BALFOUR BEATTY INFRASTRUCTURE, INC. v. RUMMEL KLEPPER & KAHL, LLP
No. 14, Sept. Term, 2016
Court of Appeals of Maryland.
February 21, 2017
155 A.3d 445
John A. King (Patrick James Attridge, Ronan A. Geronimo, King & Attridge, Rockville, MD), on brief, for respondent.
Jonathan C. Shoemaker, Lee & McShane, PC, Washington, DC, Amicus Curiae for the American Council of Engineering Companies of Maryland, the American Council of Engineering Companies of Virginia, the American Council of Engineering Companies, the Society of Civil Engineers, the American Institute of Architects, the Maryland Society of Professional Engineers and the National Society of Professional Engineers.
Barbera, C.J., Greene, Adkins, McDonald, Watts, Getty and Lynne A. Battaglia (Senior Judge, Specially Assigned), JJ.
Adkins, J.
In this appeal we revisit the elusive economic loss doctrine, to decide whether to extend a duty in tort to persons not in privity for the recovery of purely economic losses. Petitioner, a general contractor who successfully bid for work on a City of Baltimore construction project, argues that Respondent, the project‘s design engineering firm, owes it a tort duty of care because Respondent knew that Petitioner would rely on its designs in bidding and constructing the project. We shall hold, that, in the absence of contractual privity, physical injury, or risk of physical injury, design professionals in large government construction projects do not owe a tort duty to those who bid for and contract with a government entity.
FACTS AND LEGAL PROCEEDINGS
The City of Baltimore (“City“) contracted with Rummel Klepper & Kahl, LLP (“Engineer“) to design upgrades to the Patapsco Wastewater Treatment Plant. Under the contract, Engineer was tasked with designing the plans for two interrelated projects, Sanitary Contract 852R (“SC 852R“) and Sanitary Contract 845R (“the companion project“).1 According to Balfour Beatty Infrastructure, Inc.‘s (“Contractor“) complaint, Engineer‘s responsibilities under the contract included:
- Developing the design for SC 852R and its companion project;
- Developing drawings and specifications for prospective contractors to use when submitting bids and for the successful contractor to use for construction;
- Developing construction timetables for the projects;
- Providing responses to questions from prospective bidders regarding the design of the projects;
- Evaluating and commenting on contractors’ bids;
-
Evaluating and approving submissions from the successful contractor during construction; - Inspecting the successful contractor‘s work during construction to ensure conformance with Engineer‘s design; and
- Evaluating and accepting the successful contractor‘s work and certifying the work to the City.
The City opened both projects up to bids through its competitive bidding process.2 Contractors that submitted bids had to be prequalified as being able to complete the work required by the designs. Contractor3 was the successful bidder for SC 852R.4 Under its contract with the City, Contractor agreed to construct 34 denitrification filter cells (“DNF cells“), which are concrete tubs that hold untreated wastewater, next to the existing wastewater treatment facility. Contractor was also to construct “pipes and pipe support systems” for SC 852R. During construction, Contractor encountered leaking and other problems, which resulted in delays and cost overruns.
In 2014, Contractor filed a complaint against Engineer in the Circuit Court for Baltimore City seeking to recover its financial losses. According to Contractor‘s complaint, Engineer designed the DNF cells using expansion and contraction joints that were meant to accommodate changes in water pressure in the cells. On completion, the water retention ability of the DNF cells was tested. The testing revealed leaks due to cracks in the expansion joints. Contractor averred that it constructed the DNF cells according to Engineer‘s design, and any leaking from the expansion joints was a “direct result of deficiencies in [Engineer‘s] design.” It alleged “substantial additional costs, expenses and time to remediate the leaks.” Contractor also claimed that Engineer‘s “design of the pipe support system was defective,” which caused it to suffer additional financial losses and delays.
Finally, Contractor averred that Engineer failed to timely complete the design for SC 852R‘s companion project, which “hindered and delayed” Contractor‘s construction of SC 852R. Engineer also allegedly failed to warn SC 852R‘s prospective bidders of the delayed completion of the companion project‘s design and established an unreasonable time line for the completion of SC 852R, which Contractor relied on when submitting its bid. As a result, Contractor claimed, it “incurred significant cost, expense and time for which [Engineer] is responsible.”
