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U.S. District Court in Delaware Holds Surety’s Claims Against Construction Manager and Architect Barred by Economic Loss Doctrine; Surety Liable on Performance Bond Where Owner Overpays Contractor in Good Faith Reliance on Architect’s and Construction Manager’s Certifications
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RLI Insurance Company v. Indian River School District
2008 U.S. Dist. LEXIS 43303 (D. Del. June 3, 2008).
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In this case, the United States District Court for the District of Delaware held that a surety’s claim against an architect and construction manager for improper approval of payments to the principal was barred by the economic loss doctrine. Additionally, the court held that the surety was not released of its liability to the owner where the owner wrongfully paid the contractor, as the owner had made those payments in reliance on certifications from the architect and the construction manager.
Defendant McDaniel, a subcontractor, entered into a contract with the Indian River School District to perform certain work in conjunction with the construction of a new high school. Plaintiff RLI issued the performance and payment bonds on behalf of McDaniel for its work on the project. During the course of the Project, McDaniel fell behind on its work and the construction manager on the Project notified RLI of McDaniel’s delayed and unsatisfactory work. In response, RLI instructed the construction manager to stop issuing payments to McDaniel. However, the school district, with authorization from the construction manager and the architect, issued additional payments by joint check to McDaniel and one of its unpaid suppliers whohad refused to ship equipment until they were paid. According to the school district, such payment was made with RLI’s express consent. Thereafter, the school district terminated McDaniel and submitted a claim under the performance bond for completion of the project. RLI denied the bond claim, contending that the school district failed to comply with its contractual obligations by overpaying McDaniel for the work actually performed. RLI also asserted negligent misrepresentation claims against the construction manager and the architect. The school district, the construction manager, and the architect each moved for summary judgment.
The district court granted each of the defendants’ summary judgment motions. First, the court held that the economic loss doctrine barred RLI from prosecuting its tort claims against the construction manager and the architect because it had suffered only economic losses. RLI contended that its negligent misrepresentation claim was brought under the exception to the economic loss doctrine which allows tort claims against defendants who are in the business of supplying information. Specifically, RLI asserted that the construction manager and the architect were engaged to provide information that the school district relied upon in issuing payment to McDaniel. The court, however, found that the exception did not apply because the construction manager and the architect were not in the business of supplying information, and that any information they provided was incidentally supplied as part of their work on the construction project.
In granting the school district’s motion for summary judgment, the court rejected all of RLI’s defenses to the school district’s claims under the performance bond. Although the court recognized the modern rule that a surety is discharged of its obligations under a bond where contractual provisions have not been followed, the court found that the situation fell within the exception to this defense. Under the exception, the defense does not apply when the owner has in good faith relied upon the certifications of its architect or engineers. Because the school district had relied on the construction manager’s and the architect’s certifications in making payments to the subcontractor, as required under the subcontract, and RLI failed to submit any evidence that the school district was not acting in good faith with respect to those payments, RLI was not relieved of its obligations under the bond.
Click here for full text opinion provided courtesy of LexisNEXIS.
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U.S. District Court In Pennsylvania Holds Certificate Of Merit Requirement Does Not Apply To Contractor’s And Subcontractor’s Bilt-Rite Claim Against Architect
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Quinn Construction, Inc. v. Skanska USA Building Inc.
2008 U.S. Dist. LEXIS 45980 (E.D. Pa. June 10, 2008)
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| The United States District Court for the Eastern District of Pennsylvania held that no certificate of merit was required in contractor and subcontractor’s negligent misrepresentation claims against architect.
Skanska served as general contractor for two private construction projects owned by the Trustees of the University of Pennsylvania. Skanska entered into two written subcontracts with Quinn for certain concrete work on the projects. Thereafter, Quinn filed a negligent misrepresentation claim against the project Architect, alleging that it relied upon the drawings, specifications, addenda and bulletins prepared by the Architect in preparing its bids, executing its subcontracts with Skanska, planning and scheduling its work and performing its work. Quinn further alleged that the Architect’s continuous design changes, its failure to complete drawings previously represented as 100% complete and its failure to timely review and approve Quinn’s shop and coordination drawings created an unreasonably and unforeseeably lengthy submission process, which prevented Quinn from timely delivering its materials to the Project and caused Quinn to incur overtime labor expenses to adhere to the Project schedule.
General contractor, Skanska, also filed a claim for negligent misrepresentation against the Architect, in which it alleged that it detrimentally relied on the Architect’s negligently supplied inaccurate and/or incomplete drawings, specifications, addenda and bulletins.
