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Thelen Reid Brown Raysman & Steiner LLP
Two
courts have allowed a contractor and an owner who relied
to their detriment on allegedly incorrect information communicated
by a design professional to seek to recover economic losses
even when there was no contract. Defenses based on the economic
loss rule, which bars recovery of economic losses in most
instances when there is no contract, were not successful.
West Virginia: Sewer Line Design
An
engineer contracted with the City of Salem, West Virginia,
to design a new sewage treatment plant and two sewer lines.
The city awarded one of the sewer line contracts to Eastern
Steel Constructors, Inc. It sued the city and the engineer
for damages resulting from delays caused by subsurface rock
conditions and existing utility service lines that were
not disclosed in the engineer's design. There was no contract
between the engineer and the contractor.
The
contractor sued the engineer for: 1) negligence in
its engineering services, consultation, project inspection,
project management and project administration; 2) breach
of the implied warranty of plans and specifications; and
3) damages as a third party beneficiary of the contract
between the design engineer and the city.
The
lower court granted summary judgment for the engineer on
all three causes of action. The West Virginia Supreme Court
of Appeals reversed, holding that the contractor could recover
against the design engineer for negligence and breach of
the implied warranty of plans and specifications even though
it had no contract with the engineer. Eastern Steel Constructors,
Inc. v. City of Salem, 549 S.E.2d 266 (W. Va. 2001).
As
to the negligence claim, the court concluded that the engineer
owed the contractor a duty of care because of the special
relationship between them. The special relationship arose
because the contractor must rely on the engineer's plans
and specifications in both bidding and constructing the
sewer line and because the contractor may be subject to
further supervision from the engineer during construction
of the sewer line. The court explained that these facts
made the harm resulting from the engineer's negligence foreseeable,
thereby alleviating any concern that the engineer would
be unfairly subjected to limitless liability. The court
wrote:
An individual who sustains economic loss from an interruption
in commerce caused by another's negligence may not recover
damages in the absence of physical harm to that individual's
person or property, a contractual relationship with the
alleged tortfeasor, or some other special relationship
between the alleged tortfeasor and the individual who
sustains purely economic damages sufficient to compel
the conclusion that the tortfeasor had a duty to the particular
plaintiff and that the injury complained of was clearly
foreseeable to the tortfeasor. Where a special and narrowly
defined relationship can be established between the tortfeasor
and a plaintiff who was deprived of an economic benefit,
the tortfeasor can be held liable. In cases of that nature,
the duty exists because of the special relationship.
Applying
that rule, the court held: A "design professional (architect
or engineer) owes a duty of care to a contractor, who has
been employed by the same project owner as the design professional
and who has relied upon the design professional's work product
in carrying out his or her obligations to the owner, notwithstanding
the absence of privity of contract between the contractor
and the design professional."
When
a design professional owes a duty of care to a contractor,
the scope of the duty is defined on a case-by-case basis.
Generally, the duty is to "render services with the
ordinary skill, care and diligence commensurate" with
that rendered by other members of the profession in the
same or similar circumstances, though the scope of the duty
also may be affected by contractual provisions, as in the
owner-contractor contract or owner-engineer contract or
in the rules of professional conduct governing engineers.
As
to the breach of the implied warranty claim, the court held
that "a design professional (e.g. an architect or engineer)
providing plans and specifications that will be followed
by a contractor in carrying out some aspect of a design,
impliedly warrants to the contractor, notwithstanding the
absence of privity of contract between the contractor and
the design professional, that such plans and specifications
have been prepared with the ordinary skill, care and diligence
commensurate with that rendered by members of his or her
profession." The court found that the special relationship
between the engineer and contractor justified imposing an
implied warranty of plans and specifications on the engineer.
As
to the third party beneficiary claim, the court concluded
that the contractor had failed to establish that the contract
between the owner and engineer was for the contractor's
sole benefit. The Supreme Court thus sustained the lower
court's dismissal of the third party beneficiary claim.
Missouri: Determining Strength of Concrete
Homeowners
hired a concrete contractor to pour the foundation for the
new home they were building. During the pour, the concrete
contractor noticed that the concrete was not the proper
consistency and contained significant amounts of debris.
The concrete supplier (two concrete supply companies owned
by the same person) gave assurances that the concrete was
acceptable. When the foundation began to crumble, the concrete
supplier agreed to test the strength of the foundation.
Wolf, an engineer and concrete salesman employed at W.R.
Grace & Co., agreed to perform a strength test on the
foundation for free as a service to the concrete supplier,
who was a frequent customer of Grace.
When
Wolf asked how old the foundation was, the concrete supplier
said it was 10 days old when it really was 20 days old.
Although Wolf informed the concrete supplier that the strength
test would not be particularly accurate unless the foundation
was 28 days old (the curing time for concrete), the concrete
supplier insisted that Wolf perform the test immediately.
Wolf conducted the strength test, and based on the incorrect
age information, Wolf concluded that the foundation would
satisfy local strength requirements.
The
homeowners relied on Wolf's strength test and continued
to build until a later strength test revealed that the foundation
fell short of building code requirements. The homeowners
sued, alleging breach of the implied warranty of fitness
for a particular purpose and breach of the implied warranty
of merchantability against the concrete supplier and negligent
misrepresentation and negligence against Wolf and Grace.
The
claims against the concrete supplier went to trial. The
trial court dismissed the claims for negligent misrepresentation
and negligence against Wolf and Grace on motions for summary
judgment. The Missouri Court of Appeals reversed as to both
claims. Miller v. Big River Concrete, LLC, 14 S.W.3d
129 (Mo.App.E.D. 2000).
The
court found that triable issues of fact existed as to the
negligent misrepresentation claim, reversing the summary
judgment. Among the facts at issue were whether the representations
were false, whether the plaintiffs were part of a limited
group for whose guidance the information was provided and
whether the plaintiffs reasonably relied upon the representations.
As
to the negligence claim, Wolf and Grace invoked the economic
loss rule, arguing that the homeowners should not recover
because they had no contract with Wolf or Grace and their
claims were for purely economic losses.
The
court found that whether a third party, with no contract,
could recover for the negligent opinion of a professional
depended on considering six factors: "1) the extent
to which the transaction was intended to affect the plaintiff;
2) the foreseeability of harm to him; 3) the degree of certainty
that the plaintiff suffered injury; 4) the closeness of
the connection between the defendant's conduct and the injury
suffered; 5) the moral blame attached to defendant's conduct;
and 6) the policy of preventing future harm."
The
court found that because there was evidence that Wolf and
Grace knew the results of the strength test would be relied
upon by the homeowners, it was foreseeable that the homeowners
would be harmed by an inaccurate strength test.
The
court held that once a duty was found to exist, liability
for economic losses depends on "whether the injury
was foreseeable and within the policy considerations of
avoiding both unlimited liability and the overburdening
of those who assume contractual responsibilities and turns
on the nature of plaintiff's injury." Applying these
factors, the court concluded that the homeowners could recover
because the nature of the injury involved interference with
a recognized property interest, it was the only property
subject to Wolf's strength test and neither Wolf nor Grace
would be exposed to unlimited liability because the injury
was foreseeable.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2002 Thelen Reid Brown Raysman & Steiner LLP
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