This dispute concerned Pennsylvania’s application of the Economic Loss Doctrine and its interpretation of the exception allowed by Section 552 of the Restatement (Second) of Torts. Gongloff Contracting, L.L.C., (“Gongloff”) was a second-tier subcontractor on a convocation center being constructed for a university in Pennsylvania. Under its contract with the firm hired to do the structural steel fabrication and erection, Gongloff agreed to provide all labor, materials, and equipment to erect the structural steel for a fixed fee.
Gongloff experienced numerous problems with the steel erection, including three shut-downs allegedly caused by the design engineer’s defective design. Attempts to redesign the structure and address its structural inadequacies substantially increased Gongloff’s costs and Gongloff submitted 81 change order requests for work that was beyond the scope of its original bid. After it stopped receiving payment on its invoices, Gongloff laid off its crew and left the job-site; it subsequently sued the design engineer for negligent misrepresentation. The trial court ruled that Gongloff could not pursue its negligent misrepresentation claim because it had not identified any specific negligent misrepresentations by the engineer. Gongloff appealed and the Appeals court reversed the ruling. Gongloff Contracting, L.L.C. v. L. Robert Kimball & Assocs., Architects and Eng’rs, Inc., 2015 Pa. Super 149 (Pa. Super. Ct. July 8, 2015)
Negligent misrepresentation differs from intentional misrepresentation (fraud) in that the speaker does not have to actually know his or her words are untrue, but must have failed to make a reasonable investigation of their truth. The elements of a claim for negligent misrepresentation are:
(1) a misrepresentation of a material fact; (2) made under circumstances in which the misrepresenter should have known its falsity; (3) with an intent to induce another to act on it; and (4) which results in injury to a party acting in justifiable reliance on the misrepresentation.
Although Pennsylvania law generally bars claims brought in negligence that result solely in economic loss, a narrow exception in Section 552 of the Restatement (Second) of Torts, “Information Negligently Supplied for the Guidance of Others” provides:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. Restatement (Second) of Torts § 552(1).
The Pennsylvania Supreme Court has adopted Section 552 and has specifically held that it applies in cases where information is negligently supplied by one in the business of supplying information, such as an architect or design professional, and where it is foreseeable that the information will be used and relied upon by third persons, even if the third parties have no direct contractual relationship with the supplier of information. Bilt-Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005).
In Excavation Technologies, Inc. v. Columbia Gas Company of Pennsylvania, 936 A.2d 111 (Pa. Super. 2007), the Appeals court explained the Supreme Court’s justification for potential Section 552 liability in disputes against architects and other design professionals, quoting the following passage from Bilt-Rite:
A design professional is typically responsible for the preparation of plans and specifications (information) that are supplied to and used by potential bidders in formulating a bid for a project. Additionally, a design professional may make representations to the contractor while performing administrative responsibilities… The design professional is paid a fee for using his or her skills and training to provide information that is relied on by others prior to and during construction. If the plans and specifications prove to be erroneous, the contractor is at grave risk of suffering economic loss. Under these circumstances, it is quite clear that the design professional is supplying information in his or her professional capacity, as part of his or her business, for the guidance of others in a business transaction. Furthermore, a design professional’s negligent misrepresentation could injure a third party in a variety of ways.
Gongloff had raised two issues in its appeal:
- Does Section 552 of the Restatement (Second) of Torts require that a design professional make an explicit negligent misrepresentation of a specific fact for a third party to recover economic damages?
- Did Gongloff properly allege that Kimball [the design engineer] either “expressly” or “impliedly” represented that the structure could safely sustain all required in situ loads?
The Appeals Court reviewed the allegations of the complaint and determined that Gongloff had alleged sufficient facts to meet the Bilt–Rite exception to the economic loss doctrine, stating:
We are persuaded that Excavation Technologies, interpreting the reach of Bilt-Rite, could reasonably be understood to subject architects to liability for Section 522 negligent misrepresentation claims when it is alleged that those professionals negligently included faulty information in their design documents. The design itself can be construed as a representation by the architect that the plans and specifications, if followed, will result in a successful project. If, however, construction in accordance with the design is either impossible or increases the contractor’s costs beyond those anticipated because of defects or false information included in the design, the specter of liability is raised against the design professional.
Comment:
In disagreeing with the design engineer’s contention that Gongloff needed to identify a specific (express) misrepresentation to proceed with its claim, the Appeals court distinguished between the requirement for an “actual” misrepresentation versus an “express” misrepresentation. A claim for negligent misrepresentation requires an actual misrepresentation; in other words, the claimant’s loss cannot be due to its erroneous assumptions. However the word “express” contemplates a higher degree of exactitude than the word “actual.” Gongloff was not required to explicitly pinpoint the specifics of the faulty design, i.e., it was not required to identify an express representation by the engineer. While the engineer might prove later in the litigation that Gongloff’s allegations were unsubstantiated, Gongloff was entitled to proceed to trial with its 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. 18, No. 3 (March 2016).
Copyright 2016, ConstructionRisk, LLC
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