The Architect moved to dismiss Quinn and Skanska’s claims pursuant to Federal Rule of Civil Procedure 12(b)(6) based solely on the fact that Quinn and Skanska’s claims were not supported by the “certificate of merit” required by Pennsylvania Rule of Civil Procedure 1042.3, which requires that such a certificate be filed where the plaintiff alleges “that a licensed professional deviated from an acceptable professional standard.”
The Court denied the Architect’s motion to dismiss, holding that Rule 1042.3 was inapplicable to Quinn and Skanska’s negligent misrepresentation claims. In so holding, the Court recognized that a certificate of merit is only required where the complaint contains allegations of professional negligence (i.e. a deviation from a professional standard), rather than ordinary negligence. Here, the Court held that neither Quinn nor Skanska’s claims contained any allegation that the Architect deviated from an acceptable professional standard of care or violated professional standards. The Court noted that the negligent misrepresentation claims did not focus on whether the substance of the information provided by the Architect fell below the applicable professional standard of care, but on whether the Architect (1) misrepresented a material fact; (2) made such a misrepresentation under circumstances in which it ought to have known its falsity; (3) intended to induce another to act on the misrepresentation; and (4) subjected to injury a party acting in justifiable reliance on the misrepresentation. The Court held that, to establish their negligent misrepresentation claims, neither Quinn nor Skanska would need to introduce evidence of the professional standard of care of architects, because negligent misrepresentation claims proceed under a theory of ordinary negligence. As such, the Court held that no certificate of merit was required to support their claims.
*** Six days after the United States District Court for the Eastern District of Pennsylvania issued its decision in Quinn, the Pennsylvania Supreme Court amended the Pennsylvania Rules of Civil Procedure governing professional liability actions. In particular, the amendments have substantially reduced the scope of the certificate merit rules. Rule 1042.1(a) now reads: “The rules of this chapter govern a civil action in which a professional liability claim is asserted by or on behalf of a patient or client of the licensed professional . . .” In light of these changes, a certificate of merit is no longer required for a claim for professional negligence unless contractual privity exists between the parties. Thus, under the new certificate of merit rules, which are effective immediately, a certificate of merit appears not required to support a third-party claim against a design professional.
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U.S. District Court in Michigan Dismisses Plaintiff’s Claim for Professional Malpractice Against Defendant Design Professional Because of Spoliation of Evidence
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Chrysler Realty Company, LLC v. Design Forum Architects, Inc.
2008 U.S. Dist. LEXIS 42721, No. 06-CV-11785 (E.D. Mich. May 30, 2008)
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| The United States District Court for the Eastern District of Michigan was asked to consider whether a plaintiff’s claim for professional liability against a design professional should be dismissed where plaintiffs allowed evidence to be destroyed. Finding that the plaintiff’s intentional removal and destruction of the allegedly defective HVAC system without notice to the defendant deprived the defendant of an opportunity to develop defenses to the claims, the Court dismissed the plaintiff’s claims.
Defendant Design Forum Architects, Inc. (“DFA”) filed a motion for summary judgment seeking dismissal of plaintiff, Chrysler Realty Company, LLC’s (“Chrysler”) claims of breach of contract, unjust enrichment and professional negligence. The Eastern District granted summary judgment on the breach of contract and unjust enrichment claims in DFA’s favor. In its ruling, the Court indicated that it did not need to address DFA’s spoliation claim against Chrysler because summary judgment was warranted on other grounds. On a motion for reconsideration, DFA asked the Court to address the spoliation issue as it related to the professional malpractice claim and sought dismissal of that remaining claim.
With regard to the spoliation claim, DFA claimed that Chrysler intentionally removed and discarded of the allegedly defective HVAC system designed by DFA without notice to DFA. Chrysler had an inspection of the HVAC system performed, dismantled the HVAC system, and destroyed the HVAC system all without notice to DFA. Chrysler later utilized the findings from the original inspection as the basis of its demand to DFA for damages. DFA claimed that destruction of the HVAC system deprived DFA the ability to properly investigate and raise all applicable defenses to Chrysler’s claims.
Utilizing Michigan law, the Court examined the nature of a professional malpractice claim and the law of spoliation. First, the Court acknowledged that Mich. Comp. Laws § 600.2912 applied to architects. Second, the Court turned to Michigan state law principles governing spoliation of evidence. Relying on Detroit Edison Co. v. City of Detroit, 2006 Mich. App. LEXIS 462, No. 257667 (Mich. Ct. App., Feb. 21, 2006), the Court explained that sanctions may be permitted where there is a showing of intentional or unintentional destruction of material evidence. The Court also noted that sanctions should be issued if there is a necessity to create a “fair playing field” and if there is a finding that the lost evidence was material to the claims and defenses. The Eastern District further indicated that a presumption that the lost or destroyed evidence would have been adverse to the party charged with the loss or destruction is only permitted where there is evidence of intentional fraudulent conduct and destruction of evidence. Should there be an absence of intent, an adverse inference may be permitted, but there is no presumption.
