When confronted with extra costs on construction projects caused by architects and engineers who were hired by the owner (and have no contract with the contractor), contractors are generally inclined to seek direct recourse against the perceived wrongdoers. Generally, unless there is some personal injury or property damage involved, however, the “economic loss rule” precludes the contractor from suing an entity with whom it lacks privity of contract.
We have reported cases involving the economic loss rule in Washington and the new “independent duty doctrine” in previous posts. Court Reaffirms Economic Loss Rule. WA Supreme Court Muddies the Waters of Economic Loss Rule. Not All Fraud Claims Barred by Economic Loss Rule.
Recently, relying on the “economic loss rule,” the Nevada Supreme Court barred a suit by a subcontractor against a structural engineer for negligent misrepresentation and professional negligence.[1]
- A. New Harmon Hotel in Las Vegas to be Razed
This dispute arises out of the litigation involving the ill-fated 46-story hotel and casino in Las Vegas called the Harmon Hotel. Construction of the Harmon Hotel was halted when parties discovered flawed steel reinforcements in the hotel structure. The rebar had been improperly installed in places and was simply missing in several areas, and ultimately the hotel has to be demolished.
The contractor, Tutor Perini Building Corporation (“Tutor Perini”)[2], and the owner, MGM, filed suit against each other over responsibility for the expected $500 million loss. Trial is scheduled for later in 2014. In August 2013, the Clark County District Court granted MGM’s request to raze the partially-built structure prior to trial. Tutor Perini had opposed this request, arguing that it needed to carry out additional tests on the structure to help prove its case.
- B. General Contractor Sues Rebar Installer and Rebar Installer Sues Structural Engineer
As part of the lawsuit against MGM, Tutor Perini sought indemnity from its rebar installation subcontractor, Pacific Coast Steel (“PCS”). PCS, in turn, filed a complaint against the project’s structural engineer, Halcrow, Inc., for professional negligence. Halcrow was a subconsultant to the architect of record and had no contract with either Tutor Perini or PCS. The Nevada trial court ruled that the economic loss rule barred PCS’s professional negligence claim against Halcrow, but allowed PCS to amend its complaint by adding a claim against Halcrow for negligently misrepresenting the status of its site inspections and on-site adjustments to the steel installation. PCS claimed that the reinforcing steel was omitted due, in part, to Halcrow’s negligent inspections of the steel and its recommendations as to how to correct the reinforcing steel issue.
Negligent misrepresentation refers to false statements made, in this instance, by the engineer in the course of his or her work that are relied upon by another party in making business decisions. This allegation is different from a professional negligence claim that the licensed architect or engineer failed to exercise the care that a reasonably prudent, similarly situated professional would exercise under similar circumstances.
- C. Nevada Supreme Court Does Not Permit Subcontractor Suit Against Designer
The engineer, Halcrow, petitioned the Nevada Supreme Court to reverse the trial court ruling that allowed PCS to amend its complaint to add a claim against Halcrow. Halcrow asserted that the negligent misrepresentation claims were also barred by the economic loss doctrine. PCS maintained that an exception to the economic loss doctrine existed here because (1) Halcrow owed PCS a duty to act with reasonable care in communicating information to PCS about the steel installation, (2) Halcrow failed to conduct timely inspections in accordance with the representations that inspections would take place, and (3) Halcrow erroneously stated that on-site adjustments would rectify the errors in its plans. PCS asserted that, since it relied on Halcrow’s representations regarding the steel installation inspection correction process, Halcrow should be held liable.
The Nevada Supreme Court ruled that allowing third parties to use negligent misrepresentation tort theory against design professionals without allowing them to sue for professional negligence would essentially nullify the economic loss rule. The court reasoned that such a rule would allow any third party to recast a barred professional negligence claim as a negligent misrepresentation claim. The court acknowledged that there are certain exceptions to the economic loss rule, but negligent misrepresentation claims do not fall in such a category because “contract law is better suited” for resolving such claims.
Ultimately, the court, reiterated the importance of relying on contract law to resolve complex commercial construction disputes:
The parties’ disappointed economic expectations are better determined by looking to the parties’ intentions expressed in their agreements…. Thus, requiring parties that are not in direct privity with one another but involved in a network of interrelated contracts to rely upon that network of contracts ensures that all parties to a complex project have a remedy and maintains the important distinction between contract and tort law.[3]
In other words, contract remedies (breach of contract) are preferred over tort remedies (professional negligence and negligent misrepresentation) in construction cases because the outcome is more predictable and the remedies can be negotiated as part of the contract bargaining process.
Comment: PCS’s success on the merits of its amended complaint is difficult to envision. How failing to conduct timely inspections could constitute negligent misrepresentation is confounding. The dispute revolves around allegedly defectively installed rebar, and the rebar supplier will ultimately be brought into the suit by those parties with which it contracted. MGM, for example, has the option of filing a third-party complaint against the architect, who can then in turn bring in the structural engineer. Although Halcrow might be dismissed from this action, it will probably become part of the lawsuit that is scheduled to occur later this year.
[1] Halcrow, Inc. v. Eighth Judicial District Court of the State of Nevada, 302 P.3d 1148 (2013).
[2] Tutor is also a member of the Seattle Tunnel Partners joint venture, which is the general contractor for the SR-99 Alaskan Way Viaduct Replacement Project here in Washington.
[3] Halcrow, 302 P.3d at 1153 (internal quotations omitted).