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Contractor asked the court to apply the economic loss doctrine to dismiss an action that alleged negligent misrepresentation concerning the contractor’s services to construct a pre-engineered building to serve as a personal and business location, and to do so in a timely manner and meet or exceed all industry standards.  The written contract was between the contractor and the individuals that owned the property.  The suit against the contractor, however, was brought by the business entity (LLC) that the individuals owned.  Thus, the LLC itself did not have a contract with the builder.  Only the individuals were under contract.  In declining to apply the economic loss doctrine to dismiss the case by the LLC, the court held that the doctrine only applies where parties are in privity of contract with each other.  Rinehart v. Morton Buildings, Inc., 305 P.3d 622 (Kansas 2013).

The Plaintiff sought over $218,000 in economic damages for shop rent at an alternative facility, as well as lost production, relocation costs, and interest expense on its line of credit.  The jury found in the plaintiff’s favor for about $149,000.    The builder appealed, arguing that the economic loss doctrine barred the negligent misrepresentation claim.  It also argued that the doctrine should apply because the plaintiff had an opportunity to bargain for contractual protections. It was not explained how that could have occurred since there was no contract between the LLC and the Builder.  Perhaps, what was meant was the individual people with whom the Builder contracted could have negotiated protections for the LLC. 

The appellate court affirmed the lower court determination that the economic loss doctrine was inapplicable.  But the court based its decision on the nature of the negligence misrepresentation tort, which has its own scope-of-liability limits.  The court stated that a jury found that the Builder misrepresented that the building would be completed in a timely fashion and meet or exceed industry standards.  And the court explained that the elements of a negligent misrepresentation claim restrict liability by imposing legal duty only in limited circumstances—when a defendant supplies information to guide others in business transactions in the course of that defendant’s business.  “In other words, this tort confines the universe of potential claimants to those for whose benefit the defendant supplied the information and whom the defendant intended to influence.”

The court stated that it is important to note that in the elements required for a plaintiff to prove entitlement to recover for negligent misrepresentation “we do not require privity of contract as an element for this cause of action, nor have we said the existence of contractual privity bars the tort.”   The court went on to state: “We hold negligent misrepresentation claims are not subject to the economic loss doctrine because the duty at issue arises by operation of law and the doctrine’s purposes are not furthered by its application under these circumstances”.

 

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. 16, No. 3 (Mar 2014).

Copyright 2014, ConstructionRisk, LLC