In its three-count complaint against Engineer, Contractor brought a professional negligence claim, a negligent misrepresentation claim, and a cause of action based on
In its negligent misrepresentation claim, Contractor asserted that because Engineer designed the interrelated projects, it was aware that any delay in the design of the companion project would impact SC 852R. Contractor also claimed that Engineer intended prospective bidders like Contractor to rely on the time line it had developed for SC 852R when submitting bids for the project, and an intimate nexus and privity equivalent existed between it and Engineer, establishing a duty. In Contractor‘s words, Engineer owed it “a duty to fairly and accurately describe the contract duration for [SC 852R] as well as the status of the [companion project‘s] design.” In addition, Contractor alleged, Engineer knew that the companion project‘s design was not sufficiently complete to allow for timely completion of SC 852R. Therefore, Contractor claimed, Engineer had a duty to advise prospective bidders, including Contractor, that SC 852R could not be completed within the time frame it had established. Finally, in its
Engineer filed a motion to dismiss for failure to state a claim. In its motion, Engineer argued that without privity between the parties, no legally cognizable tort duty ran from Engineer to Contractor that would permit recovery of purely economic losses. Engineer also argued that the intimate nexus test and
The Circuit Court granted Engineer‘s motion to dismiss due to lack of privity between Contractor and Engineer. Contractor appealed. The Court of Special Appeals affirmed the dismissal of Contractor‘s complaint based on lack of privity. Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 226 Md. App. 420, 130 A.3d 1024 (2016). It held that the economic loss doctrine barred Contractor‘s negligence and negligent misrepresentation claims, and that privity equivalent concepts of extra-contractual duty did not apply in Contractor‘s case. Id. at 445, 452-53, 459-60, 130 A.3d 1024.
We granted Contractor‘s Petition for Writ of Certiorari to consider the following questions:5
- Does the economic loss doctrine bar a general contractor‘s professional negligence claim against a design professional on a government construction project under the privity-equivalent analysis of the intimate nexus test?
- Does the economic loss doctrine bar a general contractor‘s action for negligent misrepresentation against a design professional
on a government construction project? - Does the economic loss doctrine bar a general contractor‘s action under the
Restatement (Second) of Torts § 552 against a design professional on a government construction project?
Because we answer yes to all three questions and decline to apply the privity-equivalent component of the intimate nexus test, we shall affirm the judgment of the Court of Special Appeals.
STANDARD OF REVIEW
We review a trial court‘s grant of a motion to dismiss to determine whether it was legally correct. Kiriakos v. Phillips, 448 Md. 440, 454, 139 A.3d 1006 (2016) (citation omitted). In conducting this review, we assume that the facts and allegations in the complaint, and any inferences that may be drawn from them, are true and view them in a light most favorable to the non-moving party. Rounds v. Md.-Nat‘l Capital Park & Planning Comm‘n, 441 Md. 621, 636, 109 A.3d 639 (2015) (citation omitted). The Court does not, however, accept conclusory allegations and assertions containing insufficient facts as true. State Ctr., LLC v. Lexington Charles Ltd. P‘ship, 438 Md. 451, 497, 92 A.3d 400 (2014) (citation omitted). We only consider the well-pleaded facts to determine whether the complaint states a cause of action for which relief may be granted. Id.
DISCUSSION
Contractor‘s overarching contention is that the economic loss doctrine6 does not apply to its claims of professional negligence,
Engineer urges us to apply the economic loss doctrine, which is a principle courts have used to limit the expansion of tort liability absent privity. Engineer avers that under this doctrine there is no liability without privity when a plaintiff has suffered only economic loss without physical injury or risk thereof.
Professional Negligence
Contractor contends that Engineer is liable for damages it sustained under a
To establish a negligence claim, a plaintiff must allege facts showing that: (1) the defendant owes the plaintiff a duty of care; (2) the defendant breached that duty; (3) the plaintiff sustained an injury or loss; and (4) the defendant‘s breach of the duty was the proximate cause of the plaintiff‘s injury. 100 Inv. Ltd. P‘ship v. Columbia Town Ctr. Title Co., 430 Md. 197, 213, 60 A.3d 1 (2013) (citation omitted). In a negligence claim against a provider of professional services, the professional is held to the standard of care of his or her profession. See Schultz v. Bank of Am., N.A., 413 Md. 15, 28-29, 990 A.2d 1078 (2010). But without a duty of care, there is no liability in negligence. Walpert, Smullian & Blumenthal, P.A. v. Katz, 361 Md. 646, 666, 762 A.2d 582 (2000) (citations omitted).
