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(A
revised version of this article will appear in The Construction
Lawyer, Volume 21, No. 4, October 2001, published by
the American Bar Association's Forum on the Construction
Industry.)
By
John W. Ralls
Thelen LLP
Utah's
Salt Lake County undertook a renovation of its Salt Palace
Convention Center. The county engaged TVSA to provide architectural
and consulting services. TVSA engaged other design professionals
to assist.
After
the job was completed, a structural steel subcontractor
submitted a $2.2 million claim that focused on defects in
the design (inaccurate drawings and details, late and deficient
responses to requests for information, etc.). The general
contractor forwarded the subcontractor's claim to the county,
which rejected it.
The
county reached a settlement with the general contractor.
The settlement included a $150,000 payment to the general
contractor and assignment of all rights, causes of action
and claims the county had against the design team related
to the structural steel portion of the project. The general
contractor subsequently reached a settlement with the subcontractor
by paying the subcontractor $150,000 and assigning all of
the general contractor's direct and assigned rights, causes
of action and claims against the design team.
The
subcontractor then filed a complaint against members of
the design team for delay damages and other economic losses.
The subcontractor sought recovery on both direct and assigned
claims under five legal theories: (1) breach of the county/TVSA
contract; (2) breach of express and implied warranties in
the county/TVSA contract; (3) negligent interference with
advantageous economic interests; (4) professional negligence;
and (5) breach of contract as a third party beneficiary
of the various design contracts.
The
defendants moved to dismiss. The trial court treated the
motions to dismiss as motions for summary judgment. The
trial court granted the motions in full. For the most part,
the Utah Supreme Court affirmed. The court held that the
subcontractor's direct claims failed as a matter of law
but found that certain of the assigned claims may be valid.
SME Industries, Inc. v. Thompson, Ventulett, Stainback
& Associates, Inc., 2001 UT 54, 424 Utah Adv. Rep.
8 (2001).
Breach
of Contract: TVSA argued that the assignments of rights
under the county-TVSA contract were invalid because the
county-TVSA contract provided that neither party shall assign
"its interest in this Agreement." The court said,
"As a general rule, a contract provision prohibiting
the assignment of the contract itself, or of the rights
and privileges under the contract, does not, unless a different
intention is manifested, prohibit the assignment of a claim
for damages on account of breach of the contract."
The court found that the contract was ambiguous with respect
to the parties' intent to permit assignment of the right
to sue for breach of contract damages after the contract
has been fully performed. "Here, the parties have presented
contrary, tenable interpretations of the language contained
in the anti-assignment provision…. Accordingly, it
is unclear from the language of the provision whether the
parties intended to prohibit only the assignment of rights
and privileges under the county-TVSA contract or whether
the parties also intended to prohibit the assignment of
a cause of action seeking money damages for breach of contract
after the contract had been fully performed." The court
reversed summary judgment on this cause of action and said
that parol evidence might have to be considered to resolve
the issue.
Express
Warranty: In support of its express warranty claim,
the subcontractor relied on provisions in the county-TVSA
contract under which TVSA agreed it would prepare construction
documents "setting forth in detail the work to be accomplished"
and would perform its services "accurately and timely
in accordance with industry standards." The court concluded
that these kinds of provisions do not create an express
warranty. "[E]ven when viewed in a light most favorable
to [the subcontractor], the[se] provisions of the county-TVSA
contract… do not contain 'direct and positive affirmations
of fact' guaranteeing, assuring, or warranting that the
services provided… would be complete, free from defects,
or suited for their intended use."
Implied
Warranty: With respect to the implied warranty claim,
the court found that the trial court erred by failing to
allow the claim to proceed to the extent the claim was based
on the architect's implied promise to use reasonable and
customary care in performing professional services. The
court noted, however, that the implied duty to use reasonable
and customary care is owed only to the person for whom the
professional services are rendered. "Therefore, [the
subcontractor] may proceed with its implied warranty claim,
only if, on remand, the trial court determines that the
county's assignment of its claims to [general contractor]
and [general contractor's] subsequent assignment of such
interest to [subcontractor], is valid." The court also
noted that the subcontractor's recovery would be limited
to damages the county suffered as a result of the alleged
breach of implied warranty.
Tort
Claims: The court held that the subcontractor's tort
claims (for negligent interference with advantageous economic
interests and professional negligence) were barred by the
economic loss rule. The court found that the "rationales
underlying" the economic loss rule, including maintaining
the distinction between tort and contract, "are particularly
applicable in the construction setting.…" The
court reasoned that contractors and subcontractors are able
to distribute risks in their contracts. "Therefore…
we hold that the general rule in this jurisdiction prohibiting
the recovery of purely economic loss in negligence is applicable
to a contractor's or subcontractor's negligence claim against
a design professional." The court cited a number of
decisions from other jurisdictions rejecting negligence
claims by contractors against design professionals for economic
loss. The court also rejected the subcontractor's attempt
to make out a cause of action based on the Restatement (Second)
of Torts §552. Section 552 provides, "One who,
in the course of his business… supplies false information
for the guidance of others in their business transactions,
is subject to liability… caused to them by their justifiable
reliance upon the information…." The court reasoned,
"[T]o maintain the fundamental boundary between tort
and contract law, we hold that when parties have contracted,
as in the construction industry, to protect against economic
liability, contract principles override the tort principles
enunciated in Section 552 of the Restatement (Second) of
Torts and, thus, economic losses are not recoverable."
Third
Party Beneficiary: Finally, the court rejected the subcontractor's
claim to be a third party beneficiary. The court found that
there was nothing in the design professionals' agreements
suggesting that the contracting parties clearly and affirmatively
contracted to confer a separate and distinct benefit upon
the contractor or subcontractor. In fact, the contract disclaimed
such intent by providing that the services under the agreement
"shall not create… any independent duties…
to or with the contractor, subcontractor, their employees,
or any third persons." The court said it was not enough
that the parties to the contract knew or expected that others
would benefit. Rather, the contract must affirmatively state
that it was undertaken for the plaintiff's direct benefit.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2001 Thelen LLP
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