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Atlas-Allied v. SD Community College District

Victory; No Duty: No Fault
Karen Holmes, Shareholder and Justin Reid, Law Clerk


On July 30, 2014, in an unpublished opinion, the California Court of Appeal affirmed the trial court’s ruling granting civil engineer, Nolte Associates, Inc. (hereinafter “Nolte”), motion for judgment on causes of action for negligence and negligent misrepresentation. Karen Holmes of Balestreri Potocki & Holmes had successfully defended Nolte at trial.  Gary Jacobsen and Lisa Shemonsky of Koenig Jacobson handled the appeal thereafter.

Upon extensive analysis of applicable supporting and distinguishing case law, the Appellate court confirmed that a civil engineer owes no duty of care to the General Contractor absent privity of contract. To reach this conclusion, the Appellate court not only analyzed factors addressed and relied on by the trial court but, further, took into consideration a case recently decided by the California Supreme Court, Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP (July 3, 2014, S208173) Cal.4th [2014 D.A.R. 8787] (Beacon) to support its affirmation.

According to the facts, plaintiff, Atlas-Allied, Inc. (hereinafter “Atlas”) sued Defendants San Diego Community College District, (hereinafter “District”) for breach of contract, breach of warranty/failure to disclose hidden condition on the project plans and specifications, and Nolte, an engineering firm, for negligence and negligent misrepresentation.  Atlas contracted with the District to construct an underground fire suppression system on the District’s Miramar College Campus after submitting the lowest bid for the project. Nolte, the engineering firm, was hired to design and prepare the plans and specifications for the project. Following completion of the project, Atlas filed suit against District and Nolte for alleged damages that were incurred as a result of unforeseen conditions on the project site that caused it to incur costs that exceeded the contract price.

Although the Appellate Court addresses and affirms judgment for the District on the breach of contract and warranty actions, for purposes of this analysis the discussion will be limited to those concerning the engineering firm, Nolte.

In 2008, Nolte entered into contract with the District to design improvements to the fire suppression system on the Miramar Community College campus and subsequently, in 2009 the District contracted with Atlas to trench and excavate the soil for pipelines. In order to obtain a sufficient bid on the project, Atlas reviewed the plans and technical specifications Nolte prepared and an added “Soil Conditions” (section “HH”) the District prepared that described underlying soils and warned for use of “heavy equipment.” Once Atlas began work, it encountered problems associated with claimed unknown soil conditions resulting in the need for larger and heavier equipment to excavate, which lead to increased time and expenses in performing the work. Since Atlas relied on the plans and specifications prepared by Nolte, it alleged that Nolte, “through its plans, misrepresented the condition of the soil… and also provided an inaccurate plan profile depicting wrong utility depths which caused increased time and expenses.” Further, Atlas alleged that Nolte negligently oversaw and directed it in the entire project causing damages to the tune of $519,957.


Negligence

The Appellate Court relied on several factors to conclude that Nolte owed no duty to the third party contractor in which it was not in privity of contract. First, as was the basis for the trial court’s ruling, the Appellate court analyzed the case of Weseloh Family Ltd. Partnership v. K.L. Wessel Const. Co., Inc. (2004) 125 Cal.App.4th, which applied [citing Biakanja v. Irving (1958) 49 Cal.2d 647, 650] a checklist of factors to consider in assessing legal duty in the absence of privity of contract between a plaintiff and a defendant. These factors are: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing harm. (Biakanja at p. 650)

Here, the Appellate Court determined that Nolte’s design work was never intended to benefit Atlas and the fact its plans incidentally had an affect, does not amount to an intended beneficiary. Rather, the intended beneficiary of Nolte’s design work was the District, the students and employees of Miramar College. Next, the Court stated the extent Nolte’s design work could foreseeably result in Atlas to underbid the project was minimal. In fact, the court noted that even if Nolte could be held responsible for section HH of the technical specs, it provided inquiry notice to Atlas that the trenching would be difficult and may “require heavy equipment.” Therefore, Atlas should have investigated further before relying on the specifications to base its contract for work.

The Appellate Court further held that the connection between Atlas’s loss and Nolte’s conduct was remote. Since Nolte did not prepare or draft section HH of the technical specifications, nothing Atlas relied on to bid on the project with the District was associated with Nolte. Most importantly, Nolte had no control over Atlas’s work on the project and the injury was solely attributable to Atlas’s conduct in underbidding the project and the manner in which the work was performed. Lastly, this court supported its determination by the fact Nolte should not be liable to a contractor with whom it was not in contractual privity for faulty technical specifications prepared and issued by the District. This would impose liability out of proportion to fault and would have a potential adverse impact on design engineers and architects generally as a class of Defendants.

In response to oral arguments asserted by Atlas, citing the recent Supreme Court decision Beacon, this Appellate Court found the present case to be distinguishable. The Beacon Court held that “an architect owes a duty of care to future homeowners in the design of a residential building where… the architect is a principal architect on the project – that is, the architect, in providing professional design services, is not subordinate to other design professionals.” They found that among all other entities involved the architects uniquely possessed the expertise, which no one else on the project did.

In this decision, the Appellate Court found that Nolte was not a principal and, in fact, the District’s knowledge of the site conditions on the project were superior to Nolte’s; it was the one which prepared the technical specifications including section HH and had far more control over the plans and specifications than Nolte did. Moreover, the Court of Appeals stated, unlike the powerless homeowner in Beacon, Atlas had the power, ability and expertise to protect its interests through its own prudence and diligence by seeking clarification about the soils conditions or contract before submitting its bid. Overall, the Appellate Court held that Nolte did not apply their specialized knowledge throughout the construction process and could not be liable to Atlas in a similar fashion as found to exist in Beacon.

Negligent Misrepresentation

Atlas asserted, as a second cause of action, that Nolte negligently misrepresented, through its plans, the conditions of the soil beneath the work of improvement. This alleged misrepresentation however, was based on section HH of the technical specifications which Nolte did not prepare. Thus, the Court of Appeals held that Nolte made no such misrepresentations to Atlas concerning the soil on the project.

A defendant who makes false statements “honestly believing that they are true, but without reasonable ground for such belief,…may be liable for negligent misrepresentation…”. However, a positive assertion is required; an omission or an implied assertion or representation is not sufficient.” (Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243.) Here, Nolte did not draft the section HH that presumably mislead Atlas to underbid the project and incur additional expenses. Nevertheless, even if Nolte was found to be responsible for section HH, this section was found to be true and accurate eliminating the assertion that it mislead Atlas and negligently misrepresented the condition of the soil. Therefore, because Nolte did not make any positive assertions at all and section HH was found to be true, the Appellate Court properly affirmed the trial court’s judgment against the cause of action for negligent misrepresentation.

With the ever-evolving concept of privity, architects, designers, and developers are consistently found defending allegations from all parties in a construction project. However, decisions such as Atlas-Allied can assist in clarifying the extent liability is owed when no contract exists. Here, while unpublished, the 4th District clearly refused to extend a duty by the civil engineer to the general contractor on a public works project, giving counsel guidance on the application of Beacon and prior decisions on design professionals’ liability.