Alert: California Courts Limit Available Remedies in Construction Cases
January 06, 2005
California courts recently issued two opinions that have important implications to all stakeholders in California's construction industry. Both of these opinions limit the legal remedies available against a party causing damage.
In Lewis Jorge Construction Management, Inc. v. Pomona Unified School District, 04 C.D.O.S. 11267 (December 27, 2004), the California Supreme Court unanimously held that a contractor whose contract was wrongfully terminated, and who suffered diminished bonding capacity as a result, could not recover the lost profits it would have earned on other jobs had the contractor's bonding capacity not been reduced.
In Weseloh Family Limited Partnership et al v. K.L. Wessel Construction Co. et al., 04 C.D.O.S. 11242 (December 23, 2004), the California Court of Appeal held that design professionals under contract with a subcontractor did not owe a duty of care to either the general contractor or the owner of property that was damaged by the design professional's negligence.
The Lewis Jorge Decision
In the Lewis Jorge case, a school district contracted with a general contractor to perform building improvements at a school. Because the general contractor was late in completing the work, the school district terminated its contract for breach. As a result of the contract termination, the general contractor's surety reduced its bonding capacity by half. The general contractor claimed the reduction of its bonding capacity caused it to be unable to make bids on other jobs that would have provided $3.1 million in profits. In the trial court, the school district was found to have breached its contract by terminating it, and the general contractor was awarded its lost profits on jobs it could not bid due to its reduced bonding capacity.
The California Supreme Court reversed the trial court and held that lost profits resulting from reduced bonding capacity are not recoverable as "general" damages. Although the Supreme Court held that lost profits may be recoverable as "special" damages, it found that the contractor had not plead lost profits as special damages. Nor had the contractor offered evidence that, but for the school district's breach, the contractor would have made the profits. Of particular importance to the Supreme Court was that the contractor had not demonstrated that the owner had specific knowledge that its breach would make the losses reasonably foreseeable.
Construction Industry Implications
The Lewis Jorge case has significant implications to the construction industry. Contractors seeking lost profits under these circumstances will be required to prove that the owner was specifically aware at the time of contracting that such damages would result from a breach of contract, or that circumstances existed at the time of contracting that made such damages reasonably foreseeable and within the contemplation of the parties. In addition, contractors seeking such damages will also be required to prove that the occurrence of such damages is not uncertain, and that the amount of such damages is not speculative.
The Weseloh Decision
In the Weseloh case, an owner hired a general contractor to build an auto dealership. The general contractor hired a subcontractor to build retaining walls on the site, and the subcontractor, in turn, retained engineering consultants to design the retaining walls. When the retaining walls failed, the owner and the general contractor sued the design engineers. Because neither the owner nor the general contractor had a contract with the engineers, the Court of Appeal used tort principles to evaluate the engineers' duty to the owner and the general contractor.
The Court of Appeal found that the engineers did not, as a matter of law, owe a duty of care to the owner or the general contractor and, therefore, could not have been negligent in exercising their duty.
In arriving at its holding, the court stated that the case does not create a rule that a second tier subcontractor that provides only professional services can never be liable in general negligence to a general contractor or the owner of the property. The court observed that there may be circumstances that would support such a duty. Of particular significance to the court in this case appeared to be the fact that there was no evidence presented either that the design was used without alteration, or that the design defects alleged actually caused the damages.
The court also observed that there was no evidence that the engineers ever participated in or supervised any physical work in the construction of the retaining walls. The result may have been different if these facts existed. The court stated that the general contractor and the owner could have provided for contractual duties running from the engineers to them. Finally, the court observed that both the general contractor and the owner may have pursued claims against the engineers indirectly, by pursuing claims in contract against those who caused the engineers to be engaged.
Although the court declined to find a duty based on general principles of negligence, it did observe that a claim for negligent misrepresentation may exist under these circumstances. Apparently, no such claim was made in this case.
Construction Industry Implications
The implications of the Weseloh decision for the construction industry are also significant. Owners or general contractors, who are not in privity of contract with design professionals, will now have a more difficult time proving that these design professionals owe them a duty of care in the event their professional negligence results in economic loss or property damage. But such a duty may be created by contract. However, it appears that no direct contractual relationship may be necessary to establish this duty. It may be enough that the contract with the design professional contains a provision that the duty of care of the design professional runs to the owner and/or general contractor. Moreover, this decision does not foreclose the potential of using the theory of negligent misrepresentation as a basis of establishing liability under these circumstances.
For more information on these decisions, please contact your Farella Braun + Martel attorney or Jeff Sykes at 415.954.4967, or jsykes@fbm.com.
This article is published as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.
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