Opinion
No. 26882-9-III.
April 30, 2009.
Appeal from a judgment of the Superior Court for Columbia County, No. 06-2-00015-2, William D. Acey, J., entered February 13, 2008.
Affirmed in part and reversed in part by unpublished opinion per Kulik, A.C.J., concurred in by Sweeney and Korsmo, JJ.
Damian and Jeanne Walter purchased a log home from Wayne and Beverly Barnett. Prior to closing, the Walters had the home inspected by Steelman Home Inspections. During the Walters' first night in the home, rain penetrated the inside of the home to such an extent that the Walters had to leave and go to a hotel. The Walters brought suit against the Barnetts and Steelman. The jury awarded $239,257 to the Walters against the Barnetts, based on the Walters' fraudulent concealment claim. The Walters were awarded $120,000 against the Barnetts for breach of contract. The Walters were also awarded $12,300 against Steelman for negligence. The Barnetts appeal, contending that: (1) the Walters failed to diligently inspect the home, (2) the economic loss rule precluded the negligence claim against Steelman, (3) the injection of negligence into the case caused the jury to allocate a disproportionate amount of the damages to the Barnetts rather than to Steelman, and (4) the jury award of $120,000 was not supported by the facts.
We affirm the judgment on the fraudulent concealment claim against the Barnetts and the $12,300 judgment against Steelman for negligence. We reverse the $120,000 damage award on the breach of contract claim against the Barnetts.
FACTS
The Walters purchased a log home from the Barnetts for $425,000. Prior to closing, the Walters visited the home four times. They also had Steelman perform a home inspection. Steelman provided the Walters with an inspection report. The Walters did not inspect the home themselves, but, instead, they relied on the Barnetts' disclosure statement and Steelman's inspection report.
After closing, on the Walters' first night in the home, they experienced rainwater coming into the home and running down interior walls. The Walters were forced to leave their home and go to a hotel.
The Walters filed a suit against the Barnetts and Steelman. The jury awarded $239,257 to the Walters and against the Barnetts, based on the Walters' fraudulent concealment claim. The Walters were also awarded $120,000 against the Barnetts for breach of contract. The Walters were awarded $12,300 against Steelman for negligence. This appeal followed.
ANALYSIS
Fraudulent Concealment. The Barnetts appeal from a jury trial. Questions of law are reviewed de novo. Sunnyside Valley Irrigation Dist. v. Dickie, 149 Wn.2d 873, 880, 73 P.3d 369 (2003). A jury finding must be supported by substantial evidence, which is a sufficient quantity of evidence to persuade a rational, fair-minded person of the truth of the premise in question. See Canron, Inc. v. Fed. Ins. Co., 82 Wn. App. 480, 486, 918 P.2d 937 (1996). A reviewing court may overturn a jury's verdict only if the verdict is "clearly unsupported by substantial evidence." Burnside v. Simpson Paper Co., 123 Wn.2d 93, 108, 864 P.2d 937 (1994). However, a reviewing court may not substitute its judgment for that of the jury when there is evidence that, if believed, would support the verdict rendered. Id. (quoting State v. O'Connell, 83 Wn.2d 797, 839, 523 P.2d 872 (1974)).
To prove fraudulent concealment, a home buyer claimant must prove six elements by clear, cogent, and convincing evidence. Alejandre v. Bull, 159 Wn.2d 674, 689, 153 P.3d 864 (2007). The six elements are:
(1) There was a concealed defect in the house;
(2) The sellers knew of the defect prior to selling the house;
(3) The defect was unknown to the purchasers;
(4) A careful, reasonable, and diligent inspection by the purchasers would not have disclosed the defect;
(5) The defect was dangerous to the property, health, or life of the purchaser; and
(6) The defects substantially lowered the value of the property or operated to materially impair or defeat the purpose of the transaction.
Atherton Condo. Apartment-Owners Ass'n v. Blume Dev. Co., 115 Wn.2d 506, 524, 799 P.2d 250 (1990).