Applying the law of spoliation to the facts at hand, the Court concluded that sanctions against Chrysler were appropriate. Citing cases in other jurisdictions where plaintiffs deprived a defendant of the opportunity to inspect an allegedly defective building component before such component was removed and destroyed, the Court found that Chrysler had a duty to preserve all relevant evidence.
Having concluded that sanctions were appropriate, the Court next had to weigh the various options for sanctions. The Court rejected Chrysler’s proposal that its expert, who performed the inspection of the HVAC system before it was destroyed, be barred from testifying as a fact witness. The Court further rejected Chrysler’s alternate proposal that DFA be permitted additional time for third-party discovery. Instead, in order to level the playing field, the Court held that dismissal of Chrysler’s claims was the only reasonable sanction to address the fact that spoliation of the evidence resulted in DFA’s substantially impaired ability to maintain defenses.
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U.S. District Court in Pennsylvania Holds Bilt Rite Claim Subject to Discovery Rule for Limitations Purposes
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Waynesborough Country Club of Chester County v. Diedrich Niles Bolton Architects, Inc.
2008 U.S. Dist. LEXIS 45980 (E.D. Pa. July 21, 2008)
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| The case arose out of the design and construction of a new clubhouse for Waynesborough. Diedrich Niles Bolton Architects (“DNB”) provided professional architectural services to Waynesborough for the project and Ehret Construction served as the project’s general contractor and construction manager. Structural problems arose after the clubhouse was complete, and Waynesborough sued DNB alleging, as a result of DNB’s professional negligence and breach of contract, significant water leaks developed at various places throughout the interior of the clubhouse. DNB joined Ehret as a third party defendant. Ehret, in turn, filed a counterclaim against DNB for negligent misrepresentation, claiming that DNB’s architectural work was deficient and that Ehret’s work was delayed, disrupted and inefficient as a result of having relied upon inaccurate drawings and other architectural documents supplied by DNB during construction.
DNB moved to dismiss Ehret’s negligent misrepresentation claim on the basis that Ehret’s claim was barred by the applicable statute of limitations, because it was filed more than two years after the local government authority issued a certificate of occupancy for the clubhouse. In response, Ehret argued that DNB offered no support for its argument that the statutory period governing a negligent misrepresentation claim began to run on the date the occupancy permit was issued. Ehret argued that its loss occurred after construction was completed and that it was entitled to proceed with discovery to substantiate its allegations. Ehret further argued that the discovery rule tolled the statute of limitations for its claim until it knew or had reason to know that it was damaged by the negligence of DNB. Ehret asserted that it could not know of its claim until the leaks were discovered and Waynesborough required Ehret to complete the construction of the Clubhouse.
The Court denied DNB’s motion to dismiss, holding that any bar to Ehret’s negligent misrepresentation counterclaim was not apparent on the face of the pleadings and, thus, such claim could not be dismissed under Rule 12(b)(6).
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U.S. District Court in Pennsylvania Holds that Gist of the Action Doctrine Bars Claims for Fraud and Negligent Misrepresentation Where a Contract is Central to the Claim
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Bryan’s Quality Plus, LLC v. Shaffer Builders, Inc.
2008 U.S. Dist. LEXIS 61713 (E.D. Pa. Aug. 12, 2008)
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| The District Court for the Eastern District of Pennsylvania was faced with a motion to dismiss a defendant’s counterclaims for fraud and negligent misrepresentation. The case arose out of a subcontract between the defendant contractor and the plaintiff subcontractor in which the subcontractor agreed to complete piling work for a commercial project undertaken by defendant (the “Project”). The contractor alleged in its counterclaim that the subcontractor represented that it would complete the work in seven days, that it could install in excess of fifty piles a day, that its performance and equipment would surpass conventional methods, that it would furnish and install pile tension brackets and fasteners, and that it had sufficient credit to purchase the materials necessary to complete the work. The parties executed a written contract, although some of the work was completed prior to execution of the subcontract.
The subcontractor failed to complete the work within the time proscribed. As a result, the subcontract was amended to agree that the subcontractor would provide another crew to install the pilings, and that the contractor would provide a crane, hammer, air compressor, hoses, and a crane operator. The contractor also agreed to further reimburse the subcontractor for the engineering fees associated with the piling work at the Project. Shortly thereafter the subcontractor submitted two applications for payment, which the contractor refused to pay. The contractor maintained that the subcontractor failed to complete the work in a timely manner, failed to pay for the materials or a second crew, and failed to authorize release of the engineering reports.
