Kentucky Appellate Court Holds That a Contractor May Pursue Claim of Negligent Misrepresentation Against Architect Despite Lack of Contract, the Economic Loss Rule, and Project Waivers

D.W. Wilburn, Inc. v. K. Norman Berry Assocs., No. 2015-CA-001254-MR, 2016 Ky. App. Lexis 206 (Ky. Ct. App. Dec. 22, 2016)

This case arose out of a construction project in which the Oldham County Board of Education (the “Board”) was the owner, K. Norman Berry Associates (“KNBA”) was the architect and D.W. Wilburn (“Wilburn”) was the general contractor. The Board’s contract with Wilburn provided that: (i) change orders must be signed by the architect, contractor, and owner; (ii) claims for additional time, money or delay damages must be submitted within twenty-one days of the event giving rise to the claim; (iii) change orders resolved all claims for time and money relating to the scope of the change order, and (iv) the contractor’s acceptance of final payment waived its claims, except those identified in writing as unsettled at the time of final application for payment.  Pursuant to the contract, the parties executed twenty-one change orders and Wilburn submitted a final payment application and closeout form.

Later, Wilburn was sued by one of its subcontractors for delay to the project. Wilburn then sued KNBA in a third party complaint asserting that KNBA was liable for the delay as a result of its defective plans and specifications.  The trial court granted KNBA summary judgment, dismissing Wilburn’s claim for lack of contractual privity.  Wilburn appealed, and the Court of Appeals reversed.

The Supreme Court of Kentucky had already adopted the tort of negligent misrepresentation and Section 552 of the Restatement (Second) of Torts in Presnell Constr. Managers, Inc. v. EH Constr., LLC, 134 S.W.3d 575 (Ky. 2004).  Accordingly, the Court here found that KNBA owed Wilburn a tort duty, independent of its contract with the Board, and may be found to have breached that duty if it negligently prepared plans upon which Wilburn reasonably relied.  This holding raised two new issues for the Court to consider: (i) whether the economic loss rule bars negligent misrepresentation claims seeking purely economic loss, and (ii) whether Wilburn waived its claim by executing change orders and the waiver in its final application for payment.

First, the Court held that the economic loss rule does not apply to negligent misrepresentation claims. Because the tort is designed to compensate purely economic losses when there is no contractual remedy available, the Court concluded that applying the economic loss rule would allow a party to pursue an action only to hold that, once the elements were shown, it was unable to recover its losses, which the Court called “a nonsensical result.”

Next, the Court held that, while the waivers in the change orders and final payment application would preclude claims by Wilburn against the Board, they did not waive Wilburn’s claims against KNBA because KNBA was not a party to the contract with Wilburn. Further, while KNBA’s signature was required on change orders, these change orders did not constitute a contract between KNBA and Wilburn.  Finally, the Court stated that there was nothing in the change orders or final payment application to waive Wilburn’s claims against KNBA.

For these reasons, the Court of Appeals reversed the trial court’s grant of summary judgment and remanded the case for further proceedings.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

John J. Gazzola

 

 

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