The Barnetts contend the Walters failed to diligently inspect the house or to demonstrate that such an inspection would not have disclosed defects. The Barnetts point out that the Walters had four opportunities to visit the home before the sale closed, but that Mr. Walters admitted that he did not perform an inspection because he was not an inspector. Specifically, Mr. Walter testified that he viewed the home but did not inspect the home because he was not an inspector.
The Barnetts also rely on the testimony of Terry Creasey of Creasey Log Homes. Mr. Creasey testified that when he visited the home early in 2006, he observed water stains on interior log surfaces and sheetrock that took years to develop. Mr. Creasey also stated that the wood rot on the deck railings was "very visible." Report of Proceedings (RP) at 286. Ted Boyd of Cascade Mountain Log Homes noticed rotten logs that were stained so thick it looked as if someone was trying to cover the areas that were rotten. Mr. Boyd testified that clues to the rot in the home were visible "to anybody in our industry." RP at 1058.
Mr. Creasey and Mr. Boyd are both in the business of building log homes. The fourth element of fraudulent concealment adopts a standard based on the purchaser. In general, Mr. Creasey's and Mr. Boyd's testimony cannot be used to determine the standard for a "careful, reasonable inspection by the purchaser." Alejandre, 159 Wn.2d at 689 (emphasis added).
The Barnetts also argue that the Walters are precluded from asserting that their own inspection would have been futile because they abdicated their duty to inspect to Steelman. But again, the standard in the fourth element of fraudulent concealment is based on the purchaser, not the home inspector.
In contrast, the Walters point out that the jury was able to view rotted logs from the home that had artificial fill put into them. Mr. Creasey testified that on a more probable than not basis, filler had been pushed into the logs to stop leakage and rot. The Walters also argue that Mr. Walter did not fail to follow up on the cause of the water damage to sheetrock. The Walters, in the company of a real estate agent, Brent Meservia, observed the damage and "agreed that it was . . . of minimal concern." RP at 1431. Significantly, the Walters and Mr. Meservia reached this conclusion when they walked through the home to follow up on statements contained in the home inspection report. During this walk-through, they even called Steelman with questions. After this visit to the home, Mr. Meservia concluded that he saw nothing to indicate that the Walters should renegotiate the purchase price.
The Barnetts rely on the following testimony offered by Mr. Creasey:
Q. (By Mr. Johnson) You testified on direct that when you got to the job site for the first time, you were able to observe signs of water damage in the house; correct?
A. Correct.
Q. And that was based on your experience and training of detecting these things?
A. It was, ah, partially based on that, but a good portion of it was pretty obvious. I mean, it didn't take someone — I mean, ah, you, as juries, if you were to you at — look at — excuse me, if you were to look at, ah, some of the discoloration in — in parts of that, I would believe you would have to agree that you — you would wonder about that, at [a bare] minimum.
RP at 459-60. However, the Walters and Mr. Meservia observed the water damage and concluded that it was of minimal concern.
Credibility determinations are left to the jury and are not subject to review. State v. Myers, 133 Wn.2d 26, 38, 941 P.2d 1102 (1997). Here, there was substantial evidence for the jury to conclude that "the defect would not be disclosed by a careful, reasonable inspection by the purchaser." Alejandre, 159 Wn.2d at 689. There was substantial evidence for the jury to conclude that the Walters proved their claim of fraudulent concealment by clear, cogent, and convincing evidence.
Economic Loss Rule. Washington's economic loss doctrine prohibits plaintiffs from recovering purely economic damages in tort when the plaintiffs' entitlement to the damages is based in contract. Alejandre, 159 Wn.2d at 683. "[T]he purpose of the economic loss rule is to bar recovery for alleged breach of tort duties where a contractual relationship exists and the losses are economic losses." Id. (emphasis added). A clear distinction between the remedies available in tort and contract with respect to economic loss encourages the parties to allocate risk and prevents a party to a contract from obtaining benefits that were not part of the bargain. Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wn.2d 816, 826-27, 881 P.2d 986 (1994); see also Carlile v. Harbour Homes, Inc., 147 Wn. App. 193, 203, 194 P.3d 280 (2008).
