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An engineer who was retained by its client to design and construct anaerobic digesters to process cattle manure and paper sludge was sued by its client when the system failed to process the amount of sludge and produce the amount of electricity per day that engineer represented would be produced, and on which the client based its decision to award the contract to the engineer.  In a “design and engineering document”, the engineer made multiple representations regarding the design and operation of the digester, including that the digester was capable of processing “250 tons of paper sludge substrate … on a daily basis,” that it would “generate 2,600 kWh of electricity on a continuous basis,” and that the engineer had “extensive experience in the design, installation, and operation of digester systems.”   In the law suit, the client alleged negligent misrepresentation, breach of contract, and breach of the professional standard of care (i.e., negligence).   They say they relied on the engineer’s representations in their decision to go forward with the project and that this entitles them to pursue the negligent misrepresentation claim.   In arguing that the negligent misrepresentation claim must be dismissed by motion to dismiss, the engineer argued that it owed no duty to the plaintiffs outside of its contractual duty.  The court agreed.

The court said, “In distinguishing between persons engaged in the business of supplying information to others in a non-adversarial capacity and commercial transactions where the parties deal at arms length, it is important to consider whether the information was part of the product provided by the defendant, or whether it was merely incidental to the underlying transaction.”    The court went on to explain that there is no duty imposed on parties who deal at arm’s length. Negligent misrepresentation, says the court, “predominantly applies to situations where the information supplied harmed the plaintiff in its relations with third parties”, and this means that the negligent misrepresentation cause of action does not apply when “a defendant directly provides information to a plaintiff in the course of a transaction between the two parties, which information harms the plaintiff in the transaction with the defendant.”     In this case, since the engineer directly provided the representations in the course of the transaction between the parties, the information harmed only the client in the transaction and could not be the basis of a negligent misrepresentation action.  Amana Society v. GHD, Inc. and Excel Engineering, 2011 WL 3515475 (U.S. Dist Ct., North Dakota 2011).

Comment:  Negligent misrepresentation claims against designers and contractors seem to be increasing in the number.  Instead of suing for basic breach of contract or negligence, plaintiff’s seem to be increasingly adding Counts to the complaint for causes of action based on allegations of negligent misrepresentation or even fraud.  It can sometimes be difficult to get these counts dismissed early in a case and, as a consequence, a lot of time and money is wasted in interrogatories and depositions trying to get to the bottom of these allegations to prepare an appropriate defense.  The reasoning of the court in this case provides an excellent and clear argument for defendants to make to judges on motions to dismiss or on motions for summary judgment – to ask the court to distinguish between the representation the designer and contractor made to the client in the context of the proposals or the contract that was part of the commercial arms-length transaction to design and construct something, as opposed to a representation that arises when providing informational services to be relied upon by others.

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. 14, No.3 (Mar 2012).

Copyright 2012, ConstructionRisk.com, LLC