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Gail S. Kelley, J.D., P.E.
ConstructionRisk, LLC

In an effort to revitalize a waterfront area along Lake Michigan, the City of Whiting, Indiana hired an engineering firm to design a lakefront park and marina. The Engineer, in turn, hired a Subconsultant to serve as the marine engineer for the project. When a revetment (retaining wall) designed by the Subconsultant failed, there was extensive damage to the City’s property and considerable remediation was needed.

The Engineer assigned to the City any claims it might have against the Subconsultant relating to the revetment failure. The City then sued the Subconsultant, asserting three claims as the Engineer’s assignee, and asserting breach of the Subcontract, negligence, and negligent misrepresentation in its own capacity. The Subconsultant filed a motion to dismiss, arguing that the City’s complaint failed to state a claim. While the court granted the Subconsultant’s motion to dismiss the City’s negligent misrepresentation claim, it denied Subconsultant’s motion to dismiss the other claims and found that the assignment of the right to sue on the contract was proper. City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnani, LLC, 2015 WL 6756857 (N.D. Ind. Nov. 5, 2015).

Claims Assigned by the Engineer

The court first addressed the three claims that the City brought against the Subconsultant based on the assignment from the Engineer — breach of contract, breach of warranty, and indemnity. The court observed that Indiana law both allows assignment of claims and recognizes the causes of action that the City was asserting through the assignment.

The court stated that Indiana law recognizes that a contract-based “chose in action” (right to sue), is assignable unless it is purely personal in nature. Generally, “an assignment gives the assignee neither greater nor lesser rights than those held by the assignor. Unless a contrary intent is shown, the assignee stands in the shoes of the assignor.”

The Subcontractor had seized on an error the City made in its complaint — the City stated that it sought to recover “its own damages” for the assigned claims. The Subcontractor argued that because this was an assignment from the Engineer, the complaint had to state that the City sought to recover the damages incurred by the Engineer. The court noted that while the City might have erred in its wording, federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.” The court thus denied the Subconsultant’s motion to dismiss the claims that the City asserted through the assignment.

The City’s Contract and Tort Claims

The Third–Party Beneficiary Claim

For a third-party beneficiary claim to survive a motion to dismiss, the complaint must show:

(1) a clear intent by the actual parties to the contract to benefit the third party; (2) a duty imposed on one of the contracting parties in favor of the third party; and (3) performance of the contract terms is necessary to render the third party a direct benefit intended by the parties to the contract.

The controlling factor is the contracting parties’ intent that the third party be a direct beneficiary; this intent “may be shown by specifically naming the third party or by other evidence” in the contract. The court found that the contract documents were ambiguous. While the City was not specifically named, the subcontract did not contain a “no third-party beneficiaries” and incorporated the prime contract’s terms and conditions, including the Engineer’s duties to the City. The court thus held that the City was entitled to seek discovery on the parties’ intent.

Negligence Claim

To hold a defendant liable in tort for negligence, a plaintiff must prove:

(1) the defendant has a duty to conform its conduct to a standard of care arising from its relationship with the plaintiff, (2) the defendant failed to conform its conduct to that standard of care, and (3) an injury to the plaintiff was proximately caused by the breach.

Under the law in most states, including Indiana, there are certain limitations on what the plaintiff can recover. In particular, the “economic loss rule” precludes tort liability for purely economic loss. When the plaintiff buys an inferior product, and the product does not perform its intended function, the plaintiff cannot sue in tort for the product’s diminution in value, damage to the product itself, or incidental and consequential losses such as lost profits. However, the economic loss rule does not shield a defendant from tort liability when there is personal injury or damage to property other than the product or service itself. Reviewing the language of the complaint, the court held that the City had alleged damage to property that could be considered “other property” and thus had sufficiently stated a claim for negligence.

Negligent Misrepresentation Claim

Although its general rule is “no tort liability for pure economic loss caused unintentionally”, Indiana courts allow certain exceptions. The City cited to a previous Indiana case where a mortgage lender was allowed to sue a title company for failing to disclose an encumbrance even though it was not in privity of contract with the title company. However, the court held that the facts of this case did not allow a similar exception. In particular, the court noted that the facts were very similar to the case Indianapolis–Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 838 (Ind.Ct.App.2010). The court in that case held that there is no liability in tort to the Owner for pure economic loss caused unintentionally by contractors, subcontractors, engineers, design professionals, or others with whom the Owner is connected through a chain of contracts. The court in this case held similarly – because the City was connected to the Subconsultant through a chain of contracts, the economic loss rule barred a claim for negligent misrepresentation. 

Comment:

It is important to note that the court did not actually find that the Subconsultant was liable to the City for its damage; the issue here was only whether the City’s complaint had sufficiently stated a claim against the Subconsultant. Nevertheless, a defendant whose motion to dismiss is denied will often decide to settle the case rather than try to defend against the claims.

 

 

About the Author:  As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court.  She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law.  She provides risk management services for ConstructionRisk, LLC.   This article is published in ConstructionRisk.com Report, Vol. 18, No.4 (April 2016).

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