Inside this Issue

A1 - Plaintiff Has Right to Sue Subcontractor When Prime Becomes Insolvent
A2 - Engineer Can be Sued for Breach of Warranty of Professional Services
A3 - Accrual Date for Statute of Limitations Period Set by A/E Contract and Statute Applies to Owner’s Fraudulent Misrepresentation Claim against Architect
A4 - Economic Loss Doctrine Does Not Apply to Negligent Misrepresentation Claims

Article 1

Plaintiff Has Right to Sue Subcontractor When Prime Becomes Insolvent

See similar articles: Subcontract Claims | Warranty of Habitability

Where a condominium association filed suit against the general contractor for breach of implied warranty of habitability due to alleged faulty construction, the contractor was determined by a court to be insolvent, and under state law this permitted the plaintiff to pursue its action directly against a masonry subcontractor that was allegedly responsible for the alleged faulty workmanship. Under Illinois law, an innocent purchaser may proceed on a claim for the breach of implied warranty against a subcontractor where the builder-vendor is insolvent. The warranty binds the subcontractor who did the defective work even though there was no privity of contract between the owner and the subcontractor. But the subcontractor is not bound by the warranty if the contractor is not insolvent. 1324 W. Pratt Condo Association v. Platt Construction Group, 997 N.E.2d 246 (Illinois 2013).

The litigation in this particular case turned on the question of whether the prime contractor was indeed “insolvent” even though it was legally still in “good standing” and had some limited assets. The court held that for purposes of determining whether a purchaser may proceed against a subcontractor on a breach of implied warranty of habitability claim, the court must look to whether the general contractor was insolvent. That “simply means that a party’s liabilities exceed the value of its assets, and that it has stopped paying debts in the ordinary course of business.” Once a plaintiff has met its burden of proving that the contractor is insolvent, it must file an amended complaint alleging the insolvency and seeking to proceed against the subcontractor. That was done in this case. The plaintiff was, therefore, entitled to pursue its case against the subcontractor on the merits.

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. 16, No. 3 (Mar 2014).

Article 2

Engineer Can be Sued for Breach of Warranty of Professional Services

See similar articles: Express Warranty | Fit for Intended Purpose | Professional Standard of Care

Pulte Homes sued the engineering firm that performed certain engineering and testing services for a building site on which it built a home. It alleged that the home developed structural problems after construction due to deficiencies in the engineer’s site work and testing. After resolving defects asserted by the homeowner through arbitration proceedings, Pulte filed suit against the engineer seeking to recover the damages it incurred with the homeowner. The theories of recovery, in addition to a basic negligence count, included a count based on the right to indemnity arising from breach of express or implied warranties. Pulte alleged that “S&ME expressly or impliedly warranted to Pulte that all work performed by them would be performed in a careful, diligent and workmanlike manner, and that any materials and/or services designed, supplied or sold by them for use on the project would be merchantable and fit for their intended or specific purpose.” In reviewing the contract language, the court agreed that it “includes language arguably in the nature of an express warranty.” Pulte Home Corp. v. S &ME, Inc., 2013 WL 4875077 (U.S. District Court, South Carolina, 2013). For a sample contract clause to disavow and avoid all warranties, read the comment at the conclusion of this article.

Breach of Warranty

The engineer argued the state law does not permit a cause of action for breach of warranty against a service provider. It is true that the courts in South Carolina had previously held that attorneys could not be sued for breach of express warranty to obtain a specific result. But the court said that was not applicable here because the services at issue are not legal services. “They are, instead, services relating to testing or preparation of land, a tangible things. Thus, the services at issue here may be more like … those where a product or some tangible items is involved, such as … architectural plans or specifications.” The court explained that existing case law only held that there could be no warranty of legal services to obtain a specific result but did not address warranties “of merchantability, workmanlike service, and/or fitness for a particular or intended purpose.”

For these reasons, the court denied the engineer’s motion to dismiss the warranty claim. The matter now will go to a jury to determine whether the engineer breached an express warranty.

Comment

Design Professionals should be careful in their contract language to avoid agreeing to warranties – particularly with language such as that referenced in this decision concerning “merchantability, workmanlike service, and/or fitness for a particular or intended purpose.” It is important to limit the design professional’s responsibility to meeting the requisite professional standard of care. When the client of the design firm is a general contractor, a design-builder, or a home-builder, those entities are more inclined to attempt to insert warranties into the design professional contract. The designer needs to look beyond just the standard of care clause in its contract, and strike out all such express and implied warranty language.

