Nevada Supreme Court Extends Design Professional Economic Loss Rule Defense to Negligent Misrepresentation Claims on Commercial Construction Projects

by Snell & Wilmer

In 2009, the Nevada Supreme Court (“NSC”) applied the economic loss rule to bar claims of professional negligence by design professionals in commercial construction projects, ruling that “[i]n the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims.” Terracon Consultants Western, Inc. v. Mandalay Resort Grp., 125 Nev. 66, 77, 206 P.3d 81, __ (2009). While this determination effectively barred commercial professional negligence claims, it left open the idea that design professionals could be liable for damages resulting from negligent misrepresentations made within the commercial construction process. The NSC has now applied the economic loss rule to all claims against design professionals grounded in negligence, including claims for contribution, apportionment and indemnity.

In Halcrow Inc. v. Dist. Ct., 129 Nev.Adv.Op 42 (June 2013), a structural engineer under contract with the project architect designed structural components of a hotel tower, including design and specifications for the installation of reinforcing steel (“rebar”). Rebar subcontractors were retained by the project general contractor to follow the structural engineer’s rebar design and specifications precisely. It was later discovered that the project was structurally unsound due to problems with the rebar construction and the owner sued the general contractor for such deficiencies. The general contractor in turn sued the rebar subcontractors, who in their turn brought claims for professional negligence against the structural engineer. Granting the structural engineer’s motion to dismiss those claims under Terracon, the district court allowed the rebar subcontractor to amend its 3rd party complaint to allege claims for negligent misrepresentation, contribution, attribution and indemnity. The rebar subcontractor sought a writ of mandamus from the NSC to disallow the amendment.

In granting the writ of mandamus, the NSC extended the economic loss doctrine bar outlined in Terracon to all negligence based claims against a design professional arising from its contract obligation performance on commercial construction projects. The court refused to follow the Restatement (Second) of Torts, § 552 (1977) exception to the economic loss doctrine that “[l]iability is proper in cases where there is a significant risk that ‘the law would not exert significant financial pressures to avoid such negligence.’… [I]n the context of commercial construction design professionals, negligent misrepresentation claims do not fall into such a category because ‘contract law is better suited’ for such claims. Further, in commercial construction situations, the highly interconnected network of contracts delineates each party’s risks and liabilities in case of negligence, which in turn ‘exert significant financial pressures to avoid such negligence.’” Halcrow, 129 Nev.Adv.Op. 42 at 9-10, quoting Terracon, supra, 125 Nev., at 76-77.   

The NSC went on to explain that the contractual terms of complex commercial construction contracts generally address the parties expectations in dealing with economic losses. “Therefore, the parties’ ‘disappointed economic expectations’ are better determined by looking to the parties’ intentions expressed in their agreements.”  Id. In point of fact, since “design professionals supply plans, designs and reports that are relied upon to create a tangible structure” and are “incidental to a tangible product”; “the ultimate quality of the work can be judged against the contract. Thus, requiring parties that are…  involved in a network of interrelated contracts to rely upon that network of contracts [rather than tort claims] ensures that all parties to a complex project have a remedy…..” Id. As such, the NSC extended Terracon to all negligence based claims against design professionals in the commercial construction project context for which damages are purely economic: “Because we determine that negligent misrepresentation and professional negligence claims cannot form a basis for liability [citations], Halcrow cannot be deemed a joint tortfeasor ….  Consequently, … equitable claims for contribution, apportionment, and indemnity necessarily fail.”  Halcrow, supra, 129 Nev.Adv.Op 42 at 12.

All was not lost, however, for the rebar subcontractor who was contractually obligated to perform the work according to the plans and specifications they were provided under its subcontract. The NSC also reaffirmed its holding in Home Furniture, Inc. v. Brunzell Construction Co., 84 Nev. 309, 440 P.2d 398 (1968), adopting the Spearin doctrine (United States v. Spearin, 248 U.S. 132 (1918)) that the rebar subcontractor “cannot be liable for loss or damage resulting from defects in the plans and specifications, when the contractors simply followed the plans as provided.”  Halcrow, supra, 129 Nev.Adv.Op 42 at 12, fn 3.

This case raises interesting concerns within the construction industry. It is clear that unlike the residential construction defect cases arising from and governed by NRS 40.600, et seq., the NSC will enforce contract relationships within complex commercial construction projects. See Road and Highway Builders, LLC v. Northern Nev. Rebar, 128 Nev.Adv.Op. 36 (2012) (disallowing a claim for fraud in the inducement as a matter of law where the claim contradicts the express terms of an integrated contract). Questions exist, however, as to the enforceability of certain contractual provisions within the commercial construction context, based on applicable Nevada legislative prohibitions. For instance, NRS 108.2453(2)(e) appears to limit the ability of an owner to require a contractor to release some consequential damage claims. Recent case law seems to have restricted the type and reach of some contractual indemnity clauses in the construction context: see e.g., Brown v. Star Ins. Co., 237 P.3d 92, 97 (Nev. 2010); Rayburn Lawn & Landscape v. Plaster Dev. Co., Inc., 255 P.3d 268 (Nev. 2011), and United Rentals Highway Tech., Inc. v. Wells Cargo, Inc., 128 Nev.Adv.Op. 59 (2012). Drafters of commercial construction agreements must keep these provisions in mind when negotiating risks and liability within a complex project.  


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