Maryland defines “duty” as “an obligation to which the law will give effect and recognition to conform to a particular standard of conduct toward another.” Jacques v. First Nat‘l Bank of Md., 307 Md. 527, 532, 515 A.2d 756 (1986) (quoting J. Dooley, Modern Tort Law § 3.03, at 18-19 (1982, 1985 Cum. Supp.)). As Professors Prosser and Keeton have explained, duty is “an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is entitled to protection.” W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 53, at 358 (5th ed. 1984). “To determine whether a tort duty exists in a particular context, we examine: (1) ‘the nature of the harm likely to result from a failure to exercise due care,’ and (2) ‘the relationship that exists between the parties.‘” 100 Inv. Ltd. P‘ship, 430 Md. at 213-14, 60 A.3d 1 (quoting Jacques, 307 Md. at 534, 515 A.2d 756).
Privity, Tort Duty, and the Economic Loss Doctrine
The economic loss doctrine represents a judicial refusal to extend tort liability to negligence that causes purely economic harm in the absence of privity, physical injury, or risk of physical injury.8 See Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17, 403 P.2d 145, 150-51 (1965); East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 870-71, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1986)
We discussed the evolution of tort law and the economic loss doctrine in the construction context in Whiting-Turner. In that case, condominium owners brought a negligence suit against the general contractor and architect who constructed their condominiums, alleging that defectively constructed electrical ductwork had created a fire hazard, rendering the units uninhabitable.10 We recognized that
privity is not an absolute prerequisite to the existence of a tort duty in this type of case, and that the duty of builders and architects to use due care in the design, inspection, and construction of a building extends to those persons foreseeably subjected to the risk of personal injury because of a latent and unreasonably dangerous condition resulting from that negligence.
Whiting-Turner, 308 Md. at 22, 517 A.2d 336. Therefore, we concluded, the condominium owners could recover the reasonable cost of fixing the defective ductwork even without privity or actual physical harm. Id. at 35, 517 A.2d 336.
In reaching its holding, the Whiting-Turner Court discussed the traditional requirement
In its early development, the law relating to builders and architects generally held that their duty did not extend to those with whom they had no contractual privity. Gradually, however, exceptions to the general rule of nonliability were judicially recognized. Actions in negligence were permitted, for example, where the contractor had practiced fraud or deceit or had deliberately concealed defects in the work; where construction created a condition that was imminently or inherently dangerous; or where the contractor created a nuisance per se.
Id. at 24-25, 517 A.2d 336 (footnote omitted). Examining the gradual progression of tort law, the Court relied on Professors Harper, James, and Gray for their acknowledgment that in building and construction work “[t]he modern tendency has been to measure the scope of duty here by the same broad principles of negligence as are generally applied in the field of accidental injuries.” Id. at 26, 517 A.2d 336 (quoting 3 F. Harper, F. James & O. Gray, The Law of Torts § 18.5, at 708-10 (2d ed. 1986)). The Court concluded, “[T]he rule of nonliability...has now evolved into a general rule of liability where the result of negligence is the creation of a dangerous condition.” Id. at 27, 517 A.2d 336 (emphasis added). To explain this duty, it used the words of Professors Prosser and Keeton:
[T]he contractor is liable to all those who may foreseeably be injured by the structure, not only when he fails to disclose dangerous conditions known to him, but also when the work is negligently done. This applies not only to contractors doing original work, but also to those who make repairs, or install parts, as well as supervising architects and engineers. There may be liability for negligent design, as well as for negligent construction.
Id. at 27-28, 517 A.2d 336 (emphasis in original) (quoting W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 104A, at 723 (5th ed. 1984)). Therefore, the recovery of economic losses for the repair or remedy of defective conditions was permitted, provided it was necessary to prevent physical injury. In other words, the prospect of physical injury was sufficient to warrant imposing a tort duty in the absence of privity.
