By: Kent Holland
A professional negligent misrepresentation claim was filed against a professional environmental/geotechnical firm by the project developer that was its client. The suit sought to recover economic losses the developer incurred when it discovered that a an abandoned landfill encroached on part of the land it had purchased in reliance upon a Phase I environmental site assessment (ESA) performed by the consultant. On appeal, a summary judgment that had been granted to consultant on the basis of the economic loss doctrine was reversed. The court held that because this case concerns an alleged negligent misrepresentation, it falls under Section 552 Restatement (Second) of Torts negligent misrepresentation exception to the economic loss doctrine rule, which would have otherwise barred the developer from seeking purely economic losses in a tort action instead of a breach of contract action. Atlantic Geoscience, Inc. v. Phoenix Development and Land Investment, LLC, 341 Ga. App. 81 (2017).
The developer hired the consultant to conduct the Phase I ESA, which results in a report based on a field and paper study that that does not involve any subsurface or intrusive investigation. The report concluded that an adjacent landowner had encroached on and was using a small portion of the property as a “soil/stone storage yard.” The report advised that the consultant did not recommend any additional environmental investigation.
After the developer purchased the property it learned from the adjacent property owner that the encroachment was a “landfill” and not merely a yard for “soil/stone storage.” Due to the landfill, it was determined that the land could not be developed as planned because this made it economically unviable. It then sued the consultant to recover the amount it would have earned if it had been able to have the land developed as intended.
This was dismissed by the trial court on a summary judgment motion because the judge found that the damages were not recoverable under the economic loss rule and, alternatively, that there was no evidence that the damages were proximately caused by the consultant’s alleged negligence. The appellant court disagreed, and therefore reversed that decision, explaining:
“Georgia permits the recovery of certain types of economic losses in an action, such as this, where the plaintiff alleges professional negligence resulting in a misrepresentation. (citations omitted). Georgia has adopted the rule, enunciated in Restatement (Second) of Torts § 552, that
one who supplied information during the course of his business, profession, employment, or in any transaction in which he has a pecuniary interest has a duty of reasonable care and competence to parties who rely upon the information in circumstances in which the maker was manifestly aware of the use to which the information was to be put and intended that it be so used.
(citation omitted). This rule can apply to claims for professional malpractice in cases asserting that a professional made a misrepresentation in the breach of his or her professional duties.”
The case will have to go back to trial to decide whether the consultant was negligent and if so what damages resulted. But the court stated that most of the damages sought by the developer cannot be granted at trial. Specifically, the court stated:
“ … Georgia law does not allow the bulk of the damages Phoenix has sought. Phoenix must prove actual economic loss proximately resulting from Atlantic’s alleged misrepresentations. (citation omitted). Our Supreme Court has explained that this type of loss is measured by an “out-of-pocket” standard, not a “benefit-of-the-bargain” standard (citation omitted). Consequently, Phoenix cannot measure its damages by the benefit of the bargain that it hoped to achieve when it bought the property in reliance on the representations made by Atlantic in connection with the environmental study. The evidence of the benefits Phoenix would have attained under its agreement with SMIG does not demonstrate Phoenix’s “out-of-pocket” losses.”
Comment: (1) There seem to be a number of cases recently holding that an allegation of negligent misrepresentation gets the plaintiff out from under the bar of the economic loss doctrine. This results in an erosion of the protection of the rule. (2) This being a phase 1 ESA it is likely that the consultant’s fee was only a few thousand dollars. The risk of suit seeking millions of dollars for the loss of a real estate development deal are so significant that most firms providing ESAs routinely request and obtain, limitation of liability (LoL) clauses in their contracts to limit their liability to the amount of their fee or some specified dollar amount, whichever is higher. The profit earned on an ESA simply would not justify performing the services without some reasonable LoL.
The limitation of liability clause we see in many ESA agreements provides something like the following:
“Limitation of Liability
To the fullest extent permitted by law, the total liability, in the aggregate, of Consultant and its officers, directors, partners, employees, agents, and subconsultants, to Client, and anyone claiming through or under Client, for any claims, losses, costs, or damages whatsoever arising out of, resulting from or in any way relating to this Project or Contract, from any cause or causes, including but not limited to tort (including negligence and professional errors and omissions), strict liability, breach of contract, or breach of warranty, shall not exceed the total compensation received by Consultant or $25,000, whichever is greater. The Client may negotiate a higher limitation of liability for an additional fee, which is necessary to compensate for the greater risk assumed by Consultant.”
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. 8 (Aug 2017).
Copyright 2017, ConstructionRisk, LLC