It used to be hornbook law that the duty of care owed to third parties by architects, engineers and other similar professionals providing services on construction projects was circumscribed in construction defect litigation by principles of contract law privity. I have previously reported in this blog on the Beacon case, which extended the reach of this duty with respect to residential development matters despite a lack of contract privity. A recent federal court case in California has further applied this rationale, expanding this duty outside of the residential realm.
In Apex Directional Drilling, LLC v. SHN Consulting Engineers & Geologists, Inc., the U.S. District Court for the Northern District of California found that a geotechnical engineering firm, which had been hired as the project manager and lead engineer on a municipal wastewater pipeline project, owed a duty of care to the general contractor that submitted the winning bid for the project in reliance on the engineering firm’s flawed geotechnical report for the project, even though there was no contract between the engineering firm and the contractor. Based on this finding, the court allowed the contractor’s claims for professional negligence and negligent misrepresentation against the engineering firm to proceed, denying its motion to dismiss.
The underlying circumstances giving rise to this decision are as follows: The City of Eureka (the “City”) solicited bids from contractors to build a new wastewater pipeline. Separately, the City engaged SHN Consulting Engineers and Geologists, a geotechnical engineering firm (“SHN”), to serve as project manager and lead engineer on the project. As part of this engagement, SHN conducted geological studies of the project location and, in reliance on its findings, drew up plans, reports and specifications for the project. Portions of SHN’s descriptions of the project were provided to potential bidders by the City, with the intention on the part of the City and SHN that contractors would rely on those descriptions in submitting their bids for the project.
Unfortunately, the information prepared by SHN and provided to potential bidders by the City was based on the results of a single test bore made by SHN, taken a significant distance from the proposed path of the project. Based on the information generated by SHN and provided by the City, Apex Directional Drilling (“Apex”) submitted the lowest qualifying bid, and thereupon entered into a contract with the City to build the pipeline. Shortly after starting the project, however, Apex began experiencing serious problems with the project due to the fact that the actual conditions at the site were significantly different from the information it was given, and the project costs increased significantly as a result.
Despite learning of its errors, as claimed by Apex, SHN continued to assert that Apex should proceed with the project in reliance on the faulty information it had provided. Relying on those assertions, the City refused to accept change orders from Apex for its cost overruns, and finally terminated Apex’s contract. Shortly afterwards, Apex sued the City in state court for breach of contract. Later, in a separate action, Apex sued SHN in federal court for, inter alia, professional negligence and negligent misrepresentation. SHN then moved to dismiss Apex’s complaint.
In evaluating SHN’s motion to dismiss, the court analyzed the above two claims raised by Apex under the Biakanja six-factor balancing test for negligence, as well as the Bily requirement of a separate review with regard to claims of negligent misrepresentation. Weighing all of these factors, and noting the recent trend exemplified in the California courts by Beacon, the court ultimately held that SHN owed Apex a duty of care in providing this information to Apex, with respect to both its professional negligence claim as well as its negligent misrepresentation claim. Finally, it should be noted that Apex’s complaint alleged that SHN had both prepared its information with the intention of influencing the potential bidders, and was actively involved in the administration of the project, working closely with Apex during the course of the work; both these assertions are subject to factual proof at trial, however, and could be weighed against Apex depending on the evidence.
Given the trend of these recent California cases, professionals who consult on construction projects should take great care with regard to the accuracy of the information they provide in connection with those projects. They should also consider including language in their reports disclaiming any reliance on their findings by anyone other than the party who commissioned them, and urging third parties to conduct their own independent investigation. While neither approach is a panacea, taking these precautions, with the assistance of experienced legal counsel, can help lower the risk of litigation.
The case is Apex Directional Drilling, LLC v. SHN Consulting Engineers & Geologists, Inc., — F.Supp.3d —, 2015 U.S. Dist. LEXIS 105537 (N.D. Cal. August 11, 2015). ()