The Intimate Nexus Test
In cases where there were no safety concerns and the risk was purely economic, as in this case, the privity requirement did not erode so quickly or so far. Instead, in such cases we have refrained from finding a tort duty absent privity or its equivalent—i.e., an “intimate nexus.”11 Jacques, 307 Md. at 537, 515 A.2d 756; Walpert, 361 Md. at 681, 762 A.2d 582; see also 100 Inv. Ltd. P‘ship, 430 Md. at 219, 60 A.3d 1. Put differently, the intimate nexus test requires the relationship between the parties to be sufficiently close—or intimate—to support finding a tort duty. Jacques, 307 Md. at 535, 515 A.2d 756. In these cases, if an intimate nexus was established, a duty of care was owed, and the defendant could be held liable to the plaintiff for pecuniary losses. Id. at 534, 515 A.2d 756.
In Jacques—where we adopted the intimate nexus test—the Court ruled that a bank owed its customers a duty of reasonable care in processing a home loan application. In reaching its holding, the Court discussed two leading cases from the Court of Appeals of New York—Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), and Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931)—to determine whether an intimate nexus existed between the parties and, consequently, a duty of care was owed. Jacques, 307 Md. at 535-36, 515 A.2d 756. In Glanzer, the court permitted a bean purchaser to recover purely economic losses in tort from a public bean weigher even though the weigher‘s contract was with the bean seller. Glanzer held that the weigher owed a duty in tort to the purchaser because the sale of the beans was the end goal of the transaction, and, as a public weigher, in undertaking to weigh the beans he assumed a duty to do so with reasonable care. Glanzer, 135 N.E. at 276-77. In discussing Glanzer, the Jacques Court emphasized the nature of the contractual relationship between the seller and the weigher and that the weigher held itself out as “skilled and careful in its calling.” Jacques, 307 Md. at 535-36, 515 A.2d 756 (citing Glanzer, 135 N.E. at 276).
In Ultramares, on the other hand, the same court declined to impose a tort duty of care running from accountants to recipients of their audit reports for alleged negligent misrep-resentations in the reports. The Ultramares court reasoned that if it imposed a duty, a “thoughtless slip or blunder...may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Ultramares, 174 N.E. at 444. Distinguishing Glanzer, the Ultramares court reasoned that the “intimacy of the resulting nexus” between the weigher and the purchaser “was so close as to approach that of privity, if not [be] completely one with it,” which warranted finding a tort duty. Id. at 445-46. The court found that the accountants in Ultramares, by contrast, did not have such a relationship with the recipients of their audit reports. Id. at 446. The Jacques Court emphasized that even though the accountants were generally on notice that nonclients might rely on their audit reports, the relationship between them and the nonclients was not close enough to support finding an intimate nexus—and corresponding tort duty—like in Glanzer. Jacques, 307 Md. at 536, 515 A.2d 756.
The Jacques Court concluded:
As the magnitude of the risk increases, the requirement of privity is relaxed—thus justifying the imposition of a duty in favor of a large class of persons where the risk is of death or personal injury. Conversely, as the magnitude of the risk decreases, a closer relationship between the parties must be shown to support a tort duty. Therefore, if the risk created by negligent conduct is no greater than one of economic loss, generally no tort duty will be found absent a showing of privity or its equivalent.
Relying on Glanzer and Ultramares, the Jacques Court “examin[ed] carefully the relationship that existed between these parties” because “the harm likely to result from negligent processing of a loan application is limited to economic loss.” Id. at 535, 515 A.2d 756. The Court found that the relationship between the parties amounted to a contract because the bank agreed to process the customers’ loan application and “lock in” a specific interest rate in exchange for a processing fee. Id. at 537-38, 515 A.2d 756. This contract, the Court reasoned, included an implied promise
Based on Judge Cardozo‘s description of the defendants’ professions as a “public calling” in Glanzer and Ultramares, the Jacques Court also found relevant “the nature of the business of the party upon whom the burden is sought to be imposed.” Id. at 541, 515 A.2d 756. The Court emphasized the “public nature” of the bank. Id. at 542, 515 A.2d 756. It reasoned that the banking industry is “affected with the public interest” and banks and their officers have been “held to a high degree of integrity and responsiveness to their public calling,” which also supported finding a tort duty. Id.
