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Where a subcontractor sued the prime contractor based in part on delay claims, the prime filed a third-party complaint against the project owner and the architect seeking indemnity. The court held that the architect owed the contractor a duty of care and that the economic loss did not apply. Change orders that had been signed by the subcontractor did not serve as a waiver or release of its negligent misrepresentation claim against the architect. The key holding of the court was that the economic loss rule does not apply to a claim of negligent misrepresentation where there is no privity of contract.” D.W. Wilburn, Inc. v. K. Norman Berry Associates, 2016 WL 745774 (Kentucky 2017).

Comment: This decision gives the contractor a way to circumvent the waiver and release of claims by having signed change orders and having accepted final payment and closeout of the contract. Although it can’t make claims against the project owner, the contractor was permitted to make claims against the design professional that was under separate contract with the owner.

The contract incorporated the American Institute of Architects (AIA) Document A201-1997. This included a provision that change orders must be signed by the architect. It also included standard language stating that acceptance of final payment would constitute a waiver of claims.

During the course of the project, twenty change orders were approved and signed by the owner, architect prime contractor. This resulted in a time extension for the final completion date. A comprehensive change order was issued that included any and all claims regarding the final schedule and completion date. At that same time, the prime contractor submitted its final application for payment and signed a closeout form.

After the project was completed, the subcontractor sued the prime for delay and impact costs. The prime filed a third-party claim against the architect asserting that the delays claimed by the subcontractor were caused by the architect’s failure to properly prepare plans and specifications that prevented the project from being timely approved for a building permit.

The trial court granted summary judgment in favor of the architect based on lack of privity of contract between the contractor and architect. This was reversed on appeal, with the court holding that the subcontractor was entitled to its day in court to attempt to prove the elements of a negligent misrepresentation claim.

In reaching that decision, the court followed precedent established in the decision of Presnell Construction Managers, Inc. v. EH Construction LLC, 134 S.W.3d 575 (KY. 2004), where the court stated that legal duty, rather than contractual privity, is the fundamental element under tort law, and that a contractor could recover if the architect “breached some duty to the [contractor] apart from its duties to the [owner] under the contract—i.e., and independent duty.” The court concluded:

“[W]e are convinced that it does not apply to a claim under Section 552 where there is no contractual relationship between the parties. It is the very purpose of the tort to compensate purely economic losses when there is no contractual remedy available but there is a breach of the duty described in that Section. To apply the rule would essentially eviscerate the tort. We agree with the Court in Bilt–Rite, 581 Pa. at 484, 866 A.2d at 288, that the result would simply be “nonsensical.” “[I]t would allow a party to pursue an action only to hold that, once the elements of the cause of action are shown, the party is unable to recover for its losses. We conclude that the economic loss doctrine does not apply to a claim of negligent misrepresentation in the architect/contractor scenario.”

“We further hold that the economic loss rule does not apply to a claim of negligent misrepresentation where there is no privity of contract.”

Subcontractor Claim against the Architect was not waived by Prime Contractor Having Executed Change Orders with the Owner and Accepting Final Payment

The Architect argued that even if the claim was not precluded by the economic loss rule, the contractor was barred from doing do because it had executed twenty change orders and accepted final payment and closeout. This argument was rejected by the court because it found that although those change orders and final payment would preclude a delay claim against the Board, it wouldn’t bar that same claim against the Architect who was “not a party to those documents and cannot seek to enforce their provisions.” According to the court, “Any change order executed by the parties affected only the contract between [the Board] and [contractor].”

For these reasons, summary judgment was reversed, and the case must go to trial to give the contractor an opportunity to prove the elements of negligent misrepresentation.

 

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. 11 (Dec 2017).

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