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By J. Kent Holland, Jr., Esq.

The Maryland Court of Appeals applied the economic loss doctrine to bar a claim against an engineer by a general contractor seeking to recover economic losses based upon reliance on allegedly defective designs. In the absence of contractual privity, physical injury, or risk of physical injury, the court held that design professionals in government construction projects do not owe a tort duty to those who bid and contract with the government. Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 451 Md. 600 (2017).

Pursuant to its contract with the City of Baltimore, the engineer designed upgrades for a wastewater treatment plant. A construction contract was then awarded to the low bidder to construct denitrification cells, pipes and supporting systems. During construction, the contractor states that it encountered leaks and other problems, which caused delays and cost overruns. The contractor filed suit against the engineer seeking to recover its financial losses. There is no indication in the courts decision whether the contractor also filed suit against its client the city.

According to the contractor, leaks at the expansion joints of the cells were the result of deficiencies in the engineer’s design. The contractor also alleged that that the engineer failed to complete the design in a timely manner and failed to warn about delayed completion of a companion project’s design, and this hindered and delayed the construction. The theories of the complaint against the engineer included (1) negligence, (2) negligent misrepresentation, and (3) Restatement of Torts, sec. 552 extra-contractual duty.

In a motion to dismiss, the engineer argued that without privity of contract with the contractor, there was no legally cognizable tort duty running for the engineer to the contractor.   The trial court granted the motion to dismiss, which was affirmed by the intermediate court of appeals and ultimately the Court of Appeals.

Professional Negligence Claim

The court began its analysis by explaining that the “The economic loss doctrine represents a judicial refusal to extend tort liability to negligence that causes purely economic harm in the absence of privity, physical injury, or risk of physical injury.”   The rule applied by Maryland courts has been that the recovery of economic losses for the repair or remedy of defective conditions was permitted, provided it was necessary to prevent physical injury.  In this case, there was no physical injury element to the complaint.

The Intimate Nexus Test

In cases where there are no safety concerns, the Maryland courts have still allowed economic loss cases to proceed under certain limited conditions. Specifically, the court applies what is called the “The Intimate Nexus Test.” That test requires the relationship between the parties to be sufficiently close—or intimate—to support finding tort duty. The court explained that its “privity-equivalent analysis in economic loss cases looks for linking conduct—enough to show the defendant knew or should have known of the plaintiff’s reliance.”

The court agreed with the Engineer’s argument that:

“[I]n the construction industry parties “must be able to rely on the objective expression of their bargains,” which involves a network of contracts detailing liability between the parties involved in the project. Without a contract, Engineer contends, the economic loss doctrine bars Contractor’s claims. Contractor, on the other hand, asserts that its lack of a contract with Engineer is precisely why we should permit it to bring a negligence claim under the intimate nexus test.”

The court stated:

“[W]e think the complex web of contracts that typically undergirds a public construction project should govern because parties have sufficient opportunity to protect themselves (and anticipate their liability) in negotiating these contracts. An Indiana case explains the construction industry’s contractual landscape well:

“Perhaps more than any other industry, the construction industry is vitally enmeshed in our economy and dependent on settled expectations. The parties involved in a construction project rely on intricate, highly sophisticated contracts to define the relative rights and responsibilities of the many persons whose efforts are required—owner, architect, engineer, general contractor, subcontractor, materials supplier—and to allocate among them the risk of problems, delays, extra costs, unforeseen site conditions, and defects. Imposition of tort duties that cut across those contractual lines disrupts and frustrates the parties’ contractual allocation of risk and permits the circumvention of a carefully negotiated contractual balance among owner, builder, and design professional. Indianapolis–Marion Cty. Pub. Library, 929 N.E.2d at 737–38 (quoting Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891, 941 (1989)); see also BRW, Inc., 99 P.3d at 72.”

The court focused largely on the fact that this case involved a government contract, and what financial impact might befall the owner and the public if contractors could make tort claims against design firms to recover economic losses. The court explained, “We are also mindful that government contracts have a special consideration—the public purse. Imposing a tort duty on design professionals will likely correlate with an increase in project costs and with a corresponding risk in price for government entities.”

This favorable decision for the design firm based on the court finding no privity-equivalent nexus comes with a significant caveat. The court stated, “we decline to extend the privity-equivalent intimate nexus test to design professionals on government projects, we do not hold that the test cannot apply to design professionals in other contexts.”

Negligent Misrepresentation Claim

A negligent misrepresentation claim is “one variety of a negligence action.” Consequently, the basic rationale for the economic loss doctrine applies to negligent misrepresentation claims in a manner similar to all negligence actions. The contractor here attempted to argue that to find the design professional liable, the court merely needed to find that the designer knew the class of potential plaintiffs that would rely on the plans and specifications, and did not need to know the specific potential plaintiff (contractor). Because the court found that this instant case “involves an underlying web of contracts that allocates risk and liability,” the contractor had the ability to protect itself through contract language.

The court noted that the “Contractor had the opportunity to review Engineer’s design, ask for clarifications, and submit a bid detailing how much it would cost to construct the project. In other words, Contractor was able to evaluate whether it could complete the project and at what cost, and the City was free to accept or reject its bid. If Contractor was not satisfied with the City’s contract, it could have negotiated different terms or bid on a different project.”

A secondary misrepresentation count that was based on the Restatement (Second) of Torts, section 552 was rejected by the court outright because that count would require a finding a “privity equivalent” that the court had already determined (as described above) does not apply to large-scale government construction projects.

Comment: It is surprising that the decision makes no mention of any claim against the city. The typical way for a contractor to recover in a situation such as that at issue here is to make a change order request to the city, and if it is rejected, the contractor can then file suit against the city. Pursuant to the Spearin Doctrine, when a city provides a contractor with plans and specifications, there is an implied warranty that the project can be successfully built using those plans and specs. That means the contractor does not have to prove negligence against the city or its engineer. No rationale is evident from the decision as to why the contractor would choose to sue the engineer instead of the city and therefore, have to prove negligence in the event that the court allowed it to overcome the economic loss doctrine.  Perhaps contractual conditions prevented such a 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. 19, No. 6 (June 2017).

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