Fourteen years later, in Walpert, an accountant liability case, we adopted the three-part test from Credit Alliance Corporation v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985), as one way to establish an intimate nexus between parties. Walpert, 361 Md. at 674, 762 A.2d 582. The Credit Alliance/Walpert test requires the plaintiff to show: (1) the accountants were aware that their financial reports were to be used for a particular purpose; (2) a known party was intended to rely on the reports; and (3) conduct linking the accountants to the party that demonstrates the accountants’ understanding of the party‘s reliance. Id. In adopting the test, we noted that the reason for requiring privity or its equivalent to impose tort liability is “to limit the defendant‘s risk exposure to an actually foreseeable extent, thus permitting a defendant to control the risk to which the defendant is exposed.” Id. at 671, 762 A.2d 582. After examining duty analyses from other jurisdictions, the Court concluded that the Credit Alliance test most closely reflected Maryland‘s policy concerns because it would “limit[] the unpredictable and unlimited nature of economic damages.” Id. at 675, 762 A.2d 582.
Initially, the Credit Alliance/Walpert test applied only to accountants, but we have since applied it to title examiners. See 100 Inv. Ltd. P‘ship, 430 Md. at 222, 60 A.3d 1. But Walpert is the only case in which we have used the test to find an intimate nexus between an individual and a third party not in privity.12 361 Md. at 693-94, 762 A.2d 582.
We have, however, considered whether there was an intimate nexus between parties without applying the Credit Alliance/Walpert test. We found that the parties’ relationship lacked an intimate nexus in the following cases: Blondell v. Littlepage, 413 Md. 96, 991 A.2d 80 (2010) (no tort duty owed by one attorney to another in joint representation); Remsburg v. Montgomery, 376 Md. 568, 831 A.2d 18 (2003) (leader of a hunting party owed property owners no duty of care); Jones v. Hyatt Ins. Agency, Inc., 356 Md. 639, 741 A.2d 1099 (1999) (insurance agent who failed to obtain insurance not liable to accident victim); Noble v. Bruce, 349 Md. 730, 709 A.2d 1264 (1998) (attorney not liable to non-client beneficiaries of a will); Erie Ins. Co. v. Chops, 322 Md. 79, 585 A.2d 232 (1991) (insurer‘s failure to comply with statutory duty to report lapse in motorist‘s coverage to the Motor Vehicle Administration did not render it liable to accident victims).
In other situations, we considered the relationship between the parties sufficient to establish an intimate nexus.
Weisman v. Connors, 312 Md. 428, 540 A.2d 783 (1988), involved an employee who sued his employer for alleged negligent misrepresentations made during pre-employment negotiations—at two in-person meetings and in several phone conversations the employer had made certain promises to induce him to leave his previous employer. Id. at 432-33, 540 A.2d 783. Because the employer‘s objective was to “sell” the employee on the idea of leaving his current employer during “face-to-face precontractual discussions,” we held that a jury could find that there was an intimate nexus between the parties. Id. at 448-49, 540 A.2d 783. In reaching this conclusion, we reasoned that the employee “had a great stake in receiving accurate information” and the employer “had to realize that negligence on his part in conveying such information could result in considerable economic harm to [the employee].” Id. at 449, 540 A.2d 783. Because their relationship “more closely resemble[d] the intimacy of the Glanzer parties than the remoteness of the Ultramares relationship,” the jury could find a tort duty. Id. Similar negligent misrepresentations in “intensive communications” regarding employment were the basis for liability in Griesi v. Atlantic General Hospital Corporation, 360 Md. 1, 756 A.2d 548 (2000).13 Weisman and Griesi illustrate that we consider the closeness of the relationship between the parties—especially one party‘s reliance on the other party‘s exercise of due care—when determining whether
there is an intimate nexus that would support finding a duty of care.
In Chicago Title Insurance Co. v. Allfirst Bank, 394 Md. 270, 905 A.2d 366 (2006), we found a privity-equivalent intimate nexus between the third-party drawer of a check and a depositary bank. Without citing the Credit Alliance/Walpert test, we used one of its criteria in our analysis—linking conduct.14 Id. at 299, 905 A.2d 366. The check at issue was made payable to the depositary bank (not the bearer) for the purpose of paying off a customer‘s mortgage loan as part of a refinancing. Id. at 278, 905 A.2d 366. Instead of applying the funds to the outstanding balance, the depositary bank credited the customer‘s personal, non-mortgage account. Id. When the customer then defaulted on his loan, the drawer—the title company that conducted the settlement—learned that the funds had been misapplied and the original mortgage had never been released. Id. at 279, 905 A.2d 366. In finding an intimate nexus, we reasoned that the depositary bank had already received one check from the drawer and a payoff request from the new lender. Id. at 298-99, 905 A.2d 366. Thus, the bank knew, or should have known, that the title company expected the proceeds of the check to pay off the loan. Id. As a result, we held that the depositary bank had a duty to the title company to exercise due care in handling its check. Id. at 300, 905 A.2d 366.
