Charter Foods Inc. v. Derek Engineering of Ohio, Inc.
2009 U.S. App. LEXIS 115477 (E.D. KY. Dec. 11, 2009)

The District Court for the Eastern District of Kentucky held that a general contractor, who had performed excavation work on a site in accordance with the plans and specifications, could not be held liable for breach of contract as a matter of law, but could potentially be held liable to the owner for negligence if the contractor breached the duty of care it owed the owner.

The dispute arose out of a project to construct a fast food restaurant. The plaintiff, Charter Foods, Inc., leased an undeveloped commercial lot in Kentucky with plans to construct and operate a Taco Bell restaurant on the lot. Before signing the lease, Charter Foods determined that the site was suitable for construction and hired an architect to develop the plans. The plans included specifications for the excavation work. Charter Foods did not consult any construction experts to verify the site’s suitability for excavation and did not investigate the stability of the adjacent property before leasing the lot. Charter Foods then hired a general contractor, Derek Engineering, to construct the project. In turn, Derek Engineering hired a subcontractor to prepare the site and perform the excavation work. Neither the general contractor nor the subcontractor were involved in the development of the site plan or engineering.

A few days after the commencement of the excavation work on the site, Charter Foods directed the general contractor to stop all excavation work because soil on the adjacent lot had shifted several feet. The parties disputed when the general contractor discovered that the hillside on the adjacent lot was unstable and how much work was done before and after the instability was discovered. There was evidence that the general contractor gave the owner advice at the outset of the project that the project could be built within the site. There was also evidence that the general contractor continued the excavation work after it first learned that the stake marking the corner of the adjacent lot had shifted. The parties did not dispute that all excavation work was performed in accordance with the plans and specifications.

After directing the contractor to stop, Charter Foods decided not to construct the project and sought to cancel it lease. After settling its dispute with its landlord, Charter Foods sued its general contractor and the subcontractor for negligence and breach of contract relating to excavation work. Charter Foods sought to recover damages it incurred to secure the release of its obligations under its lease, expenses incurred in preparing the site for construction and lost profits from the anticipated operation of the restaurant. The contractor brought cross claims against its subcontractor for breach of contract and indemnity. The contractor and subcontractor moved for summary judgment against Charter Foods, challenging the claims of negligence and breach of contract..

The District Court denied the contractor’s motion for summary judgment challenging the owner’s claim for negligence against the general contractor. In order to prove negligence, a party must prove (1) the existence of a duty, (2) breach thereof, (3) causation, and (4) injury. The District Court held that as a matter of law the general contractor owed a duty to the owner, which at a minimum would create a duty for the general contractor to prevent foreseeable damage to the property. Concerning the other elements of the claim – breach, causation and damages -the Court held that the facts were disputed so that it could not rule as a matter of law against the owner.

Specifically, the Court found that even though all work was constructed in accordance with the plans and specifications, the general contractor may have continued the work even after it learned that the adjacent site was unstable and may also have advised the owner that instability would not be a problem. Furthermore, there was evidence that the general contractor may have told the owner that the restaurant could be built at the site even though the Department of Transportation had denied the owner a 10 foot right of way. Thus, the Court found that there were facts suggesting that the contractor may have breached its duty of care owed to the owner. The Court also found that there were material questions of fact as to whether the contractor’s actions caused the injury suffered by the owner (causation). Finally, the Court noted that there was evidence of damages suffered by the owner.

The Court, however, granted the contractor’s summary judgment motion as it related to the owner’s breach of contract claim. The Court found that the parties agreed that the work was done in accordance with the plans and specifications, thus there could be no breach of contract. The Court also granted the subcontractor’s summary judgment motion, dismissing the owner’s negligence claim against the subcontractor. The Court found that none of the evidence supporting the owner’s potential claim for negligence against the contractor involved the actions or statements of the subcontractor or its employees.

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