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Contractor sued a construction manager (CM) for breach of contract and negligence, claiming that the CM had negligently supplied information, and that it relied on those misrepresentations and incurred damages as a result. Contractor also claimed that the CM was negligent in its coordination and supervision of the contractors. The trial court dismissed the case on a summary judgment motion because the contractor had no contractual relationship with the CM. The CM and contractor were under separate contracts directly to the project owner. On appeal, the appellate court reversed and held that the CM had an independent duty to avoid misstatements intended to induce reliance.

The main issue in this case was whether the Kentucky courts would adopt the Restatement (Second) of Torts, section 552 (1977) (“Restatement”) and allow negligence claims by contractors against construction managers with whom they lack privity of contract. The Contractor (EH Construction), claimed it was required to restore much of the work it had already completed due to changes and improper scheduling by CM which led other contractors and subcontractors to destroy work that EH had already finished. In considering the issues, the favorably cited a Tennessee Supreme Court decision that applied the Restatement of Torts to allow a contractor suit to go forward against a CM on similar allegations. See, Morse/Diesel, 819 S.W. 2d 428. The court explained that “In line with the inclination of Kentucky courts to dispense with the requirement of privity as a prerequisite for actions in tort in other cases, we follow the approach taken by the Tennessee Supreme Court in Morse/Diesel and adopt section 552 of the Restatement.”

Section 552 of the Restatement is entitled “Information Negligently Supplied for the Guidance of Others.” It provides the following:

(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

(2) Except as stated in Subsection (3), the liability in Subsection (1) is limited to loss suffered:

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intents to supply it; and

(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in substantially similar transaction.

(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.

According the contract between the CM and owner, the CM:

* “shall provide administrative, management and related services to coordinate scheduled activities and responsibilities of the Contractors with each other and with those of the Construction Manager, the Owner and the Architect to endeavor to manage the Project in accordance with the latest approved estimate of Construction Cost, the Project Schedule and the Contract Documents.”

* “shall coordinate the sequence of construction and assignment of space in areas where the Contractors are performing Work.”

* “shall schedule and coordinate the sequence of construction in accordance with the Contract Documents and the latest approved Project construction schedule.”

Interestingly, after listing out these duties, the appellate court stated that the CM’s duty to the contractor did not rest on these contractual duties owed by the CM to the owner. The court also stated that the duty “does not rest on any professional duty.” Instead, the court held that the CM’s duty is “based on an independent duty to avoid misstatements intended to induce reliance.” The court cites Safeway Managing General Agency, Inc. v. Clarke & Gamble, 985 S.W.2d 166, 169 (Tex. Ct. App. 1998) in support of this proposition. Thus, the court concludes “[CM] had additional, independent duties pursuant to section 552.”

For the foregoing reasons, the court ordered the case reversed and remanded to the trial court for the contractor to have an opportunity to present evidence. “In order to prevail on its claim against [CM] for negligent misrepresentation, EH must prove that (1) [CM] was acting in the course of its business, profession, or employment, or in a transaction in which it had a pecuniary (as opposed to gratuitous) interest; (2) [CM] supplied faulty information intended to guide others in their business transactions; (3) [CM] failed to exercise reasonable care in obtaining or communicating the information; and (4) EH justifiably relied upon the information and thereby incurred pecuniary loss.” EH Construction, LLC v. Delor Design Group, Inc; Presnell Construction Managers, Inc, et al., 2000 Ky. App. LEXIS 29, No. 1998-CA-001476-MR (March 31, 2000).

About the author: Article written by J. Kent Holland, Jr.,  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 founder and president of a consulting firm, ConstructionRisk, LLC, 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, Vol. 2, No. 7 (Jul 2000).

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