extra-contractual duty is the gravamen of a negligence claim.

Unfortunately, defense attorneys took the Conway decision as opening the door to expanding the special relationship doctrine to apply to situations in which one party has hired the other in a professional capacity, as well as the previously recognized situations where there was a principal-agent and other fiduciary relationship. Defense counsel in Oregon began arguing that a person having a contract with a wrongdoer cannot sue for general negligence, unless there is a special fiduciary like relationship. That is precisely the type of “one size fits all” black letter pronouncement the Onita court had sought to avoid when it stated:

“But for the reasons that follow, rather than adopting a black letter “rule,” we opt to develop the scope of the duty and the scope of recovery on a case-by-case basis, in the light of related decisions of this court.” Onita, supra 315 Or at 159.

This confusion has resulted in several aberrational decisions such as Gladhart v Oregon Vineyard Supply Co., 164 Or App 438, 994 P2d 134 (1999) rev’d on other grounds 332 Or 226, 26 P3d 817 (2001) involving allegations of negligence and negligent misrepresentation. Onita was relevant to the latter claim as there was the need to show some special relationship upon which detrimental reliance could be pinned in a negligent misrepresentation theory. But the Court of Appeals in Gladhart threw the baby out with the bathwater. It confused the “independent duty” doctrine of Georgetown Realty and ignored a century of decisional law in concluding, erroneously, that there was a need to show a special relationship in all negligence cases. That was a mistake and a departure from settled case law. The relationship between the parties is merely one factor that goes into the analysis of whether there may be a duty outside the contract. Unfortunately, the Oregon Court of Appeals held to this view of the law in Strader v. Grange Mut. Ins. Co., 178 Or App 329, 39 P3d 903 (2002) (discussed in more detail below).

Eventually, this confusion had to be clarified by the Oregon Appellate Courts. Lawyers for the plaintiffs were asserting Securities and Georgetown Realty in support of their plaintiffs’ rights to assert negligence claims against builders, while defense attorneys were asserting Strader and Gladhart. On March 20, 2008 the Oregon Supreme Court, in Harris v Suniga, CA 125316, SC S054549, made it clear that the “economic loss doctrine” did not prevent an action in negligence against a contractor. The court stated, in part:

Here, plaintiffs seek recovery because defendants' negligence caused dry rot in the apartment building that plaintiffs own.  The allegations in the complaint are thus quite different from the kinds of damages that this court has characterized as "economic losses" in other cases -- the reduced stock price in Oregon Steel Mills, the monetary gift to a beneficiary in Hale, or the "indebtedness incurred or return of monies paid" in Onita Pacific Corp.  Plaintiffs here seek recovery for physical damage to their real property, and this court's cases generally permit a property owner to recover in negligence for damages of that kind. (Emphasis added).

The distinction between what is and what is not an economic loss depends upon the nature of the damage which occurred. Id. If, for example, a contractor walked off the job so that the owner had to hire another contractor at greater expense, any increased cost would be viewed as an economic loss recoverable under a breach of contract theory. The owner did not receive the benefit of his bargain because he did not receive the building for the original contract price but had to pay more for the same building. However, when a contractor, through his negligence, damages the building or contaminates its contents because of ensuing mold growth, the cost to repair and other consequential damages are not perceived as economic losses but property damage properly recoverable in tort.

Practice tip: An attorney should analyze his case and the type of damages his client suffered before pleading a complaint. If there is a construction contract, look to see if the contractor breached it or breached the warranty. If he breached a contract provision (remember, most contracts incorporate the plans and specifications into the contract) the claim is for breach of contract as regards to the damage resulting from that breach. Where there are defects that would not be, strictly speaking, a breach of the contract, then allege a negligence cause of action. Also, if a person suffered property damage or personal injury, those items can be included in a negligence claim. Don’t forget to analyze whether there is an attorney fee clause in the contract. I have seen attorneys fail to include a claim for attorney fees in their complaint and end up losing their client’s right to reimbursement for their attorney fees after the case. I know of one recent case where a defense attorney received a defense verdict but had neglected to plead a right to defendant’s attorney fees. His client then had a malpractice claim against him for failing to do so.

If you commit this kind (or any kind) of mistake, notify your client immediately in writing and advise him or her to consult independent counsel to analyze and advise whether there is a viable claim for malpractice. Do not try to bull your way thorough. Do not try to cover up your mistake. You can be disbarred for dishonesty but usually not for committing an honest mistake. Most clients will forgive an attorney for making an honest mistake, but never for covering one up.

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