Some chicanery has legal ramifications, some does not

THERE ARE MANY KINDS OF LIES. We call them fibs, white lies and fabrications, or we equate them with mere prankishness or with evil dealing. In the law, the word “lie” is vague and ambiguous, as there are many types. For example, there is deceit, puffery, misrepresentation and frauds, defined somewhat in case law and statutes. Some of these lies have legal ramifications; some do not. Making matters even quirkier, the law also divides lies into those about opinions and those about facts.

In past articles, various types of chicanery have been discussed. One article, for example, outlined the law of “fraud,” where a lie is intentional.

But what happens when a false statement is made without malice or bad intentions, or without even knowing that the statement is not true? The statement is still false, and someone may have relied on it, with justification, to his detriment. In such an instance, there is the legal concept of “negligent” misrepresentation.

In particular, there is a tort entitled “Information Negligently Supplied for the Guidance of Others.” How this tort affects construction contracting is becoming a major question.

Negligent misrepresentation

Negligence starts as a breach of a duty of care. A simple application of this concept is the duty not to drive a car while intoxicated. The instances where there is a duty to act or not act, to speak or not speak, are not capable of being put into a definitive list. Therefore, the courts have tried to analyze circumstances that might create some kind of “duty,” with a view to morality and justice and also, to whether creating (or finding) a “duty” in a given situation will create an administrative nightmare.

With this uncertainty as a starting point, one definition, given by some courts, of negligent misrepresentation (a breach of a duty not to tell a lie) is:

1. A misrepresentation of a material fact

2. Where the speaker should have known of the falsity of the statement

3. Made with the intention to induce another to act on the falsehood

This approach is extremely broad in its implications and, quite frankly, is not workable, particularly with regard to construction contracting. Imagine that there was a basis for a lawsuit each time a person says, “Don’t worry, I’ll take care of you.”

Another approach is suggested by the Restatement (Second) of Torts. The Restatement is not a law. It is a set of proposed rules and definitions prepared by legal scholars and practitioners, and it is very influential. Section 552 of the Restatement (Second) sets forth these elements of negligent misrepresentation:

“One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.” (Emphasis added.)

What does it mean?

This definition was drafted by committee. Perhaps that is why it begs the question of when a lie becomes a tort, as the legal wrong of supplying false information is hinged on what is a failure to exercise “reasonable care” with regard to collecting or communicating information. Reasonable care is not defined specifically.

The key elements are that the person telling the falsehood has a financial stake in the matter, and he did not lie intentionally. He just was not careful about collecting the data or the manner in which the data was communicated. So what happens with this concept in a construction contract setting? Is it a tort for a contractor to tell an owner that a repair was accomplished when repair work was not fully done? Is it a tort for an architect to tell a contractor that the owner will make payment as soon as a portion of the work is finished when that information was not thoroughly confirmed and is inaccurate? And who owes a duty to whom? A subcontractor to another subcontractor? A second-tier supplier to an owner?

The question presented to a court in Pennsylvania touched on one such critical issue: Did the architect commit a tort by issuing specifications that expressly represented that a curtain wall system could be installed using “normal” construction means where that representation was wrong (i.e. false)? The answer was yes, he did. Bilt-Rite Contractors Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005). [The Pennsylvania Supreme Court issued its decision two years after the case was argued, perhaps indicating the significance the court placed on the question.]

Bilt-Rite is a 30-page opinion, with two dissenting opinions. It compares and analyzes positions taken in other states and reflects the difficulties the court had in rendering its decision. Even for a lawyer trained in this area, the potential use of Bilt-Rite in construction disputes is difficult to comprehend. For example, in Pennsylvania, as in all jurisdictions, a claim in negligence requires the breach of a “legally recognized duty.” Until Bilt-Rite, there was no such duty of an architect directly to a contractor. Instead, the “duty” was that of the owner, by contract, to supply a correct set of bid documents to the contractor and the contractor’s sole remedy, also by contract, was a change order from the owner. Before Bilt-Rite, no tort claim like this against the designer was possible in Pennsylvania or a number of other states.

The ramifications of this change in scope of negligence law could be wide-ranging and unpredictable. Take the instance where the owner/contractor agreement has limitations on claims for errors in the specifications (waiver of untimely claims, method of calculation of costs, a no damages for delay clause). The contract claim may be weakened by contract restrictions. But a negligence claim against the architect would not be so limited.

Certainly, there is no contractual relation between the architect and the contractor. In many jurisdictions, that absence of contract obligations would preclude a claim for economic loss by one against the other. Bilt-Rite holds that a contract is not necessary. How distant from the owner/contractor agreement does the Bilt-Rite decision go? Between an electrical subcontractor and a consulting electrical engineer for the architect? There has already been a follow-up case in Pennsylvania allowing a contractor to sue a utility company for job disruption costs related to poorly marked gas lines.

In addition, because the courts have rules concerning the necessity to join, in one lawsuit, all parties who may be liable for a claim, the Bilt-Rite decision may require contractors to sue architects.

There is also the potential for a negative effect on information flow on construction projects. Design professionals could become less likely to pass along information to contractors, and more likely to require contractors independently to verify the owner’s specifications. What is likely, at least in Pennsylvania, is that additional clauses will be added to contract terms and conditions in an effort to reduce the architect’s responsibility.

Here we may have further proof of the maxim: “Hard cases make bad law.” By trying to help the contractor who was hurt because of a specification error in Bilt-Rite, in the future contractors might be worse off in getting the information they need. Close attention must be paid to this developing area of the law. Contractors need to be alert as to how these changes will affect them and their relations with other contracting parties. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, e-mail: USBuildlaw@aol.com, or his Web site, www.ittig-ittig.com.