The California Court of Appeal recently issued a significant decision for design professionals. In State Ready Mix, Inc. v. Moffatt & Nichol (http://www.courts.ca.gov/opinions/documents/B253421.PDF), the Court held that a concrete supplier (State Ready Mix, Inc.) could not sustain a cause of action for contribution or equitable indemnity against the civil engineer (Moffatt & Nichol).
Synopsis: A pier construction contractor filed a complaint against concrete subcontractor State Ready Mix, Inc. (“State”) for breach of contract and breach of warranty after the concrete supplied by State failed to meet the project owner’s compressive strength requirements. State filed a cross-complaint for equitable indemnity and contribution against Moffatt & Nichol (“Moffatt”), the civil engineer. The trial court sustained Moffatt’s demurrer without leave to amend, and State appealed. The Court of Appeal affirmed and held:
Background and Discussion: Moffatt was retained by the project manager (Bellingham) to prepare plans for a travel lift pier. Moffatt’s plans required the concrete have an air entrainment of two to four percent and the concrete, when cured, attain a compressive strength of 5,000 PSI in 28 days.
The general contractor hired State to prepare the concrete mix used to construct the lift. After State submitted its concrete mix design, Moffatt, at the request of the general contractor and even though outside the scope of its contract, reviewed and approved State’s concrete design. After a portion of the pier had to be demolished and rebuilt after it was discovered the concrete supplied by State was defective, the general contractor sued State for breach of contract and breach of warranty. State filed a cross-complaint against Moffatt for implied equitable indemnity and contribution, alleging Moffatt failed to use reasonable care in reviewing and approving the concrete mix design. After three amended pleadings, the trial court sustained Moffatt’s demurrer without leave to amend because Moffatt was not in privity of contract with the general contractor or State and because State’s cross-complaint was barred by the economic loss doctrine.
The Court affirmed and held that without a duty of care sounding in tort, State could not maintain a cause of action for equitable indemnification or contribution from Moffatt based on a theory that Moffatt negligently performed its duties. In reaching this conclusion, the Court relied on, among other authority, the seminal cases Aas v. Superior Court (2000) 24 Cal.4th 627 (Aas) and BFGC Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848 (BFGC).
In Aas, the California Supreme Court upheld the economic loss rule and maintained the line between tort and contract claims by rejecting a negligence cause of action for construction defects that had not yet caused appreciable physical damage. Although statutory measures of damage in contract (Civ. Code section 3300) and tort (Civ. Code section 3333) use the same language—the amount of compensation “for all the detriment proximately caused”—the common law economic loss rule provides that “appreciable, nonspeculative, present injury is an essential element of a tort cause of action.” Aas, supra, 24 Cal. 4th at 646. The Court held that without manifest property damage, homeowners and HOAs did not have negligence claims against developers, general contractors, or subcontractors for construction defects. Id., at 632 (emphasis added.) While the Aas Court discussed the applicability of the economic loss doctrine to developers, general contractors and subcontractors, courts remain divided as to whether design professionals are excluded from its protection. For that reason, the State Ready case is significant in that it extends the application of the economic loss doctrine to a professional engineer. The Court reasoned “like Aas, the economic loss rule bars State’s cross-complaint because Moffatt has no contractual relationship with State or [the general contractor] and no facts are alleged that the concrete injured a person or damaged other property.” State Ready Mix, Inc. v. Moffatt & Nichol, 2015 WL 109869, at *3.
The Court also relied on BFGC in finding that State could not maintain a cause of action for equitable indemnification or contribution from Moffatt. In BFGC, the Court rejected the equitable indemnity claim brought by the contractor against the architect, holding that the underlying action in an equitable indemnity claim must sound in tort. Since the underlying case was based solely on breach of contract allegations, claimant’s indemnity claim was barred. BFGC, 119 Cal.App.4th 848. Similarly, the Court in State Ready found that since the general contractor did not assert a tort claim against State, there was no basis for a finding of potential joint and several liability on the part of defendants, thereby precluding a claim for equitable indemnity.
State also argued because Moffatt reviewed and approved the concrete mix design, there was an “implied contract” between Moffatt and the general contractor regarding the concrete. Invoking the doctrine of promissory estoppel, State argued Moffatt promised the concrete design would work. In finding State could not maintain a cause of action for promissory estoppel, the Court noted Moffatt worked for the project manager, not the general contractor or State. The Court further noted no facts were alleged that Moffatt made a clear and unambiguous promise regarding the concrete. In addition, Moffatt’s review and approval of the mix design for the concrete was not the cause of the bad concrete. Further, the Court held that even if its complaint was based on an implied contract or promissory estoppel (of which State sought equitable indemnification), the damages are to recoup the cost of replacing the concrete. Again citing the reasoning of Aas, the Court denied State’s promissory estoppel claim and held “the economic loss rule prevents the law of contract and the law of tort from dissolving one into the other.”
Finally, State argued Moffatt owed a duty of care based upon the “special relationship” analysis of Biakanja v. Irving (1958) 49 Cal.2d 647 (Biakanja). In Biakanja, the Court permitted the intended beneficiary under a will to recover damages from a notary public who failed to have the will properly attested. In concluding the notary owed a duty to an intended beneficiary not to mishandle the will’s drafting and solemnization, the Court held a defendant’s negligent performance of a contractual obligation resulting in damage to economic interests of a person – even one who is not in contract – could support recovery if the defendant was under a duty to protect those interests. In finding the special relationship between the parties, the Court discussed the following factors: (1) the extent to which the transaction was intended to affect the future homeowners; (2) the foreseeability of harm; (3) the degree of certainty that the future homeowner suffered injury; (4) the closeness of connection between the actor’s conduct and the injury suffered; (5) the moral blame of preventing future harm; and (6) the policy of preventing future harm. The State Ready Court rejected every factor as a basis for finding a special relationship between State and Moffatt (e.g., Moffatt provided a gratuitous service to benefit the project manager, not State; State did not establish any foreseeability of harm, etc.)
Central to the Court’s holding in State Ready was the fact that Moffatt was in contract with the project manager, not State or the general contractor. The Court declined to impose liability for any of Moffatt’s extra-contractual duties, despite the fact Moffatt agreed to perform work outside the scope of its contract. No facts were alleged that Moffatt made a “clear and unambiguous promise” to support finding an implied contract for promissory estoppel. Further, Moffatt’s review and approval of the concrete mix design was not the cause of the bad concrete. The State Ready decision supports that a design professional’s liability for economic losses is limited by the terms of its contract and the obligations stated therein.