"The key inquiry is the nature of the loss and the manner in which it occurs, i.e., are the losses economic losses, with economic losses distinguished from personal injury or injury to other property." Alejandre, 159 Wn.2d at 684. If the claimed loss is an economic loss, and no exception applies to the economic loss rule, then the parties will be limited to contractual remedies regardless of how the plaintiff frames his or her action. Id. at 683-84.
Here, there was no contract between Steelman and the Walters. Alejandre stated that: "In short, the purpose of the economic loss rule is to bar recovery for alleged breach of tort duties where a contractual relationship exists and the losses are economic losses." Id. at 683. Berschauer/Phillips held that the economic loss rule barred recovery of economic loss due to construction delays. Berschauer/Phillips, 124 Wn.2d at 826-27. The court stated that:
We hold that when parties have contracted to protect against potential economic liability, as is the case in the construction industry, contract principles override the tort principles in [Restatement (Second) of Torts § 552 (1977)] and, thus, purely economic damages are not recoverable.
Id. at 828. In Baddeley v. Seek, 138 Wn. App. 333, 339, 156 P.3d 959 (2007), Division Three of this court succinctly stated: "Since no contract relationship exists between STI and the Baddeleys, the economic loss rule does not apply."
The Barnetts point out that some jurisdictions no longer require privity when applying the economic loss rule. See, e.g., Cooper Power Sys., Inc. v. Union Carbide Chem. Plastics Co., 123 F.3d 675, 680-81 (7th Cir. 1997) (applying Wisconsin law). But Washington has not done so. The Barnetts also rely on Carlson v. Sharp, 99 Wn. App. 324, 994 P.2d 851 (1999) (Division Three), where the court allowed only contract damages against a geotechnical engineer based on the application of the economic loss rule. The court noted that the alleged damages were for defective services and that Washington courts have been reluctant to allow homeowners to recover in tort damages from design professionals. Id. at 330. But, in Carlson, the parties had a contract and the court applied the economic loss rule to adopt the allocation of risk agreed to by the parties. Id.
The Barnetts also suggest that privity is not required because the policies of the economic loss rule are not affected by the presence or absence of an actual contractual risk allocation provision. See Alejandre, 159 Wn.2d at 688. However, the fact that the contract need not have an allocation of risk provision does not mean that there need not be a contract.
The Barnetts also assert that the special verdict form was confusing because it included damages for the negligence claim against Steelman. The special verdict form contained separate lines for the jury to write in damages for the Barnetts' intentional conduct and for Steelman's negligence. The Barnetts feel that the jury took advantage of this format and allocated a disproportionate amount of damages to them rather than Steelman.
Tegman v. Accident Medical Investigations, Inc. held that damages from negligence must be segregated from damages resulting from intentional acts. Tegman v. Accident Med. Investigations, Inc., 150 Wn.2d 102, 105, 75 P.3d 497 (2003). For this reason, the trial court was required to have separate lines on the special verdict form. The Barnetts argue that the special verdict form was confusing. But this is not the case. The negligence claim was against Steelman, and the breach of contract and fraudulent concealment claims were against the Barnetts. Moreover, as Tegman stated: "Segregating fault-based damages from those caused by intentional acts or omissions should pose no great difficulty because similar allocations are already part of the [tort reform act of 1986, chapter 4.22 RCW]." Id. at 116.
Finally, Steelman argues that a misstatement in jury instruction 13 allowed the jury to award damages under a negligence theory or a breach of contract theory. This argument is not helpful. Jury instruction 13 mistakenly refers to "claims of negligence and breach of contract against defendants Steelman." Clerk's Papers (CP) at 910. However, the special verdict form did not have a place for the jury to award damages for breach of contract against Steelman. The award the jury made against Steelman was clearly identified as sounding in tort, and, in any event, an award of tort damages and breach of contract damages against Steelman would have been error.