These cases illustrate that regardless of whether we apply the Credit Alliance/Walpert test, our privity-equivalent analysis in economic loss cases looks for linking conduct—enough to show the defendant knew or should have known of the plaintiff‘s reliance. This means, of course, that context is critical. Blondell, 413 Md. at 122, 991 A.2d 80 (quoting Dan B. Dobbs, The Law of Torts § 229 (2000)) (“Relationship of the parties is so pervasively important in determining existence and measure of duty that it often goes unmentioned.“). We have yet to apply the Credit Alliance/Walpert test or the privity-equivalent analysis in the public construction context and, as discussed below, Engineer argues that there are many reasons why we should not do so.
The Construction Industry and the Privity-Equivalent Intimate Nexus Analysis
First, Engineer avers, the Credit Alliance/Walpert criteria only apply to accountants. Second, Engineer argues that in the construction industry parties “must be able to rely on the objective expression of their bargains,” which involves a network of contracts detailing liability between the parties involved in the project. Without a contract, Engineer contends, the economic loss doctrine bars Contractor‘s claims. Contractor, on the other hand, asserts that its lack of a contract with Engineer is precisely why we should permit it to bring a negligence claim under the intimate nexus test.
Jurisdictions are split over whether to apply the economic loss doctrine in the construction context.15 See A. Holt Gwyn, Tort Damages, in Construction Damages
States applying the economic loss doctrine to bar recovery typically reason that the construction industry is governed by a network of often-complicated contracts, and because the parties have carefully contracted to protect against economic losses, there is no reason to add a tort remedy to the mix for use by parties claiming such losses. See, e.g., Indianapolis-Marion Cty. Pub. Library, 929 N.E.2d at 740 (“[W]hen it comes to claims for pure economic loss, the participants in a major construction project define for themselves their respec-tive risks, duties, and remedies in the network or chain of contracts governing the project.“); Terracon Consultants W., Inc. v. Mandalay Resort Grp., 125 Nev. 66, 206 P.3d 81, 89 (2009) (“In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims.“); LAN/STV, 435 S.W.3d at 249 (“[C]ourts should use contract principles, not tort principles, to determine whether the architect has ‘contractual’ obligations to the contractors and subcontractors.” (footnote omitted)); Berschauer/Phillips, 881 P.2d at 992 (limiting recovery of economic losses due to construction delays to contractual remedies “to ensure that the allocation of risk and the determination of potential future liability is based on what the parties bargained for in the contract“).
States that decline to apply the economic loss doctrine to bar recovery, on the other hand, typically focus on classic tort principles to decide whether a design professional owes a third party contractor a duty in tort in the absence of contractual privity. See Jim‘s Excavating Serv., Inc. v. HKM Assocs., 265 Mont. 494, 878 P.2d 248, 255 (1994) (“[W]e hold that a third party contractor may successfully recover for purely economic loss against a project engineer or architect when the design professional knew or should have foreseen that the particular plaintiff or an identifiable class of plaintiffs were at risk in relying
Some of these courts hold that if there is a “special relationship” or privity-equivalent relationship—like Maryland‘s intimate nexus—a design professional owes a third party a tort duty, thus permitting the recovery of purely economic damages. See, e.g., Ossining Union Free Sch. Dist. v. Anderson LaRocca Anderson, 73 N.Y.2d 417, 541 N.Y.S.2d 335, 539 N.E.2d 91, 94 (1989) (requiring “actual privity of contract between the parties or a relationship so close as to approach that of privity” to recover purely economic losses); Tommy L. Griffin Plumbing & Heating Co. v. Jordan, Jones & Goulding, Inc., 320 S.C. 49, 463 S.E.2d 85, 88-89 (1995) (“When ... there is a special relationship between the alleged tortfeasor and the injured party not arising in contract, the breach of that duty of care will support a tort action.“); E. Steel Constructors, Inc., 549 S.E.2d at 275 (permitting contractor to bring negligence claim against design professional “due to the special relationship that exists between the two“); Clevecon, Inc. v. Ne. Ohio Reg‘l Sewer Dist., 90 Ohio App.3d 215, 628 N.E.2d 143, 146 (1993) (“[L]ack of privity is not an absolute bar to a design professional‘s malpractice action when there is a nexus that can serve as a substitute for privity.“).
