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It can be a perplexing issue whether a project owner that believes its contractor or design professional has breached its contract due to defective work or faulty performance can sue under a theory of negligence as well as for breach of contract.  Where the alleged breach of contract does not cause property damage or personal injury but only results in extra costs being incurred by the owner to correct the defective work, a good argument can be made that these are merely “economic damages” and should not be recoverable under a “negligence” cause of action.

A good argument can also be made that if the only reason the contractor or designer has a duty to the owner was because of the contractual requirements, there is no independent duty owed to the Owner at common law, and without such a duty a tort claim such as “negligence” cannot be pursued. In Haward Baker, Inc. v. Shirttail Gulch Road District, Inc., 2012 WL 3929211 (United States District Court, South Dakota 2012), the court held that while the obligation to provide an appropriate design and proper construction arose out of the contract, a duty existed to provide such services using such skill and care ordinarily exercised by others in the same profession.  The negligence claim was therefore properly pleaded.

The failure to exercise reasonable care had the potential of increasing the risk of harm, and the Owner relied upon the firm to exercise reasonable care in designing and constructing an earth retention system.  “The court finds this case is the type of situation foreseen by the South Dakota Supreme Court when it said, ‘[a] contract may establish a relationship requiring exercise of proper care, and acts or omissions in performance of such duty may give rise to a tort liability.’”  Based on the allegations of the complaint, the court found that the firm owed a duty of care to the owner, “the violation of which gives rise to tort liability.”

The firm argued that the economic loss rule barred the Owner from recovering damages.  In rejecting that argument, the court determined that the rule would apply to manufactured goods under the uniform commercial code but that in this case what was provided by the firm constituted “services” not “goods” and the economic loss doctrine would, therefore, not bar the negligence claim.

 

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. 15, No. 1 (Jan 2013).

Copyright 2013, ConstructionRisk, LLC