Fidelity and Surety Committee: September 2005
Contracting Without a License (177k PDF)

CURRENT ARTICLE
Kentucky contractors can now sue construction professionals for negligent misrepresentation.

OLDER ARTICLES
Recent Significant Claims Handling Cases
Obligee Cannot Ignore Its Contract



Kentucky contractors can now sue construction professionals for negligent misrepresentation.

In the past, construction contractors in Kentucky suffering damages as a result of mistakes or misinformation provided by architects, engineers, and construction managers were restricted to seeking compensation only from the entity with whom it had a contract – the owner. Those construction professionals who were not in direct contractual privity with the contractor were immune from a lawsuit filed by the contractor under Kentucky law. However, pursuant to a recent decision of the Kentucky Supreme Court, Kentucky no longer provides architects, engineers, or construction managers with this safe haven. Those entities can now be held liable to the contractors and/or their sureties for their negligent supplying of false construction information.

In Presnell Construction Managers, Inc. v. EH Construction, LLC, 134 S.W.3d 575 (Ky. 2004), the contractor (represented by Bruce Stigger of Alber Crafton, PSC) brought suit against the Owner’s construction manager for providing erroneous information, directives and schedules to the contractors on a multi-prime construction project, seeking various delay and impact damages. In the past, a contractor would have been prevented from recovering such damages from an architect, engineer, or construction manager based on the Kentucky courts’ adherence to the “economic loss rule,” which prevents a person from asserting purely economic damages (as opposed to personal injury or property damages) for another party’s breach of an express or implied contractual obligation owing to a third party. The purpose of the economic loss rule was to prevent a person from enforcing a contract to which it was not a party by characterizing the claim as one for negligence. Because contractors did not have direct contracts with the Owner’s design professionals or construction managers, the economic loss rule prohibited a contractor from maintaining a claim against them for defective construction documents or other professional negligence.

However, in a recent decision which will significantly affect the rights and liabilities of the various entities involved in Kentucky construction projects, the Kentucky Supreme Court has now established the tort of “negligent misrepresentation”. In the Presnell case, the Court established the parameters of this new law as follows:

One who, in the course of his business, profession, or employment … supplies false information for the guidance of others in their business transactions, is subject to liability for the pecuniary loss caused by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. … [Liability] is limited to loss suffered by the person or one of a limited group of persons for whose benefit and guidance he intends to supply or knows that the recipient intends to supply it.

In the construction context, this new law allows contractors to sue construction professionals for purely economic damages resulting from the supplying of false information intended for the guidance of the contractor (i.e. defective construction drawings or specifications, design errors, defective subsoil reports, faulty schedules, etc.). Bidding contractors rely heavily on information supplied by architects and engineers, including construction drawings, specifications and various project reports. If such information supplied is false, contractors can now seek and obtain damages directly from the entity that made the false statement.

While not at issue in the Presnell case, a contractor’s surety that is entitled to assert the affirmative rights or claims of its principal (based on assignment language in an indemnity agreement or under the doctrine of equitable subrogation) should be able to assert claims against such entities as well.

If you have questions about this important ruling or want a copy, please contact Bruce Stigger in Alber Crafton’s Louisville office at (502) 815-5000 or bstigger@albercrafton.com.