Both sets of cases provide good policy reasons to expand or limit tort liability in the construction industry, and there is no clear majority position. We are not persuaded by Engineer‘s arguments that the Credit Alliance/Walpert test must be limited to accountants. As we have said, “even states which limit tort actions for negligent performance of a contract generally permit recovery in tort for economic losses caused by the negligent services of a professional.” 100 Inv. Ltd. P‘ship, 430 Md. at 228, 60 A.3d 1 (citation omitted). We have emphasized that “in those occupations requiring peculiar skill, a tort duty to act with reasonable care will be imposed on those who hold themselves out as possessing the requisite skill,” regardless of whether the parties are in contractual privity. Jacques, 307 Md. at 541, 515 A.2d 756. These occupations include “professionals such as physicians, attorneys, architects, and public accountants.” Id. Instead, we find persuasive the logic of states barring negligence claims for purely economic damages against design professionals in complex construction projects absent privity. But our view turns on the unique aspects of large-scale public construction, rather than the finer distinctions of tort law.
The New York Court of Appeals, in Ossining, extended the Credit Alliance test to design professionals in the construction
at 94-95. Instead, the court emphasized, the test “reflects our concern for fixing an appropriate ambit of duty.” Id.
Although we share New York‘s reluctance to create a categorical distinction (and protection) for architects, we think the complex web of contracts that typically undergirds a public construction project should govern because parties have sufficient opportunity to protect themselves (and anticipate their liability) in negotiating these contracts. An Indiana case explains the construction industry‘s contractual landscape well:
Perhaps more than any other industry, the construction industry is vitally enmeshed in our economy and dependent on settled expectations. The parties involved in a construction project rely on intricate, highly sophisticated contracts to define the relative rights and responsibilities of the many persons whose efforts are required—owner, architect, engineer, general contractor, subcontractor, materials supplier—and to allocate among them the risk of problems, delays, extra costs, unforeseen site conditions, and defects. Imposition of tort duties that cut across those contractual lines disrupts and frustrates the parties’ contractual allocation of risk and permits the circumvention of a carefully negotiated contractual balance among owner, builder, and design professional.
Indianapolis-Marion Cty. Pub. Library, 929 N.E.2d at 737-38 (quoting Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891, 941 (1989)); see also BRW, Inc., 99 P.3d at 72 (“In the context of larger construction projects, multiple parties are often involved. These parties typically rely on a network of contracts to allocate their risks, duties, and remedies .... [T]he parties do have the opportunity to bargain and define their rights and remedies, or to decline to enter
We are also mindful that government contracts have a special consideration—the public purse. Imposing a tort duty on design professionals will likely correlate with an increase in project costs and with a corresponding rise in price for government entities.17 See Boyle v. United Techs. Corp., 487 U.S. 500, 507 (1988) (“The imposition of liability on Government contractors will directly affect the terms of Government contracts: either the contractor will decline to manufacture the design specified by the Government, or it will raise its price.“); LAN/STV, 435 S.W.3d at 248 (“[I]mposing the risk of economic loss on the architect requires the architect to pass the cost along to the owner.“); Berschauer/Phillips, 881 P.2d at 992 (“If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity. ... The fees charged by architects, engineers, contractors, developers, vendors, and so on are founded on their expected liability exposure as bargained and provided for in the contract.“).
Although we decline to extend the privity-equivalent intimate nexus test to design professionals on government construction projects, we do not hold that the test cannot apply to design professionals in other contexts.
Negligent Misrepresentation and Restatement (Second) of Torts § 552
“Negligent misrepresentation is one variety of a negligence action,” Walpert, 361 Md. at 655, 762 A.2d 582, so Contractor‘s negligent misrepresentation claim also depends on its ability to establish a duty on the part of Engineer.18
Because we decline to extend the privity-equivalent analysis to the public construction context, Contractor cannot satisfy the duty element using that test.