The subcontractor filed a lawsuit alleging a number of claims against the contractor including a breach of contract claim. The contractor filed a counterclaim against the subcontractor asserting breach of contract, fraud, and negligent misrepresentation claims against the subcontractor. The subcontractor moved to dismiss the fraud and negligent misrepresentation claims.
The subcontractor argued that the claim of fraud and negligent misrepresentation sounded in tort and were thus barred by the “gist of the action” doctrine as the duties in question between the parties all arose out of contract. The contractor opposed the motion to dismiss arguing that the “gist of the action” doctrine only applies to claims for fraud in the performance of a contract. Here, the contractor maintained that the fraud and negligent misrepresentation claims were designed to induce the contractor to enter into a contract with the subcontractor, and were thus not barred by the doctrine. The subcontractor responded by arguing that any pre-contractual promises subsumed by the contract by virtue of an integration clause in the subcontract.
The Court granted the subcontractor’s motion to dismiss. The Court held that a tort claim is barred by the gist of the action doctrine if (1) the tort claim arises solely from a contract between the parties; (2) the duties allegedly breached were created and grounded in the contract itself; (3) the liability stems from the contract; or (4) the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of the contract. In essence, the Court concluded that it must determine whether the source of the duties breached are “intertwined” with obligations under the contract. In this case, the Court concluded that the contractor’s claims for fraud and misrepresentation involve matters that became contractual duties as the contract specifically contained a provision addressing scheduling, a provision providing that the subcontractor would provide sufficient labor, materials, and equipment to maintain the progress of the work, and there was a provision providing for the quality of the work to be performed by the subcontractor. The Court therefore concluded that the tort claims were duplicate of the contractor’s claim for breach of contract, and thus were barred by the gist of the action doctrine.
The Court also noted that the parol evidence rule would be fatal to the contractor’s tort claims as prior representations concerning matters covered in a written contract cannot be considered where a contract contains an integration clause and the representations were not fraudulently omitted from the contract. The Court also concluded that the economic loss doctrine, which bars recovery for tort claims were losses are solely economic and no physical harm is suffered, would also bar the contractor’s counterclaim. The Court held that the Bilt-Rite exception to the economic loss rule in claims of negligent misrepresentation does not apply to this case as it is only applicable where the parties are in the business of supplying information. The Court held that to determine if the exception applies a court must consider not whether the damages are purely physical or economic, but rather whether the source of duty the defendant allegedly breached is based in contract or in tort.
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Georgia Supreme Court Holds Limitation of Damages Clause in Engineering Agreement to Be an Unenforceable Indemnity Provision
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Lanier at McEver, L.P. v. Planners and Engineers Collaborative, Inc.
2008 Ga. LEXIS 553 (Ga. June 30, 2008)
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| In this case, the Supreme Court of Georgia reversed a Court of Appeals’ decision, previously reported here, holding that a provision limiting an owner/developer’s damages against the project engineer to the fees paid for the engineer’s services was void and unenforceable as against public policy.
Lanier was the owner/developer of an apartment complex. Lanier hired the defendant engineering firm, PEC, to design various aspects of the apartment complex, including the storm sewer and sanitary drainage system. The engineering agreement contained a provision stating that the total aggregate liability of PEC and its subconsultants to Lanier “for any and all claims … shall not exceed PEC’s total fee for services rendered on this Project.” The clause applied not only to liability to Lanier, but also to “all construction contractors and subcontractors on the project or any third parties.” Following construction of the Project according to the plans and specifications prepared by PEC, problems arose with the storm water system that required modification and repair by the owner. As a result, Lanier sued PEC for negligent design, breach of express contractual warranty and litigation expenses.
PEC filed a motion for partial summary judgment based on the contractual limit on the damages Lanier could recover to the amount of fees it paid PEC. The trial court granted the partial summary judgment motion and the Court of Appeals affirmed, concluding that the provision was an enforceable limitation of liability clause.
On appeal, the Georgia Supreme Court found that the provision was void and unenforceable under a Georgia statute. Under the applicable statute, a provision in an agreement which purports to indemnify a party to a construction project against liabilities for personal injury or property damages allegedly resulting from its sole negligence is void and unenforceable. The Supreme Court found that the provision in the parties’ agreement limiting PEC’s damages was, in effect, an indemnity provision prohibited by the Georgia statute. The Court held that because the clause applied to liabilities to third parties as well as direct claims of Lanier, it would, in effect, shift liability for third party claims for which PEC was responsible to Lanier once the limit of liability was exceeded, in contravention of the statute. Accordingly, the Court distinguished the provision from similar provisions upheld in other jurisdictions by reasoning that the other provisions did not limit the liability with respect to third parties, but limited the limitation of liability to claims arising between the contracting parties. Here, because the threshold fee limit had already been exhausted by costs for repair work, it construed the clause as providing that PEC could recover from Lanier losses for all future third party claims.
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