Inside this Issue

A1 - Contractor based its Bid on a Design-Build Project on an Erroneous Low Quote from Equipment Supplier whom it then Sued for Detrimental Reliance, Negligence and negligent misrepresentation
A2 - Design Professionals in Arizona no Longer Owe Duty to Third Parties for Economic Loss
A3 - Arbitration Demand may be filed after Statute of Limitations Period for Filing Litigation (Maryland Law)

Article 1

Contractor based its Bid on a Design-Build Project on an Erroneous Low Quote from Equipment Supplier whom it then Sued for Detrimental Reliance, Negligence and negligent misrepresentation

See similar articles: Design-Build | detrimental reliance | low bid

Almost a $1 million judgment was granted for the Design-Builder against its subcontractor and also against its design professional. On appeal, the court sustained the judgment, holding that the design-builder acted in detrimental reliance on the low bid, and that the design professional was negligent in failing to advise the design-builder that the bid was grossly low. Alfred Conhagen, Inc. v. Ruhrpumpen, Inc. , 338 So.3d 55 (2022).

According to trial testimony Healtheon was putting together a design-build proposal for NASA for a pump installation project. Healtheon approached Conhagen to be the mechanical subcontractor for the project. In turn, Conhagen recommended Nelson to be a design professional. As a result, the design-builder entered into a teaming agreement with Nelson, for design engineering services.

Nelson's design professional role evolved into reviewing the pump packages and pricing. An equipment supplier named Ruhrpumpen submitted what seemed like a very low subcontract bid for certain important equipment. In addition to the low quote from Ruhrpumpen, the team also received higher quotes from two other firms. The engineer asked a number of questions of Ruhrpumpen to confirm the veracity of its quote. Subsequently, the engineer advised the design-builder that this quote was the only one that matched the desired specifications and that this justified the price disparity.

At some point, the day before the design-bid proposal was due to be submitted to the project owner, the engineer was apparently so concerned about the low equipment bid that it asked Ruhrpumpen to provide a cost breakdown by component. Ruhrpumpen responded that they didn’t want to do that because they did not have any firm quotes and the price could change. The engineer failed to forward this information to the design-builder.

After the contract was awarded to the design-builder, it sent a notice of intent to contract with Conhagen. Conhagen had based its pricing in part on the low equipment quote from Ruhrpumpen. After the award to Conhagen, Ruhrpumpen began receiving buyout quotes for parts of its equipment package, and these were much higher than it had quoted to Conhagen. But rather than notify the team of a major price discrepancy, Ruhrpumpen remained silent and continued with the project. After multiple requests for a final quote, on July 28, 2014, Ruhrpumpen falsely represented to Conhagen that it had not received any buyout quotes from the vendors. In early August, it informed Conhagen that it would advise if there was a problem with the final quote. However, Ruhrpumpen never notified Conhagen with any issues concerning the final quote. Finally, a month later, Ruhrpumpen submitted a second quote in the amount of $1,793,360.00, a difference in $1,058,880.00 from the first quote.

The court found that Ruhrpumpen should have expected Conhagen to receive and rely upon their budget quote. The Court found that Conhagen was a member of a limited group for whose benefit and guidance the quote was composed to guide. As discussed, Nelson, the design engineer, obtained the quote for the benefit of Conhagen, the mechanical subcontractor, and Healtheon, the general contractor, to assist with the design-build proposal to NASA. Moreover, Ruhrpumpen proceeded with discussions and e-mail communications with Conhagen after submitting its proposal without expressing any confusion or surprise.

The quote was prepared in the context of a design-build project. While Ruhrpumpen did not receive immediate compensation for preparing the quote, it had a substantial pecuniary interest in being selected as the supplier of the pump equipment because a substantial purchase order would follow.

Conhagen was a foreseeable third party who was “expected to receive and rely upon the contents” of the quote in the context of a design-build construction project, where obtaining correct quotes from potential sub-contractors is crucial. Under these circumstances, extending liability would serve public policy.

