Most construction cases deal with contract law, not tort law. The difference between contract law and tort law is the subject of many legal articles and is beyond the scope of this blog. In simple terms, contract law is based on enforceable written or verbal agreements, whereas tort law stems from some type of “personal wrong” committed, such as negligence. Contract damages give the non-breaching party the “benefit of the bargain.” Tort damages are assessed on the basis of loss suffered as a result of the negligent act (for non-personal injuries at least). The Economic Loss Rule, now dubbed the “Independent Loss Rule” in the state of Washington (See A+C blog dated April 24, 2012) generally prohibits both contract and tort theories from being raised in a construction lawsuit.
A recent California case of Martin A. Torres v. Seaberg Construction, C062830, 2011 WL 4844690 (Cal. Ct. App. Oct. 12, 2011), illustrates a case in which both contract and tort actions were allowed.
Seaberg Construction (“Seaberg”) was the general contractor on a private cost-plus development of a commercial building. Seaberg was responsible for awarding subcontracts, inspecting and approving the work of subcontractors, as well as reviewing invoices and forwarding those costs to the owner for payment. Torres General Engineering (“Torres”) contracted with Seaberg on a time and materials basis to furnish installation of water, sewer and fire suppression lines. During construction, Torres, having been paid in full on a number of invoices, began to receive inquires from the owner regarding its time records and equipment charges. The owner then refused to pay the invoices. Torres went out of business and ultimately sued Seaberg for breach of contract and sued the owner for “tortious interference with its contract.” (Tortious interference is an action based on a third party “outsider” who has “no legitimate social or economic interest in the contractual relationship but interferes in that relationship” can be liable for tortious interference).
The California court found in favor of Torres awarding it $450,000 on its claim against Seaberg and special damages against the owner in the amount of $306,000, due to the owner’s interference with Torres’ subcontract with Seaberg. The owner appealed the verdict, asking the court whether an owner of a construction project could be liable to a subcontractor for “tortious interference with contract.”
The appellate court in California found that a claim for tortious interference with contract has merit if the non-contracting party or “stranger to the contract” (in this instance, the owner had no contract with Seaberg) intentionally interferes with the performance of a contract or prospective contract. Intentional interference requires an intermeddling that is both intentional and improper. The court concluded on the facts presented at trial that the owner’s behavior in this case, disapproving time and expense reports that had been approved by the general contractor Seaberg, was both improper and intentional interference with Torres’ subcontract. The court based its ruling on the fact that (1) there was no evidence that Torres made any errors in its invoices; and (2) the general contractor Seaberg, in accordance with the owner’s contract had the exclusive obligation and authority to review and approve invoices. Thus, the court concluded that the owner had no contractual authority to question, review or deny invoices approved by Seaberg and had no authority to refuse payment. The owner was not authorized to insert itself between Seaberg and Torres by refusing payments.
Comment: Tortious interference cases are not a litigation panacea, they are generally difficult to prove. In this case, a dissenting judge wrote an opinion which would likely sway courts in other states. If a stranger to the contractor is an “outsider” who has “no legitimate social or economic interest in the contractual relationship” then by definition, the owner is not such an “outsider” since the owner has a clear economic interest in the subcontract (as well as the time and material invoices), and therefore, could not possibly be a stranger. In this instance, the subcontractor found a way around the lack of privity with the owner by proving that the owner was liable to it under a tort theory. This result is particularly puzzling since there is no indication in the opinion that the court considered an owner’s right and obligation to review costs submitted to it for the project, under its cost-plus agreement with the general contractor.