If You Think Your Family Business's Service Contracts Limit Your Liability In All Situations, Think Again!

Family-owned businesses in the services industry in Washington (and beyond) should be paying attention to a recent Washington Supreme Court case addressing the “Independent Duty Doctrine” (also referred to as the “economic loss rule”) under Washington law. 

The claims that parties to a service contract may bring against each other relating to the services provided are largely limited to claims for breach of that contract.  However, under the “Independent Duty Doctrine,” Washington courts have recognized additional claims—and more importantly, claims that exceed any contractual limitation on liability—to the extent that the defendant had some “independent duty” to plaintiff. 

A long line of cases addresses where such a duty may arise outside the four corners of the parties’ contract.  In the recent case of Donatelli v. D.R. Strong Consulting Engineers, Inc., a narrow majority of the Washington Supreme Court justices took an expansive view of the independent duties that could arise in a service contract, which in Donatelli was a contract for professional engineering services relating to a land use proposal. In permitting the plaintiffs’ negligence-related claims against the engineering firm to proceed, the Court did seem troubled that the scope of the services to be provided was unclear, as were the parties’ communications regarding the services before the contract was signed. However, the Court found that the plaintiffs could pursue their negligence-related claims, and the damages award would not necessarily be limited by the terms of the parties’ contract.

It is important to note that the Court did not address the merits of the non-contract claims, nor did it find the defendants were liable on those claims. It simply found that the Independent Duty Doctrine did not bar the claims.  But this is a concern for any party entering into a service contract, because it opens the door for a variety of claims that can arise regardless of the terms of the parties’ express contract. 

The full impact of this decision is yet to be determined, but it makes two points very clear:

1. Make sure you have any service contract reviewed by someone who understands the terms as well as the nature of the services involved, and
2. What is missing from your contracts may be as important as what they contain. 

While Donatelli and other Washington case law suggest that you cannot use a contract to limit liability with respect to all non-contract claims, there are a number of ways that  your agreement can be brought within the four corners of the contract. For example, the parties can include a full recitation of the services to be provided; express, limited representations and warranties relating to the services; and “merger” clauses stating that the contract contains all terms of the parties’ agreement. They should also ensure that any change in the service provider’s scope of work be accompanied by a written contract amendment or change order.

In any event, the recent decision creates continued uncertainty regarding the scope of the Independent Duty Doctrine in Washington, and it is important for individuals and businesses entering into service contracts—as well as their lawyers—to keep this in mind.