“Relying on the incorrect quote, Conhagen grossly underbid the project proposal to [the design-builder]. As a result, Conhagen suffered damages because it had to build the pump, which cost almost one million dollars more than what Ruhrpumpen initially quoted. Ruhrpumpen and its employees negligently, if not intentionally, communicated inaccurate and misleading information in its budget quote. Moreover, Ruhrpumpen failed to exercise competence in ensuring the quote obtained matched the specifications for two of the three major components required for the project. Further, upon receiving the buy-out quotes at much higher prices, Ruhrpumpen failed to communicate any potential problems with its quote to Conhagen. Instead, Ruhrpumpen maintained they were still waiting on the buyout quotes from the vendors. Conhagen's reliance on the grossly incorrect quote was justified and caused harm.”

“Conhagen relied on Nelson's engineering expertise to determine what pump package was best for the job. Nelson believed Ruhrpumpen's bid to be suspect, yet it remained silent in its meetings with Conhagen about any concerns. Specifically, Nelson assuaged Conhagen's concerns about the disparity in pricing by explaining that Ruhrpumpen's package was the only package with the applicable components as stated in the initial specifications. More concerning, Ruhrpumpen communicated directly to Nelson that its prices could change the day the bid was submitted, yet Nelson never relayed that information to Conhagen.”

In light of its professional duty to warn, the engineer was held by the court to have “committed such a common-sense infraction when it failed to warn Conhagen of its concerns regarding a potential price increase, which caused Conhagen damages,” that no expert testimony was needed to demonstrate negligence. “Given the foregoing circumstances, we find that Conhagen met its burden of proving Nelson's negligence.”

Comment: Even in cases where the design subconsultant to the design-builder are not deemed to have violated common-sense standard of care requirements as happened in this case, we are finding an inordinate number of claims by design-builders against their subcontractors and subconsultants, in an attempt to recover costs they cannot recover from the project owners under the guaranteed maximum price contracts. Depending upon who you ask, it seems that over 70 percent of design-build contracts end up with claims being made by the design-builder against is design subconsultant. This has become an increasingly risk busy model for designers to pursue.

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 7 (August 2022).

Article 2

Design Professionals in Arizona no Longer Owe Duty to Third Parties for Economic Loss

See similar articles: Arizona | Duty of Care | Economic Loss | Third Party

In an important decision, the Supreme Court of Arizona held that design professionals that lack privity of contract with project owners owe no duty to reimburse those owners for purely economic losses. This is a reversal of the 1984 decision in Donnelly Construction v. Oberg/Hunt/Gilleand, which held that a design professional’s duty to use the generally accepted standard of care extended to persons foreseeably affected by a breach of the design professional’s duty to its client. In this particular case the designer in question was working for a design-build contractor. In performing its survey of the property, the designer erred in its placement of property location stakes and this resulted in the building being constructed several feet north of its planned location – and this caused the Owner economic loss in that eight planned RV parking spaces near the building had to be eliminated. Foreseeability of injury is no longer a test to be exercised in Arizona in determining the design professional’s duty to third parties. Cal-Am Properties, Inc. v. Edais Engineering, Inc., No. CV-21-0929-PR (2022).

The court explained:

“In Donnelly, we held that “[d]esign professionals have a duty to use ordinary skill, care, and diligence in rendering their professional services” and confirmed that such liability extends to “foreseeable injuries to foreseeable victims which proximately result from . . . negligent performance of their professional services.” 139 Ariz. at 187–88. In other words, the potential liability of design professionals, such as land surveyors, for negligence extended not only to the entity who contracted them, but to other foreseeable plaintiffs which may include property or project owners.”

“Donnelly’s holding controlled on the existence of such a duty until our decision in Gipson. There, we held that “foreseeability is not a factor to be considered by courts when making determinations of duty” and we “reject[ed] any contrary suggestion in prior opinions.” Gipson, 214 Ariz. at 144 ¶ 15. We have since clarified that “[p]ost-Gipson, to the extent our prior cases relied on foreseeability to determine duty, they are no longer valid.” Quiroz, 243 Ariz. at 565 ¶ 12. Indeed, we have noted repeatedly that Donnelly employed the now-rejected foreseeability framework.”

