On December 22, 2016, the Kentucky Court of Appeals held that the economic loss rule does not prohibit a general contractor from pursuing claims against an architect for negligent misrepresentation arising from the architect’s negligent project design. In D. W. Wilburn v. K. Norman Berry Associates Architects, the Court determined that a contractor could allege the elements of negligent misrepresentation against an architect based on a claim that the architect’s negligent design, which was reasonably relied upon by the contractor, caused a substantial delay of the project and resulted in economic damages to the contractor. Ultimately, the Court narrowly held that “the economic loss rule does not apply to a claim of negligent misrepresentation in the architect/contractor scenario.”
In Wilburn, the architect, KNBA, contracted with the Oldham County Board of Education to design and administer the renovation of the North Oldham High School. The Board hired Wilburn as the general contractor on the project. Wilburn hired Link Electric to perform the electrical work. KNBA never had a direct contract with Wilburn or Link Electric. The project was initially scheduled to be completed on May 31, 2009. However, after substantial delays, the final change order was not executed until February 2012, after which Wilburn submitted a final pay application and signed a closeout form.
Link Electric sued Wilburn for damages arising from the project’s delayed completion. Wilburn subsequently filed a third-party complaint against KNBA, alleging that the project could not be approved for a building permit without substantial delay because KNBA did not properly prepare plans and specifications for the project.
The trial court ruled in favor of KNBA on Wilburn’s claims, based on the fact that the architect and general contractor did not have a contract with one another. On appeal, the Court considered the following issues: (1) whether Wilburn could maintain a claim for negligent misrepresentation based on allegations that KNBA failed to properly prepare plans and specifications, and otherwise obtain permit approvals; (2) whether Wilburn’s claims for purely economic losses against KNBA were barred by the economic loss rule; and (3) whether change orders and an application for final payment approval precluded Wilburn’s claim against KNBA based on waiver or release.
Relying on Presnell Construction Managers v. EH Construction, 134 S.W.3d 575 (Ky. 2004), the Court ruled that, as the architect for the project, KNBA owed an independent duty to the general contractor, Wilburn, separate from its contractual duties to the Board. The Court determined that, under the facts of the case, it was at least possible for Wilburn to prove the elements of negligent misrepresentation based on its assertion that “the plans prepared by KNBA upon which Wilburn reasonably and foreseeably relied, were negligently prepared because they were rejected by the Commonwealth’s Office of Housing, Building and Construction… causing a delay in the project and causing Wilburn to incur additional costs.”
The Court also rejected KNBA’s argument that the economic loss doctrine barred Wilburn from recovering damages for its negligent misrepresentation claim. The economic loss doctrine was adopted by the Kentucky Supreme Court in its 2011 opinion, Giddings & Lewis, Inc. v. Industrial Risk Insurers, where the Court unanimously held that “a manufacturer in a commercial risk relationship has no duty under a negligence or strict products liability theory to prevent a product from injuring itself.” In Wilburn, the Court of Appeals narrowly held that “the economic loss rule does not apply to a claim of negligent misrepresentation in the architect/contractor scenario.”
Finally, with respect to KNBA’s argument that claims for delay damages were settled and resolved after the final change order and final pay application were signed, the Court held that neither document waived or released a negligent misrepresentation claim against KNBA, and thus Wilburn could pursue its delay damages against KNBA.
Under the current ruling, architects may face exposure for negligent misrepresentation claims by contractors arising from a contractor’s reliance on negligently prepared project plans.
Please contact us if you have specific questions about the possible impact of the D.W. Wilburn ruling.