The Economic Loss Doctrine in Alaska and the Design Professional Exception

• Publication year: 2017

§ 34 Alaska L. Rev. 67. THE ECONOMIC LOSS DOCTRINE IN ALASKA AND THE DESIGN PROFESSIONAL EXCEPTION

Alaska Law Review
Volume 34, No. 1, June 2017
Cited: 34 Alaska L. Rev. 67

THE ECONOMIC LOSS DOCTRINE IN ALASKA AND THE DESIGN PROFESSIONAL EXCEPTION

ASHLEY K. Sundquist ^[*]

ABSTRACT

The economic loss doctrine has prevented countless plaintiffs from recovering their economic losses in tort. However, over the last several decades, numerous courts have found exceptions to this doctrine. Alaska currently provides two important exceptions: the independent duty exception and the design professional exception. These two exceptions as applied provide for inconsistent results which create liability for design professionals and cut off liability for non-design professionals. Providing the same approach and analysis for all professionals creates greater consistency and predictability and provides an opportunity for design professionals to limit their exposure to negligence claims.

I.INTRODUCTION

Sally invests her entire life savings into a business. The business hires an attorney. The attorney provides negligent legal advice because he is distracted during the meeting. Sally follows the negligent legal advice, resulting in the failure of the business and the loss of her entire life savings. Sally has no contract remedies available to her because she is not in privity of contract with the attorney, so her only recourse is in tort. In Alaska, Sally will not be able to recover her economic losses in tort because the economic loss doctrine bars her recovery against non-design professionals.

In a different scenario, Sally is a sub-subcontractor on a construction project with no direct contract with the architect. The architect on the project creates faulty designs and is negligent in developing the plans it provides to Sally. Sally follows the architect's design, but various issues arise due to design defects and Sally incurs significant costs as a result. In this scenario, Sally will be able to recover her economic loss against the architect because Alaska recognizes an exception to the economic loss doctrine for design professionals.

These two scenarios demonstrate that, although Sally incurs a purely economic loss in both situations, she will only be able to recover those losses against design professionals. Alaska's exception to the economic loss doctrine for design professionals opens the door to unlimited liability to design professionals for parties not in privity of contract. Additionally, it prevents individuals such as Sally from recovering economic losses from other professionals. If, instead, the same analysis applied to all professionals, parties would have results that are more consistent, the liability of design professionals could be limited, and parties could recover economic losses from non-design professionals. This Article explores this alternative.

Part II examines the economic loss doctrine generally and specifically to Alaska and discusses some of the exceptions to the economic loss doctrine including the independent duty exception and the design professional exception. Part III argues that the Alaska courts should apply a consistent rule for all professionals and not just design professionals in order to provide better consistency and limit liability.

II. ECONOMIC LOSS DOCTRINE & EXCEPTIONS

The economic loss doctrine prevents individuals from recovering purely economic losses in tort if the losses do not stem from physical injury or property damage. ^[1] The seminal case for this doctrine is East River Steamship Corp. v. Transamerica Delaval, Inc., ^[2] where the United States Supreme Court unanimously held that "a manufacturer in a commercial relationship has no duty under either negligence or strict products-liability theory to prevent a product from injuring itself." ^[3] This doctrine has changed significantly over the last fifty years and various courts have numerous exceptions and different interpretations of what is permissible recovery.

States that follow the economic loss doctrine and bar recovery for economic losses in tort only permit recovery under a breach of warranty claim. The rationale for this approach is that parties who are in privity of contract can utilize warranty remedies and those who are not in privity of contract did not have the opportunity to bargain with the manufacturer or seller for any type of protection from defective products. ^[4]

Alaska has adopted the economic loss doctrine, thereby preventing individuals from recovering economic loss in tort. ^[5] However, Alaska and various courts around the country allow for different exceptions to the economic loss doctrine. To better understand these differences, this Part will highlight the general consensus from various jurisdictions and then highlight Alaska's interpretation of these exceptions.

Potentially Dangerous Exception

Some states allow economic recovery in tort for strict liability claims when the product poses a threat of bodily harm. ^[6] These courts argue that the plaintiff should be able to recover economic losses because there was real potential that individuals or other property could have been injured as a result of the defect. ^[7] These courts find that allowing this exception incentivizes manufacturers to ensure that their products are safe to consumers. ^[8]

Alaska follows this exception and allows recovery for economic loss in tort when faced with the potential for danger to persons or other property. ^[9] In Northern Power & Engineering Corp. v. Caterpillar Tractor Co. ^[10] the Alaska Supreme Court stated:

when a defective product creates a situation potentially dangerous to persons or other property, and loss occurs as a result of that danger, strict liability in tort is an appropriate theory of recovery, even though the damage is confined to the product itself. ^[11]

Under this theory, the plaintiff must show (1) that the loss was foreseeably caused by a dangerous defect and (2) the dangerous circumstance was the cause in fact for the loss.. ^[12]

"Other Property" Exception

In East River, the Supreme Court distinguished between two types of damages. First, damage to the property itself was held to be barred by the economic loss doctrine and not recoverable. ^[13] By contrast, damage done to "other property" was held to not be barred by the economic loss doctrine and was therefore recoverable. ^[14] However, the Court left unclear what constitutes "other property," making it difficult for courts to determine which types of damages are recoverable in tort as opposed to restricted to contract remedies. ^[15]

The U.S. Supreme Court provided some guidance on the issue in Saratoga Fishing Co. v. J.M. Martinac & Co, ^[16] where the Court addressed whether a product that is added to the initial product is considered "other property" and therefore recoverable in tort, or is considered part of the product itself and therefore not recoverable in tort. ^[17] In that case, Saratoga Fishing Co. brought a claim against J.M. Martinac & Co. for the loss of its fishing vessel and other equipment on the boat after a fire in the engine room. ^[18] The Court held that the extra skiff, nets, spare parts, and other equipment which were added to the ship after the ship was delivered by the manufacturer were "other property" and were therefore recoverable under a tort theory. ^[19] The Court reasoned that a subsequent user who may purchase a used product does not have the opportunity to contract with the manufacturer and obtain the same warranties as the original purchaser, and therefore should be able to recover in tort when no privity of contract exists. ^[20]

Courts around the country have tried to draw the distinction between the product itself and other property when a product is part of an integrated system. This can be particularly challenging in the construction context. Some courts have held that damage to a component part of a system is damage to the product itself and is not damage to "other property." ^[21] Other courts, however, have held that the individual parts of the construction are all "other property." ^[22]

Alaska has attempted to draw a distinction between property damage, which is recoverable in tort, and economic loss, which is not recoverable in tort. In Cloud v. Kit Manufacturing Co., ^[23] the Clouds purchased a mobile home which was manufactured by Kit Manufacturing Co. ^[24] The rug padding provided with the purchase of the mobile home caught fire and destroyed the mobile home and its contents. ^[25] The Alaska Supreme Court held that, although it is difficult to determine the difference between property damage and economic loss, because the fire was the result of a "sudden and calamitous occurrence," the loss to the property and the belongings were property damage and therefore recoverable in tort. ^[26] The Alaska Supreme Court has further held that when a defective component part causes damage to another component part, this does not constitute damage to "other property" and is therefore not recoverable in tort. ^[27]

In Shooshanian v. Wagner, ^[28] the Alaska Supreme Court again addressed the distinction between property damage versus economic loss. In that case, the Shooshanians brought a strict liability claim to recover replacement costs against a contractor who insulated walls with a toxic spray that caused allergic reactions among the family. ^[29] The court focused its...