In some states, courts allow contractors to sue design professionals for negligence even in the absence of a contract. In others, like Maryland, courts apply a rule known as the Economic Loss Rule (ELR) to bar such claims. Courts apply the ELR when, without a contract in place, someone sues another for purely financial losses (i.e., not for personal injuries or property damage). The ELR is very important in the construction world because contractors who sustain losses that they attribute to substandard design documents often sue the design professional who prepared the plans and specifications, even though they rarely have a contract with the designer.
In a recent case – Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP – the Maryland Court of Special Appeals (“Court”) reaffirmed the ELR and rejected various claims brought by a contractor against a design professional. The Balfour Beatty Infrastructure case involved a public works project for the City of Baltimore (“City”). The City entered into contracts with the design and engineering firm Rummel Klepper & Kahl, LLP (“RK & K”) to upgrade a water treatment plant. The City also entered into a contract with Balfour Beatty Infrastructure, Inc. (“Balfour”) to build the upgrades. Balfour did not have a contract with RK & K. Due to a series of design errors, Balfour suffered delays during construction and performed additional work that it attributed to the design errors. Based on these facts, Balfour sued RK & K for professional negligence and negligent misrepresentation, alleging that RK & K supplied false information to prospective bidders and failed to establish a reasonable contract duration.
Anticipating that the Court might apply the ELR since Balfour did not have a contract with RK & K, Balfour argued that there was a contract-like relationship between RK & K and Balfour because RK & K knew that Balfour would rely on its designs and project schedules. Balfour argued that this reliance was sufficient to create a contract-like relationship (known to Maryland courts as an “intimate nexus”). The Court rejected Balfour’s argument, holding that the “intimate nexus” test, used to establish privity of contract under certain circumstances, does not apply to public construction contracts where only purely economic damages are sought for negligence claims like the ones Balfour asserted against RK & K. In other words, the ELR applied to bar Balfour’s claim against the designer.
What does this decision mean to members of the Maryland construction industry? It means that, without a contract, contractors cannot sue an engineer or architect directly for purely economic damages sustained on a public construction contract. Public construction contracts are design-bid-build contracts involving multiple steps. In most cases, the owner first enters into a contract with the architect and/or engineer to design the project. The owner subsequently releases a request for proposals for general contractors to bid on the project based upon the drawings and specifications prepared by the design professional. Because there is not usually a contractual relationship between the contractor and designer, and the Balfour Beatty Infrastructure case says there is not a sufficient nexus between the design professional and the contractor, the contractor’s recourse for any damages attributable to any design defects in Maryland is often limited to the owner.
Courts treat this issue differently from state to state, so it is important for owners, design professionals, and contractors to consult with their attorneys and understand how construction law principles like the ELR operate in the states where they conduct business.
Steven M. Williams is the Managing Partner of the Harrisburg, Pennsylvania office of Cohen Seglias, Chair of the firm’s Commercial Litigation Group and a member of the Business Practices and Labor & Employment Groups. Steve has been representing landlords in virtually every aspect of their business for over 23 years and concentrates his practice in the areas of commercial and civil litigation, real estate, landlord and tenant law, employment law, business and corporate law and construction law.
Scott A. Earle is a Senior Associate in the Firm’s construction, commercial and creditors’ rights practice groups. Scott practices all aspects of civil and commercial litigation, concentrating on construction, asbestos defense and bankruptcy litigation before state and federal courts, as well as arbitration forums in the jurisdictions of Delaware, New Jersey and Pennsylvania where he is admitted.