E-Alert Case Updates
Economic Loss Rule Bars Recovery by Contractor from Project Designer of a Public Construction Project
Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP
Available at: http://www.mdcourts.gov/opinions/cosa/2016/0496s14.pdf
In a recent opinion, the Court of Special Appeals reiterated the principles of the economic loss rule and held that a contractor could not recover purely economic losses stemming from a public construction project from the engineering firm which designed the project.
In October 2009, the City of Baltimore entered into a contract with Rummel Klepper & Kahl, LLP (“RK&K”), a design engineering firm, to design two (2) projects to upgrade the Patapsco Wastewater Treatment Plant. Under the contract, RK&K was responsible for preparing the specifications of the upgrades, setting a timeline for construction, assisting the City in selecting a general contractor, reviewing the contractor’s work during construction, and certifying the contractor’s work to the City at the completion of the construction. After RK&K had completed its design of the upgrades, the City solicited bids for general contractors to oversee construction of the projects as designed by RK&K. Ultimately, the predecessor to Balfour Beatty Infrastructure, Inc. (“BBII”) was selected to be the general contractor, and the City entered into a contract with BBII confirming that it would arrange for the construction of the upgrades. Although both RK&K and BBII had contracts with the City relating to the same project, there was no contract between the two companies themselves.
BBII began work on the upgrades. In the course of construction, however, BBII discovered that certain joints connecting wastewater tubs to pipe systems were leaking. RK&K specifically designed the joints to expand and contract, but BBII determined that the expansion and contraction was, in fact, the cause of the leaks. Moreover, BBII discovered that RK&K’s design for a pipe system was defective, and that RK&K had not set a reasonable timeline on certain related projects, which delayed the completion of BBII’s work.
As a result of RK&K’s actions, BBII sustained substantial economic losses. Consequently, BBII sued RK&K, asserting claims for: (1) professional negligence; (2) violation of Restatement (Second) Torts § 552 (“Information Negligently Supplied for the Guidance of Others”); and (3) negligent misrepresentation. As to its claim for professional negligence, BBII alleged that it was reasonably foreseeable that BBII would rely on RK&K’s designs and, therefore, that there was an “intimate nexus between [RK&K’s] design and [BBII’s] work” as well as the equivalent of contractual privity between the parties. In breach of the duty RK&K owed to BBII as a result of the privity equivalent, BBII alleged that RK&K failed to design the project in a manner in keeping with the standards of the engineering profession. As to its claim under Restatement (Second) Torts § 552, BBII alleged that it suffered damages as a result of RK&K’s failure to exercise reasonable care in communicating the design of the project. Finally, as to its claim for negligent misrepresentation, BBII again alleged that the nature of the project was such that there was an intimate nexus between RK&K and BBII, and that RK&K negligently misrepresented the completion date of BBII’s work, causing BBII to suffer damages.
RK&K moved to dismiss for failure to state a claim, arguing that it owed no duty to BBII under the economic loss rule. According to RK&K, in absence of contractual privity, death or personal injury, or a risk of death or personal injury, an architect or engineer does not owe a duty of care to a contractor for economic losses. In this case, in the absence of a contract or a professional/client relationship between the parties, RK&K argued that it owed no duty to BBII. BBII opposed the motion, contending that the economic loss rule applies to products liability claims and does not shield a party for professional malpractice. After a hearing, the Circuit Court granted RK&K’s motion. BBII appealed.
On appeal, Judge Leahy, writing for the Court of Special Appeals, affirmed the Circuit Court’s ruling. The Court began by discussing the economic loss rule. Under the general statement of the rule, “a party cannot recover against another in tort where the resulting harm is purely economic loss and the parties have no contract between them.” Nevertheless, Maryland has recognized several exceptions to the rule. Under the first exception, the duty that builders and architects have to design and build reasonably safe structures extends to any person who is “foreseeably subjected to the risk of personal injury because of a latent and unreasonably dangerous condition.” If such a condition is discovered, a person to whom the duty is owed may recover their economic losses in repairing the condition, even if no death or personal injury has occurred. In this case, however, there was no allegation that RK&K’s design presented a risk of personal injury or death, and thus this exception to the economic loss rule was inapplicable.
More relevant to the circumstances of this case, the Court noted that, if a party can establish that there is a “privity equivalent” between itself and another, the party may maintain a tort action for purely economic losses. There is a privity equivalent where there is an “intimate nexus” between the parties such that their relationship approaches the point of contractual privity. Thus, Maryland courts have held that there is an intimate nexus between a bank and its clients, a title company and a purchaser of real property, and an accounting firm and a third-party investor. In general, in such relationships, one party is dependent on the expertise of a professional, and the party with expertise knows that the other party is depending on their exercise of reasonable care.
The Court noted, however, that Maryland courts had never addressed whether there was a privity equivalent between a construction contractor and an architect or engineer. After a thorough review of cases from other jurisdictions, the Court concluded that there was not an intimate nexus between the parties, and thus no privity equivalent. Of particular import to the Court’s decision was the doctrine established by the Supreme Court in United States v. Spearin, 248 U.S. 132 (1918), which holds that a government building contractor can normally recover its economic losses from the government itself for the contractor’s reliance on defective designs supplied by the government. Moreover, the Court was persuaded that the practices of the construction industry provided a sufficient opportunity for a party to manage its economic risks through contractual agreements. As a result, the Court held that the privity equivalent exception to the economic loss rule did not apply “in an action for professional negligence against a design professional by a contractor seeking purely economic damages on a public construction project.”1 Because, consequently, RK&K owed no duty to BBII, BBII had failed to state a claim for professional negligence.
For a similar reason, the Court held that BBII’s claim under Restatement (Second) Torts § 552 was also invalid. According to the Court, Restatement § 552 was “an alternative means of satisfying the intimate nexus test” applicable where a professional supplies information with reason to know that another party will rely on that information. Nevertheless, this case did not involve a professional and a lay person. Instead, it involved two professionals, each of which negotiated contracts with full understanding of the City’s process in arranging public construction contracts. As a result, the logic underpinning § 552 simply was not applicable here. Consequently, BBII had failed to state a claim in this regard.
Finally, the Court addressed, and rejected, BBII’s argument that it had stated a claim for negligent misrepresentation. The Court noted that, as for claims of economic loss related to professional negligence, “[f]or claims of economic loss based on negligent misrepresentation, the injured party must demonstrate it had an ‘intimate nexus’ relationship with the defendant.” As a result, BBII would have to show there was a privity equivalent or that Restatement (Second) Torts § 552 applied as between it and RK&K. Because the Court had already rejected BBII’s contentions in those regards, it concluded that BBII had also failed to state a claim for negligent misrepresentation, and it affirmed the decision of the Circuit Court.
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