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The economic loss doctrine was enforced by the Supreme Court of Wyoming to bar a general contractor’s (GC) complaint against a project engineer with whom it lacked privity of contract. The GC had a contract was with a town to construct water and wastewater lines. The city had a separate contract with an engineering firm for design and project management services. In addition to suing the town for breach of contract, the GC sued the engineer sued the engineer claiming the engineer had engaged acted negligently, intentionally interfered with its contract, breached a duty of good faith and fair dealing, and committed negligent misrepresentation. The GC accused the engineer of unreasonably refusing to certify substantial completion for the work, hindering and delaying work by refusing approve change orders, refusing to provide accurate and constructible drawings, and generally interfering with the contractor’s performance of its contract. In sustaining the trial court’s summary judgment in favor of the engineer, the state supreme court explained and reinforced the sound basis for the economic loss rule. The court stated: “The Court continues to believe that parties to a construction contract have the opportunity to allocate the economic risks associated with the work, and that they do not need the special protections of tort law to shield them from losses arising from risks, including negligence of a design professional, which are inherent in performance of the contract.” Excel Construction v. HKM Engineering, Inc., 228 P.3d 40 (Wy, 2010).

Facts and Allegations

In this case the Town of Lovell, Wyoming entered into a contract with Excel Construction, Inc., (“Excel”) to construct water and sewer lines. The town entered into a separate contract with KHM Engineering, Inc. for engineering services to include design of a new water and sewer system and project management. The contract between HKM and the town was based on an Engineering Joint Contracts Documents Committee (EJCDC) form and included the following provision at article 9.10(A):

“Neither ENGINEER’s authority or responsibility under this Article 9 or under any other provision of the Contract Documents nor any decision made by ENGINEER in good faith either to exercise or not exercise such authority or responsibility or the undertaking, exercise, or performance of any authority or responsibility by ENGINEER shall create, impose, or give rise to any duty in contract, tort, or otherwise owed by ENGINEER to CONTRACTOR, and Subcontractor, any Supplier, any other individual or entity, or to any surety for or employee or agent of any of them.”

By its contract with the town, HKM was authorized to issue written clarifications of contract documents, authorize minor variations in the work, and reject the contractor’s work that the engineer deemed to be defective or in non conformance to the plans and specifications.

The GC alleged that the specifications called for insufficient backfill in certain locations and that the engineer advised it to purchase required backfill and bill for it at the end of the month rather than immediately submitting a change order request. The contractor was not paid for the extra backfill and it alleges that it relied upon the engineer’s representations that it would be paid. The contractor also alleges that the engineer improperly denied certification of substantial completion and that liquidated damages were wrongfully assessed.

Negligence and Misrepresentation Claims Subject to Economic Loss Rule

In reviewing the allegations of the complaint, the court concluded that the negligence count of the complaint as well as the misrepresentation count were both subject to the economic loss rule which bars recovery in tort (negligence) when a plaintiff claims purely economic damages unaccompanied by physical injury of property damage. The contractor had framed the misrepresentation allegation as “negligent misrepresentation” and therefore, it must be treated as any other negligence based claim. The court noted, however, that if the count had been framed as intentional misrepresentation or fraud, the complaint lacked sufficient details in the allegations to satisfy the elements of fraud. The court also noted that the existing case precedent holds that “A party may not sidestep contractual limitations by simply pleading an intentional tort.” In the current case, the court considered the pleadings and found that regardless of how the contractor wanted to characterize its allegations, its claim “can only be construed as one for negligent misrepresentation” and that claim is barred by the economic loss rule.

Tortious Interference with Contract Claim

The contractor attempted to get around the economic loss rule by arguing that even those courts that have rigorously applied the economic loss rule do not apply it to bar claims based on intention torts. Thus, the contractor argued that its claim against the engineer for tortuously interfering with its contract should not have been dismissed. In finding against the contractor here, the court stated that because the engineer was an agent for the town which was a party to the contract with the contractor, such an agent could not legally be found to have inferred with such a contract. The court went on to explain that the engineer was not an “outsider” to the contract between the town and the contractor. Instead, the engineer, pursuant to its own contract with the owner, had a project management role in monitoring the contractor’s performance and making decisions concerning that performance. As explained more fully by the court:

“In this case, HKM was charged with determining compliance with the contract, approving change orders, and otherwise serving as decision-maker for the Town of Lovell by the express terms of its agreement. HKM therefore acted not only as an agent, but as an agent with the power to make decisions on behalf of the town. Its actions, if they breached the contract, may entitle Excel to recover against the town for that breach, but Excel may not recover from HKM on a theory of intentional interference with a contract for actions taken as the town’s agent.”

The Allegations of Breach of a Covenant of Good Faith and Fair Dealing

Citing the language of Article 9 of the engineer’s contract with the town, as quoted above, the contractor argued that the language created an obligation on the part of the engineer to act in good faith in its decision-making as the town’s agent and that the engineer failed to do so. Two key points were made by the court in rejecting this argument. First, the court states that the duty of good faith and fair dealing applies to all contracts but that duty is only applicable between the parties of the contract – thus the contractor would receive no benefit under the contract between the engineer and town. Second, the Article in question was not intended to create any affirmative duty but quite the contrary was intended to be an exculpatory clause to limit the engineer’s liability such that it would have no liability for decisions made in good faith. As stated by the court, “In other words, the clause means that the contractor may not recover from the engineer for careless errors which were not made in bad faith….” And “while it does not bar claims involving bad faith such as fraud,” the contractor would only be entitled to pursue such claims if the substantive law permitted it – but in this case the law in fact bars such claims.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report.