Some design professional contracts I review contain so many blatant or hidden warranties buried throughout the fine print of the Agreement that I have found it necessary to create a catch all clause to attempt to disavow all warranties, just in case one slips through the cracks even after we have attempted to find and delete them all. A clause that I use for this purpose is as follows:

“Standard of Care. Notwithstanding any clause in this Agreement to the contrary, Consultant expressly disclaims all express or implied warranties and guarantees with respect to the performance of professional services, and it is agreed that the quality of such services shall be judged solely as to whether Consultant performed its services consistent with the professional skill and care ordinarily provided by firms practicing in the same or similar locality under the same or similar circumstances. Nothing in this Agreement shall be construed to establish a fiduciary relationship between the parties.”

Article 3

Accrual Date for Statute of Limitations Period Set by A/E Contract and Statute Applies to Owner’s Fraudulent Misrepresentation Claim against Architect

See similar articles: Fraud | Statute of Limitations | Time Limitations

School District filed suit against its architect for fraudulent misrepresentation following subsidence of a coal mine beneath a school building. The factual dispute was whether the architect had provided sufficient notice to the school concerning the site conditions and the possibility of future subsidence. The applicable contract was the American Institute of Architects (AIA) “Standard Form of Agreement Between Owner and Architect.”

The Engineer filed a motion to dismiss the Owner’s claims because the period of time under the statute of limitations for filing suit had lapsed if it were measured from the date of Substantial Completion as stated in the contract. If, however, the normal “discovery” rule for learning of one’s alleged right to file suit were applied, the Owner might have had longer to file suit. The court determined the date of Substantial Completion and applied the contract language to judge the period by which the District had to file suit against the Architect. It granted summary judgment to the architect based on the running of the statute of limitations.

This was affirmed on appeal, with the appellate court not only applying the contract language but also rejecting the school district’s argument that there was no statute of limitations period for fraudulent misrepresentation claims. The court affirmed summary judgment for the architect. Gillespie Community Unit School District v. Wight & Company, 2104 Il 115330 (Illinois, 2014).

Comment: Rather than leaving it up to a court to determine from factual circumstances the date on which the statute of limitations should begin to run, it can alleviate a lot of headache and confusion to specify the date in the contract itself. That is what is accomplished by the AIA contract language that establishes the date of substantial completion as the date for measuring the statute of limitations period. This can avoid unnecessary arguments later on over whether or not the statue of limitations bars an action.

Article 4

Economic Loss Doctrine Does Not Apply to Negligent Misrepresentation Claims

See similar articles: Economic Loss Doctrine | Negligent Misrepresentation

Contractor asked the court to apply the economic loss doctrine to dismiss an action that alleged negligent misrepresentation concerning the contractor’s services to construct a pre-engineered building to serve as a personal and business location, and to do so in a timely manner and meet or exceed all industry standards. The written contract was between the contractor and the individuals that owned the property. The suit against the contractor, however, was brought by the business entity (LLC) that the individuals owned. Thus, the LLC itself did not have a contract with the builder. Only the individuals were under contract. In declining to apply the economic loss doctrine to dismiss the case by the LLC, the court held that the doctrine only applies where parties are in privity of contract with each other. Rinehart v. Morton Buildings, Inc., 305 P.3d 622 (Kansas 2013).

The Plaintiff sought over $218,000 in economic damages for shop rent at an alternative facility, as well as lost production, relocation costs, and interest expense on its line of credit. The jury found in the plaintiff’s favor for about $149,000. The builder appealed, arguing that the economic loss doctrine barred the negligent misrepresentation claim. It also argued that the doctrine should apply because the plaintiff had an opportunity to bargain for contractual protections. It was not explained how that could have occurred since there was no contract between the LLC and the Builder. Perhaps, what was meant was the individual people with whom the Builder contracted could have negotiated protections for the LLC.

The appellate court affirmed the lower court determination that the economic loss doctrine was inapplicable. But the court based its decision on the nature of the negligence misrepresentation tort, which has its own scope-of-liability limits. The court stated that a jury found that the Builder misrepresented that the building would be completed in a timely fashion and meet or exceed industry standards. And the court explained that the elements of a negligent misrepresentation claim restrict liability by imposing legal duty only in limited circumstances—when a defendant supplies information to guide others in business transactions in the course of that defendant's business. “In other words, this tort confines the universe of potential claimants to those for whose benefit the defendant supplied the information and whom the defendant intended to influence.”

The court stated that it is important to note that in the elements required for a plaintiff to prove entitlement to recover for negligent misrepresentation “we do not require privity of contract as an element for this cause of action, nor have we said the existence of contractual privity bars the tort.” The court went on to state: “We hold negligent misrepresentation claims are not subject to the economic loss doctrine because the duty at issue arises by operation of law and the doctrine's purposes are not furthered by its application under these circumstances”.

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ConstructionRisk.com Report (March 2014)