The court expressly rejected the precedent set by courts in other states because “Most of these jurisdictions rely on foreseeability….” In this case, the court stated that no contractual or familial relationship existed between the project owner and the design subcontractor. “No liability exists where, as here, parts of an overall enterprise were organized by another entity and the defendant’s relevant undertaking was with and for that entity. Thus, no 'special relationship' gives rise to a duty in this case.”

The court also rejected the project owner’s arguments that state statutes and regulations governing qualification and minimum standards for design professionals establish a duty. The purpose of such statutes, says the court are “to provide for the safety, health and welfare of the public.” This particular case does not involve anything other than purely economic damages. The court stated:

“The statutes and regulations governing surveyors and similar professionals were not designed to protect plaintiffs like Cal-Am—project owners—from purely economic harm. Instead, their purpose is to protect the safety, health, and welfare of individuals who enter the buildings and structures, which regulated professionals construct and maintain, from injury resulting from poor workmanship.”

The decision went on to also reject arguments that the Restatement (Third) of Torts: Liability for Economic Harm applied to create a duty owed by the professional to a third party. The court concluded:

“Our holding does not render Cal-Am or similarly situated plaintiffs devoid of a remedy. In general, when a project owner is economically harmed due to a subcontractor’s negligence, it “is viewed just as a failure in the performance of [the subcontractor’s] obligations to its contractual partner, not as a breach of duty in tort to . . . the owner of the project.” Restatement (Third) Torts, § 6 cmt. b. The remedies available to the project owner sound in contract, not tort.”

Comment: This is an important win for design professionals. We can only hope states that have been finding design professionals liable for economic losses incurred by third parties may in the future see the wisdom of this decision and adopt its sound reasoning. Project owners can recover from the design-builders or contractors that are under direct contract with them, and they have no need to attempt a tort action against a design subconsultant.

Article 3

Arbitration Demand may be filed after Statute of Limitations Period for Filing Litigation (Maryland Law)

See similar articles: Arbitration | Statute of Limitations

Where arbitration demand was filed later than a lawsuit could have been filed, the defendant asked the court to dismiss the arbitration as untimely filed. Court held that the Maryland statute of limitations applied only to actions filed in courts and that because the contract between the parties didn’t specify a deadline for filing arbitration, the court had no jurisdiction to impose a statute of limitations period on the action. Park Plus, Inc. v. Palisades of Towson, LLC, Maryland Court of Appeals (2021).

In this important decision by the highest appellate court in Maryland, the court held that the statute of limitations statute did not apply to arbitration proceedings. According to a lengthy court decision analyzing the history and purpose of the state statute, the court explained that the statute applied only to set legal deadlines for filing case in court.

In this particular case, the contract between the real estate developer and its contractor called for arbitration but did not specify American Arbitration Association (AAA) arbitration. No procedures were established for filing the arbitration or for conducting arbitration. The parties therefore had to depend upon each other to cooperate in the efforts to arbitrate.

The developer sought to arbitrate but the contractor, although initially agreeing to arbitrate, subsequently stalled and stalled. A little over three years after the cause of action arose, the developer finally filed suit asking the court to mandate that the parties arbitrate. At some point, even as the contractor argued that the statute of limitations had lapsed, the parties went forward with arbitration. The arbitrator awarded over $3 million to the developer.

The contractor then filed another action in court asking the court to throw out the arbitration decision based on the supposed lapse in the statute of limitations period. Both the trial and appellate courts found that the courts could not dismiss the arbitration decision. The appellate court explained the limited role of courts to review and reverse arbitration decisions. It then explained that the Maryland statute of limitations on its face didn’t apply to arbitration proceedings.

According to the court, the only way in Maryland to limit how long a party has to file a demand for arbitration is to specify that time limit in the contract itself. The courts in Maryland honor the contractual intent identified by the parties. Where no limitation is stated, the courts will not create one.

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