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In This Issue:

  • Contractor sues engineer for misrepresenting site conditions
  • Indemnification language found ambiguous and unenforceable
  • Economic loss doctrine bars owner’s claim against subcontractor

A/E Sued by Contractor for Misrepresenting Site Conditions

Where a general contractor prepared its bid in reliance upon information provided by the project owner’s engineer, and the site conditions differed from what was represented, the contractor sued the engineer for misrepresenting the conditions. Both the contractor and the engineer had separate contracts with the owner and there was no contractual relationship between the engineer and the contractor.

In its complaint, the contractor claimed that in preparing its construction bid, it had relied upon site information that the engineer provided to bidders.  Its bid was inadequate to cover the actual project costs, the contractor asserted,  because the site conditions were negligently misrepresented by the engineer.   Two theories were presented in the complaint.  First, the contractor claimed that it was entitled to recovery for breach of contract by the engineer.  Second, the contractor claimed that it was entitled to recovery under the tort theory of negligent misrepresentation of material facts.   Both aspects of the complaint were dismissed by the court.   In dismissing the breach of contract count, the court found that the contractor had no privity of contract with the engineer.  The separate contracts between the engineer and owner and between the contractor and owner did not show any intent to confer any rights upon the contractor against the engineer. The court also dismissed that part of the contractor’s complaint that alleged negligence against the engineer because it was filed beyond the three year statute of limitations period for negligence actions.

Despite finding a lack of contractual basis for a claim against the engineer, the court permitted  the contractor’s complaint to go forward on the allegation of negligent misrepresentation.  As reason for this, the court explained that “the record reveals that the relationship between the plaintiff and the defendants was so close as to be the functional equivalent of privity [of contract].”  Whether the project owner intended the contractor to rely only upon the contractor’s own site investigation was found by the court to be a matter to be decided by a jury.

Another aspect of this case that may interest individual design professionals working in the employ of a firm, is how the court handled that part of the complaint that named an individual engineer as a defendant.  According to the appellate court, it was not appropriate to grant summary judgment in favor of the individual “since as a principal of the defendant professional corporation, he can be held liable for any wrongful act he committed while rendering professional services on behalf of such corporation.”

Pile Foundation Construction Co., Inc. v. Berger, Lehman Associates, P.C., 676 N.Y.S. 2d 664, 1998 N.Y. App. Div.)

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Indemnity Clause Unclear and Unenforceable

According to a Louisiana appellate court,  an indemnification clause can not be enforced to require a party to indemnify  for the indemnitee’s own negligence unless the clause specifically states that to be the intent of the parties in no uncertain terms.

An equipment lease provided that the equipment lessee would indemnify the lessor for “any and all claims arising from the use of the [leased] truck.” This language, said the trial court,  was required the lessee to give full indemnity for the lessors damages under the facts of this case.   In arguing to the contrary,  the lessee/ indemnitor  argued that the lease agreement contained no dollar amount for the lease.  Without a dollar amount, the lessee asserted the lease could not be binding.   Another argument offered by the lessee was that its corporate officer that signed the lease did not read it before signing.  In fact, the lessee claimed that in 25 years of signing leases, this officer had never read one.   Moreover, the contractor claimed that the officer   “never contemplated entering into an indemnity agreement when he signed the purported lease and merely thought of that document as a form that accompanied delivery of two pieces of equipment loaned [to his firm].” Without addressing these two arguments, the court turned to a completely different reason for why it would not enforce the indemnity agreement.

Language of the indemnity agreement did not state in clear and unequivocal terms an intent by the parties that the lessee indemnify and hold harmless the lessor  from its own negligence. In explaining its decision, the court stated: “A contract of indemnity, whereby the indemnitee is indemnified against the consequences of his own negligence, is strictly construed and such a contract will not be construed to indemnify an indemnitee against losses resulting to him through his own negligent acts unless such an intention is expressed in unequivocal terms.” In addition,  the court stated that “if the intention to indemnify against an indemnitee’s liability for his negligence is equivocal, there is a presumption that the parties did not intend to indemnify an indemnitee against losses resulting from his own negligent act.”

In explaining its opinion, the court stated that it was adhering to the majority view of courts holding that general words such as “any and all liability” are not sufficient clear and unambiguous so as to find an intent to impose an obligation so extraordinary and harsh as to render an indemnitor liable for damages caused by the sole negligence of the indemnitee. “In cases in which the indemnity clause does not expressly provide that the indemnitor will indemnify the indemnitee for the indemnitee’s own negligence, the courts have found no duty to indemnify for causes of action arising form such negligence.”  Finding this clause to contain only general language, the court found it could not impose the broad indemnification that was claimed.

Guyon and Kathy Adams v. Falcon Equipment Corporation and Homestead Insurance Co., 717 So. 2d. 282 (1998, Ls. App.)

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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Owner’s Claim Against Subcontractor Barred by Economic Loss Doctrine

A court dismissed a project owner’s suit against the manufacturer of flooring materials that were used in the building because there was no privity of contract between the owner and he manufacturer. The manufacturer was a subcontractor to the flooring contractor who in turn had a contract with the owner.   Since the matter  involved the sale of commercial goods, the court found that the “economic loss doctrine” barred the negligence claim against the manufacturer.  Key to deciding this case was the court’s determination that  the predominant purpose of the underlying transaction with Parker Coatings, Inc. the subcontractor, was the “sale of goods” and not the “provision of services.” Any services provided by Parker were merely incidental to the sale of the goods and thus did not alter the essence of the transaction.

The flooring had to be ripped out a relayed because the epoxy did not hold down the material as was promised.  The contractor, Epoxy Coatings, Inc. did the rework along side its subcontractor, Parker, Inc.  Unfortunately, the flooring material continued to be unsatisfactory even after the re-work.  In response, the owner filed suit against the subcontractor, Parker.  There is no explanation for the apparent failure of the owner to sue its prime flooring contractor.

In granting summary judgment against the owner, the trial court explained that   “without a claim of personal injury or physical harm to property other than the defective product itself, [owner’s] remedy was a breach of warranty claim.” Because the the damages were strictly economic in nature, the court held that there could be no recovery absent a contract between the owner and the manufacturer.

It seems that the owner characterized it claim against Parker as being based on negligence so that it could avoid the harsh results of the economic loss doctrine.   According to the complaint,  Parker “was negligent in providing incorrect and improper instruction, guidance and advice to Epoxy” for the installation of its flooring materials.  The owner argued that this allegation was based upon “negligent provision of services.”  Parker, on the other hand argued that   the predominant purpose of its transaction with the prime contractor involved the sale of goods.  Any services provided by the subcontractor were argued to merely incidental.

“The economic loss doctrine is a judicially created doctrine providing that a commercial purchaser of a product cannot recover from a manufacturer, under the tort theories of negligence or strict products liability, damages that are solely economic in nature.”  In addition to this, the court said that  the economic loss doctrine  bars a remote commercial purchaser such as the owner in this case from recovering solely economic losses from a manufacturer with whom he has no contract.

The “predominant purpose test” was used by the court to determine whether the economic loss doctrine would bar recovery by a remote commercial purchaser under a negligence claim.  Because the court found the predominant purpose to be the sale of flooring materials and not the delivery of services, the court dismissed the negligence action.

Daniel Biese v. Parker Coatings, Inc., 588 N.W. 2d 312, (Wisc App. 1998).

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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Copyright ã 1999, ConstructionRisk.com, LLC