U.S. District Court in Delaware Holds Surety’s Claims Against Construction Manager and Architect Barred by Economic Loss Doctrine; Surety Liable on Performance Bond Where Owner Overpays Contractor in Good Faith Reliance on Architect’s and Construction Manager’s Certifications

RLI Insurance Company v. Indian River School District
2008 U.S. Dist. LEXIS 43303 (D. Del. June 3, 2008)

In this case, the United States District Court for the District of Delaware held that a surety’s claim against an architect and construction manager for improper approval of payments to the principal was barred by the economic loss doctrine. Additionally, the court held that the surety was not released of its liability to the owner where the owner wrongfully paid the contractor, as the owner had made those payments in reliance on certifications from the architect and the construction manager.

Defendant McDaniel, a subcontractor, entered into a contract with the Indian River School District to perform certain work in conjunction with the construction of a new high school. Plaintiff RLI issued the performance and payment bonds on behalf of McDaniel for its work on the project. During the course of the Project, McDaniel fell behind on its work and the construction manager on the Project notified RLI of McDaniel’s delayed and unsatisfactory work. In response, RLI instructed the construction manager to stop issuing payments to McDaniel. However, the school district, with authorization from the construction manager and the architect, issued additional payments by joint check to McDaniel and one of its unpaid suppliers whohad refused to ship equipment until they were paid. According to the school district, such payment was made with RLI’s express consent. Thereafter, the school district terminated McDaniel and submitted a claim under the performance bond for completion of the project. RLI denied the bond claim, contending that the school district failed to comply with its contractual obligations by overpaying McDaniel for the work actually performed. RLI also asserted negligent misrepresentation claims against the construction manager and the architect. The school district, the construction manager, and the architect each moved for summary judgment.

The district court granted each of the defendants’ summary judgment motions. First, the court held that the economic loss doctrine barred RLI from prosecuting its tort claims against the construction manager and the architect because it had suffered only economic losses. RLI contended that its negligent misrepresentation claim was brought under the exception to the economic loss doctrine which allows tort claims against defendants who are in the business of supplying information. Specifically, RLI asserted that the construction manager and the architect were engaged to provide information that the school district relied upon in issuing payment to McDaniel. The court, however, found that the exception did not apply because the construction manager and the architect were not in the business of supplying information, and that any information they provided was incidentally supplied as part of their work on the construction project.

In granting the school district’s motion for summary judgment, the court rejected all of RLI’s defenses to the school district’s claims under the performance bond. Although the court recognized the modern rule that a surety is discharged of its obligations under a bond where contractual provisions have not been followed, the court found that the situation fell within the exception to this defense. Under the exception, the defense does not apply when the owner has in good faith relied upon the certifications of its architect or engineers. Because the school district had relied on the construction manager’s and the architect’s certifications in making payments to the subcontractor, as required under the subcontract, and RLI failed to submit any evidence that the school district was not acting in good faith with respect to those payments, RLI was not relieved of its obligations under the bond.

Click here for full text opinion provided courtesy of LexisNEXIS.

This entry was posted in Payment bond, Payment dispute, Subcontract and tagged , , , . Bookmark the permalink.