Because there was no contract between Steelman and the Walters, the economic loss rule does not apply. The court did not err by including negligence in the special verdict form.
Breach of Contract Award. The jury awarded the Walters $120,000 against the Barnetts for breach of the purchase and sale agreement. The Barnetts contend that this breach of contract claim was limited to the propane tank. The Walters argue that the Barnetts failed to disclose the defective conditions in the home and the purpose of the breach of contract award was to place them in the position they would have been in if the contract had been fulfilled.
Jury instruction 13 reads, in part:
In order to recover on their breach of contract claim against the Barnetts for the propane tank, the plaintiffs have the burden of proving that defendants Barnett breached a contract with them, and that plaintiffs incurred actual economic damages as the result of the defendants' breach and the amount of those damages.
CP at 910 (emphasis added).
During a jury instruction conference, the court and counsel for the Barnetts and the Walters agreed that the measure of damages for the breach of contract was limited to the propane tank. Counsel for the Barnetts has not challenged jury instruction 13. Because jury instruction 13 remains unchallenged, it became the law of the case. State v. Perez-Cervantes, 141 Wn.2d 468, 476 n. 1, 6 P.3d 1160 (2000). As a result, the breach of contract claim is limited to the propane tank.
Counsel for Steelman objected because he believed that the case should proceed against Mr. Steelman under a contract theory, not a negligence theory. On appeal, Mr. Steelman concedes that this claim does not involve Steelman.
To recover on their breach of contract claim against the Barnetts, the Walters had to prove that they incurred actual damages as the result of the breach. Here, no evidence was introduced establishing the cost of purchasing the tank. The only evidence offered was the Barnetts were paying $90 per year to lease the propane tank. The evidence is insufficient to support the jury's award of $120,000.
In contrast, the Walters argue that the Barnetts failed to disclose defective conditions. They point out that jury instruction 10 stated:
You are instructed that a "material breach" is a breach that is serious enough to justify the other party in abandoning the contract. A "material breach" is one that substantially defeats the purpose of the contract, or relates to an essential element of the contract, and deprives the injured party of a benefit that he or she reasonably expected.
CP at 907.
The Walters assert that the Barnetts breached the implied covenant of good faith included in every contract. The Barnetts had an affirmative duty to disclose the defective conditions to the Walters. Because of this breach, the jury awarded damages to the Walters based on breach of contract and fraudulent concealment. In the Walters' view, this court should honor the jury's decision.
Every contract carries with it an implied covenant of good faith and fair dealing that requires the parties to cooperate so that each may obtain the full benefit of performance. Cavell v. Hughes, 29 Wn. App. 536, 539, 629 P.2d 927 (1981). In some circumstances, the seller may have a duty to disclose a material fact likely to affect a buyer's decision as to whether to buy the property. Obde v. Schlemeyer, 56 Wn.2d 449, 453, 353 P.2d 672 (1960). Importantly, fraudulent concealment is the remedy for the breach of this duty. Id. at 452, 454-55.
Here, damages for the Barnetts' failure to disclose the home's defects were recoverable in the tort claim of fraudulent concealment. The court properly limited the Walters' breach of contract action to the propane tank. The evidence related to the propane tank is insufficient to support the jury's award. As a result, the jury award of $120,000 must be reversed.
We affirm the judgment on the fraudulent concealment claim against the Barnetts and the $12,300 judgment against Steelman for negligence. We reverse the $120,000 damage award on the breach of contract claim against the Barnetts.
A majority of the panel has determined this opinion will not be printed in the Washington Appellate Reports, but it will be filed for public record pursuant to RCW 2.06.040.
KORSMO, J., SWEENEY, J., concur.