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Kent Holland, J.D.
ConstructionRisk, LLC

The United States District Court for the Northern District of California held that an engineer who prepares documents that contractors will rely on when preparing their bids owes a duty of care to the contractors, and thus can be held liable to these contractors for both breach of professional duty and negligent misrepresentation. Apex Directional Drilling, LLC v. SHN Consulting Eng’rs & Geologists, Inc., 2015 U.S. Dist. LEXIS 105537 (N.D. Cal. Aug. 11, 2015).

The dispute arose out of problems encountered by Apex Directional Drilling, the contractor on a construction project for the city of Eureka, California. The project involved installing a new wastewater pipeline using a technique known as horizontal directional drilling (“HDD”).   Before the project was put out to bid, the engineer hired by city, SHN Consulting Engineers & Geologists, conducted geological studies and prepared reports describing the conditions on the project. One such report, the Geotechnical Baseline Report (“GBR”), was furnished to bidders so they could estimate the cost of performing the work. The GBR indicated that “the majority of the subterranean region targeted by the project was composed of stable soils suitable for HDD.”

Shortly after beginning work, however, the contractor ran into problems when it encountered mud and flowing sands that were very different from the soils described in the GBR. When the contractor reported these different conditions to the city and the engineer, the engineer “continued to maintain that the project was proceeding in the competent soils described in the GBR, and, on that premise, repeatedly gave Apex illogical instructions.”   The contractor submitted change order requests seeking reimbursement for the cost overruns resulting from the adverse soil conditions, but the city, acting on the engineer’s recommendations, rejected the requests and ultimately terminated the contractor.

The contractor sued the city for breach of contract and then filed a separate complaint against the engineer asserting claims for breach of professional duty and negligent misrepresentation. The engineer argued that it could not be held liable to the contractor in tort because it did not owe the contractor a duty of care. However, the court disagreed and found that the engineer did owe the contractor a duty of care.

Claim for Breach of Professional Duty

The court observed that in the context of a negligence claim seeking economic damages where there is no contractual privity, California courts use a six-factor balancing test to determine whether a duty of care exists. The six factors are: 1) the extent to which the transaction was intended to affect the plaintiff; 2) the foreseeability of harm to the plaintiff; 3) the degree of certainty that the plaintiff suffered an injury; 4) the closeness of the connection between the defendant’s conduct and the injury suffered; 5) the moral blame attached to the defendant’s conduct ; and 6) the policy of preventing future harm.

Applying these factors, the court determined that the engineer did owe a duty of care to the contractor. In particular, the court found that the first, third and fourth factors favored imposing a duty of care, as the GBR was prepared for the purpose of establishing a baseline upon which the contractor would base its bid; mistakes in the GBR and the engineer’s subsequent actions caused the contractor to suffer considerable losses.

The court also reasoned that practical considerations supported its holding — because the duty was owed to “a specific, foreseeable and well-defined class”, there would not be “unlimited liability to a nebulous group of future plaintiffs.”   The court thus denied the engineer’s motion to dismiss the contractor’s claim for breach of professional duty. The court noted that courts in other states (Arizona, Florida, South Carolina and West Virginia) have reached similar holdings.

Claim for Negligent Misrepresentation

The court also denied the engineer’s motion to dismiss the contractor’s negligent misrepresentation claim. The court noted that under California law, “negligent misrepresentation is a separate and distinct tort from simple negligence and requires a unique duty of care analysis.”   The California Supreme Court has adopted Section 552(2) of the Restatement (Second) of Torts as the test for identifying who can recover for negligent misrepresentation.

Under the Restatement, “a plaintiff must be a member of a ‘specific class of persons’ involved in a transaction that the defendant ‘supplier of information’ intends the information to influence.” Applying the Restatement test, the court concluded that the contractor fell within the category of plaintiffs that could recover based on alleged misstatements in the GBR, since the GBR was intended to influence the contractor’s bid. The court noted that its conclusion was further supported by a previous California case, M. Miller Co. v. Dames & Moore, 198 Cal. App. 2d 305 (1961).

 Comment: Note that in its ruling, the court did not actually hold that the engineer was liable to the contractor. By denying the engineer’s motion to dismiss, the court was simply holding that the engineer could be liable to the engineer – and that the finder of fact (e.g. jury) must be allowed to make that determination. Nevertheless, this is a significant ruling as it removes a defense that engineers have typically relied on when sued by contractors – the defense that the engineer did not owe the contractor a duty of care.

 

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. 18, No. 1 (January 2016).

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