Relying on Village of Cross Keys, Inc. v. U.S. Gypsum Co., 315 Md. 741, 556 A.2d 1126 (1989), a case decided before we adopted the Credit Alliance/Walpert test, Contractor argues that to establish a duty under a negligent misrepresentation theory, the defendant only needs to know the class of potential plaintiffs, not the specific potential plaintiff. Contractor‘s reliance on Village of Cross Keys is misplaced.
In Village of Cross Keys, a condominium developer and architect sued the manufacturer that designed a curtain wall system for negligent misrepresentation, alleging that errors in the design documents, upon which they relied in constructing a curtain wall, resulted in water leaks in several condominium units. Id. at 745, 748, 556 A.2d 1126. The manufacturer had paid to publish the design in a construction industry trade catalogue that design professionals,
Contractor argues that this dicta supports imposing a tort duty on Engineer, but we disagree. Unlike Village of Cross Keys, this case involves an underlying web of contracts that allocates risk and liability. In Village of Cross Keys, the architect and developer used the curtain wall design specifications they found in a trade magazine. They had no opportunity to negotiate a contract with the manufacturer regarding the cost or remedies. There was no competitive bidding process or contract governing liability. Here, by contrast, Contractor had the opportunity to review Engineer‘s design, ask for clarifications, and submit a bid detailing how much it would cost to construct the project. In other words, Contractor was able to evaluate whether it could complete the project and at what cost, and the City was free to accept or reject its bid. If Contractor was not satisfied with the City‘s contract, it could have negotiated different terms or bid on a different project.
Contractor also included in its complaint a “Restatement (Second) of Torts § 552” count. This Restatement section describes a type of negligent misrepresentation, and was cited with approval in our discussion of duty and what constitutes a privity equivalent in Swinson v. Lords Landing Village Condominium, 360 Md. 462, 758 A.2d 1008 (2000). We said:
One “equivalent” is stated in § 552 of the
Restatement (Second) of Torts (1965), which, in relevant part, provides that (1) a person who, in the course of its business, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance on that information, if the person fails to exercise reasonable care or competence in obtaining or communicating the information, and (2) the liability of a person who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.
Id. at 477, 758 A.2d 1008. This description of a privity equivalent, like others, still depends upon judicial recognition of a tort duty. But we have already concluded that the privity-equivalent intimate nexus test does not apply to large-scale government construction projects such as this one because the complex web of contractual arrangements predominates and injecting a tort duty is not in the public interest.
CONCLUSION
We apply the economic loss doctrine and decline to impose tort liability on Engineer for purely economic injuries alleged by Contractor that was neither in privity nor
JUDGMENT OF THE COURT OF SPECIAL APPEALS AFFIRMED. COSTS TO BE PAID BY PETITIONER.
155 A.3d 463
In the MATTER OF Judge Pamela J. WHITE
Misc. No. 5, Sept. Term, 2016
Court of Appeals of Maryland.
February 22, 2017
Notes
- Did the [Court of Special Appeals] err by applying the economic loss doctrine to a limited class of professionals—designers in government contracts—to shield an engineer from liability to a contractor when the engineer knows that its services will be relied upon to the contractor‘s detriment if the engineer‘s services are negligently performed; i.e., [do] the intimate nexus and privity equivalent “tests” apply to an action by a contractor against an engineer?
- Does the economic loss doctrine bar a government contractor‘s action under the
Restatement (Second) of Torts § 552 against an engineer who negligently supplied information when all other elements are met and when other professional providers of information are not so protected? - Does the economic loss doctrine bar a government contractor‘s action for negligent misrepresentation against an engineer when the engineer: (a) intended the contractor to rely upon the representations (i.e., [its] design); (b) knew that the contractor would rely upon the design; and, (c) knew that the contractor would be harmed if the design was negligently performed?
A. Holt Gwyn, The Economic Loss Rule, in Construction Damages and Remedies 267, 293.It is in the context of construction design professional services that the application of the economic loss [doctrine] is most difficult to reconcile. No analytical theme predominates. It is almost as if someone had written the words “privity,” “special relationship,” “foreseeability,” “supervising architect,” “no duty,” and “covered by another contract” on the six sides of a die, and then passed the die to appellate judiciaries of various states to roll. The only constant is that economic damages are the subject of the claim.