Apex Directional Drilling, LLC v. SHN Consulting Eng’rs & Geologists, Inc., 2015 U.S. Dist. LEXIS 105537 (N.D. Cal. Aug. 11, 2015)

The United States District Court for the Northern District of California held that an engineer that prepares plans and specifications to be relied upon by contractors in preparing their bids for a construction project owes a duty of care to those contractors, and therefore can be held liable to the contractors for breach of professional duty and/or negligent misrepresentation.

This dispute arose out of problems encountered by a contractor, Apex Directional Drilling, LLC (“Apex”), on a municipal sewage construction project (the “Project”).  Apex entered into a contract with the City of Eureka, California (“Eureka”) to install a new wastewater pipeline utilizing a drilling technique known as “horizontal directional drilling” (“HDD”), a technique that can only be successful in soil that is sufficiently stable and dense.  Prior to entering into the contract with Apex, Eureka hired SHN Consulting Engineers & Geologists, Inc. (“SHN”) to serve as lead engineer and project manager for the Project.  As lead engineer, SHN conducted geological studies and prepared plans, reports and specifications describing the conditions on the Project.  Eureka and SHN furnished one such report, the Geotechnical Baseline Report (“GBR”), to potential bidders to allow the bidders to prepare an estimate of the cost to complete the work under the conditions represented in the GBR.  The GBR indicated that “the majority of the subterranean region targeted by the project was composed of stable soils suitable for HDD.”

Relying on the representations in the GBR, Apex submitted the lowest bid and was awarded the contract.  Shortly after commencing the work, however, Apex ran into problems when it encountered mud and flowing sands that were much different than the competent soils described in the GBR.  When Apex reported these different conditions to Eureka and SHN, SHN “unreasonably continued to maintain that the project was proceeding in the competent soils described in the GBR, and, on that premise, repeatedly gave Apex illogical instructions.”  When Apex started to submit change order requests seeking reimbursement for the cost overruns resulting from the adverse soil conditions, Eureka, based upon recommendations from SHN, rejected the change order requests and then ultimately terminated Apex.  Apex sued Eureka and then filed a separate complaint against SHN asserting claims for breach of professional duty and negligent misrepresentation, among others.  SHN moved to dismiss Apex’s complaint for failure to state a claim.

SHN argued that it could not be held liable to Apex in tort because SHN owed no duty of care to Apex.  The Apex court disagreed.

The court observed that, under California law, courts apply a six-factor balancing test to determine whether a duty of care exists in the absence of privity in the context of a negligence claim seeking economic damages.  The six factors are: 1) the extent to which the transaction was intended to affect the plaintiff, 2) the foreseeability of harm to the plaintiff, 3) the degree of certainty that the plaintiff suffered an injury, 4) the closeness of the connection between the defendant’s conduct and the injury suffered, 5) the moral blame attached to the defendant’s conduct and 6) the policy of preventing future harm.  Finding no controlling California precedent, the court applied these factors and determined that SHN owed a duty of care to Apex.  In particular, the court found that the first, third and fourth factors weighed in favor of imposing a duty of care, as it was clear to the court that the GBR was prepared for the purpose of establishing a baseline upon which Apex would base its bid and mistakes in the GBR and subsequent actions by SHN caused Apex to suffer considerable losses.  The court also reasoned that practical considerations supported its determination that SHN owed a duty of care to Apex, as the duty was owed to “a specific, foreseeable and well-defined class” as opposed to creating the potential for “unlimited liability to a nebulous group of future plaintiffs.”  Therefore, the court denied SHN’s motion to dismiss Apex’s claim for breach of professional duty.

Turning to Apex’s claim for negligent misrepresentation, the court noted that “under California law . . . negligent misrepresentation is a separate and distinct tort from simple negligence and requires a unique duty of care analysis.”  In Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992), the California Supreme Court adopted Section 552(2) of the Restatement (Second) of Torts as the test for identifying the category of plaintiffs that may recover for negligent misrepresentation; namely, “a plaintiff must be a member of a ‘specific class of persons’ involved in a transaction that the defendant ‘supplier of information intends the information to influence.’”  The court observed that the California Supreme Court in Bily specifically contemplated the availability of claims for negligent misrepresentation in cases involving information provided by engineers.  Then, applying the Restatement test, the court concluded that Apex fell firmly within the category of plaintiffs that may recover from SHN based upon alleged misstatements in the GBR, which were intended to influence the substance of bids.  The court added that its conclusion was further supported by M. Miller Co. v. Dames & Moore, 198 Cal. App. 2d 305 (1961), an analogous case in which an appellate court found “a triable issue of fact as to whether an engineer owed [a] contractor a duty of care.”  Therefore, the court also denied SHN’s motion to dismiss Apex’s negligent misrepresentation claim.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.