Construction Law

The Economic Loss Rule Still Bars Tort Claims By Contractors Against Design Professionals

By Tim Gordon

Hamon Contractors, Inc., v. Carter & Burgess, Inc. (Colo. App. 2009)

In this April 30, 2009, opinion, the Court of Appeals rejects the position that alleging fraud is enough to avoid application of the economic loss rule.  Instead, the Court holds that the economic loss rule bars even a claim for alleged fraud where the acts complained of took place during a party's performance of its contractual duties.  This holding is consistent with BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004) (holding that the economic loss rule bars misrepresentation claim by subcontractor against design professional, where alleged misrepresentation took place during the performance of the work).  The Court also holds that alleging that fraud took place before the contracts were entered into may not be sufficient to avoid dismissal, since a duty might not exist as a matter of law.

Hamon Contractors, Inc. ("Hamon"), served as the general contractor on a project for the City of Louisville.  The project involved installing a large pipe or culvert.  Craig Kitzman, the Assistant City Engineer, reviewed and approved the contract documents and specifications that the City provided to prospective bidders.  Hamon submitted its bid on October 14, 2003, was later awarded the project, and entered into a contract with the City on November 10, 2003.

On October 30, 2003, Carter & Burges, Inc. ("C&B"), submitted a proposal to the City to provide construction management and administration services for the project.  And on November 24, 2003, C&B and the City entered into a contract.  C&B basically served as the owner's representative, and its work included observing and evaluating the quality of the work, determining whether the work complied with the contract documents, issuing the City's instructions to Hamon, making recommendations on change orders, and reviewing pay applications.

Hamon claimed that it encountered excessive water on the site, and requested a change order.  C&B, acting for the City, denied the change order, and later notified Hamon that it would be assessed liquidated damages.  Hamon then sued the City, C&B, and Mr. Kitzman.  Since Hamon had no contract with either C&B or Mr. Kitzman, it pleaded only tort claims against them.

Hamon's fraud, misrepresentation, and negligence claims included allegations that:

1. The City and Kitzman knew that the project design was inadequate to handle water flow, but concealed that information from Hamon;
2. C&B was aware of this problem after March 2004;
3. the defendants told Hamon that weather and grading problems were the causes of the delay, although they knew that the design flaws were the true cause;
4. C&B negligently failed to detect the drainage design flaws before either party contracted with the City, and that C&B owed a duty to Hamon to detect those problems and inform Hamon of them during the bidding process; and
5. Mr. Kitzman negligently failed to detect the design deficiencies both before and after Hamon entered into its contract with the City.

The district court entered summary judgment in favor of C&B, concluding that C&B owed no pre-contractual duty to Hamon as a matter of law, and that the economic loss rule barred all of Hamon's post-contractual claims.  The Court also entered summary judgment in favor of Mr. Kitzman on Hamon's post-contractual claims, concluding that Hamon's claims were all barred by the economic loss rule.  And the Court later dismissed Hamon's pre-contractual claims against Mr. Kitzman for lack of timely notice under the CGIA.  Finally, the Court awarded C&B and Mr. Kitzman attorneys' fees.

With respect to the post-contractual claims, the Court of Appeals held that Hamon's claims against C&B and Mr. Kitzman for fraudulent concealment and fraudulent misrepresentation basically alleged fraud in the performance of a contract, and were barred by the economic loss rule.

With respect to Hamon's pre-contractual claims, the Court of Appeals held that the claims against C&B only alleged nonfeasance (failure to take positive steps to protect others from harm)as opposed to misfeasance (active misconduct that injures others) by C&B, and that Hamon could not maintain a claim for nonfeasance against C&B because a "special relationship" did not exist.

In explaining that Hamon alleged only nonfeasance against C&B, the Court of Appeals specifically noted that C&B did not prepare the design plans or specifications.  Although some may see this distinction as leaving the door open to tort claims against design professionals who did prepare the deign plans or specifications, keep in mind such claims would be post-contractual claims, since the design professional would almost certainly be doing work under a contract.  Thus, the claims would likely be barred by the economic loss rule.

Finally, the Court of Appeals affirmed the district court's award of attorney fees and costs against Hamon as to its pre-contractual claims, and remanded the matter for further findings from the district court as to its award of fees against Hamon related to its post-contractual claims.

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Read the slip opinion.

Full post as published by Colorado Construction Law on April 30, 2009 (boomark / email).