Presnell Construction Managers, Inc. v. EH Construction, LLC

134 S.W.3d 575, 2004 Ky. LEXIS 114, 2004 WL 1123761

• Court: Kentucky Supreme Court
• Decided: May 20, 2004
• Docket: 2000-SC-0571-DG
• Status: Published

Opinions

OPINION OF THE COURT

I. ISSUE

DeLor Design Group, Inc. (“DeLor”), the owner of a commercial building, contracted with Appellant, Presnell Construction Managers, Inc. (“Presnell”), to act as the construction manager for the building’s renovation (“the Project”). DeLor also contracted with Appellee, EH Construction, LLC (“EH”), to provide “general trades” work for the Project. EH, claiming exclusively economic losses¹ from Presnell’s failure to perform properly its contractual duty to coordinate the Project, filed a suit against Presnell in which it brought claims premised upon Presnell’s alleged negligent misrepresentation and negligent supervision of the Project. The trial court found that, under the contract, Presnell owed a duty only to DeLor and therefore dismissed EH’s claims against Presnell. Was EH entitled to maintain an action in tort against Presnell to recover for its alleged economic loss? Because we adopt § 552 of the Restatement (Second) of Torts as the standard for negligent misrepresentation in Kentucky, and because EH’s complaint against Presnell alleged “Presnell ... supplied faulty information and guidance” to the Project’s contractors, we hold that the trial court improperly dismissed EH’s claim for negligent misrepresentation against Presnell. Accordingly, we affirm the Court of Appeals and remand this case to the trial court for further proceedings.

II. BACKGROUND

The material facts involving the issues now before this Court are straightforward and undisputed. In May 1996, DeLor, as part of its efforts to renovate a commercial building owned by it, contracted with Pres-nell to act as construction manager for the Project. DeLor and Presnell completed and signed an American Institute of Architects (“AIA”) document styled, “Standard Form of Agreement Between Owner and Construction Manager where the Construction Manager is NOT a Constructor.” The contract set forth the duties and obligations that DeLor and Presnell owed to each with respect to the Project, and paragraph 10.7 of the contract provides: “Nothing contained in - this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the Owner or the Construction Manager.”

Later, in March 1997, DeLor contracted with EH to furnish what the contract referred to as “general trades” work for the Project. DeLor and EH completed and signed an AIA document styled, “Standard Form of Contract Between Owner and Contractor.” The contract set forth the duties and obligations that DeLor and EH owed to each other with respect to the Project. Paragraph 1.1.20 of Article 1 of the contract provides:

The Contractor agrees that nothing contained in the Contract Documents or any agreement between the Owner and the Construction Manager or the Owner and the Design Professional creates any contractual relationship between the Construction Manager ... and the Contractor. The Contractor waives any right the Contractor may have as an alleged third-party beneficiary of any such agreements and covenants not to sue the Construction Manager ... as a third-party beneficiary of such agreements.

And, finally, paragraph 2.1.1 of Article 2 of the contract provides: “The Construction Manager shall administer the Contract as described herein. The Construction Manager in performing under this Contract is acting as the Owner’s principal agent in all matters regarding this Contract.”

After the signing of the contracts, both Presnell and EH, along with other contractors and subcontractors on the Project, proceeded to renovate DeLor’s building under their contracts with DeLor.

However, in November 1997, EH filed a mechanics’ and materialman’s lien in the sum of $268,218.00 against the real property on which the Project was located for unpaid materials and labor that EH claimed that it had furnished to DeLor for the Project. In February 1998, EH filed suit to enforce its lien against DeLor,² Presnell, and others.³ EH also sought to recover damages for its economic losses, which EH alleged were the result of Pres-nell’s alleged negligent misrepresentation and negligent supervision of the Project.⁴ Specifically, EH’s complaint alleged that Presnell failed “to properly stage and time the work involved” for the Project and that as a result, EH “was required to redo much of the work that it had already completed, due to the other contractors and subcontractors coming in and subsequently destroying work that had already been completed by [EH].” Additionally, EH alleged that “Presnell was careless and negligent in coordinating the Project, and supplied faulty information and guidance and supervision to the contractors working on the Project.”

Presnell filed a motion to dismiss EH’s negligence claims on the ground that it owed no duty to EH.⁵ The trial court agreed, found that Presnell’s duties under the contract were owed exclusively to De-Lor, and dismissed EH’s claim against Presnell. The Court of Appeals, however, adopted § 552 and held that EH’s tort claim against Presnell was actionable because, under § 552, Presnell owed independent duties, i.e., “a duty to EH to exercise reasonable care or competence in its supervision, collection, and distribution of information and directions that it provided to EH for guidance.” As a result, the Court of Appeals reversed the trial court and remanded the case for trial on EH’s negligent misrepresentation claim against Presnell.⁶ We granted Presnell’s motion for discretionary review, and we now affirm the decision of the Court of Appeals.

III. ANALYSIS

A proper analysis and resolution of the issues presented by this appeal requires an analysis of two (2) separate topics, i.e.: (1) privity of contract and (2) the tort of negligent misrepresentation. We will discuss each topic in turn and then apply them to this case.

A. PRIVITY OF CONTRACT

“Privity of contract” is “[t]he relationship between parties to a contract, allowing them to sue each other but preventing a third party from doing so.”⁷ Thus, “[o]rdinarily, the obligations arising out of a contract are due only to those with whom it is made; a contract cannot be enforced by a person who is not a party to it or in privity with it, except under a real party in interest statute or, under certain circumstances, by a third-party beneficiary.”⁸ Consequently, “[a]s a general rule, whenever a wrong is founded upon a breach of contract, the plaintiff suing in respect thereof must be a party or privy to the contract, and none but a party to a contract has the right to recover damages for its breach against any of the parties thereto.” ⁹

“It is well established that a third person may, in his own right and name enforce a promise made for his benefit even though he is a stranger both to the contract and to the consideration.”¹⁰ But, “[n]ot every contract will give one who is not privy thereto a right of action therein, even though such third party might have received a benefit from the completion of the contract.”¹¹ Only a third-party who was intended by the parties to benefit from the contract, namely, a donee or a creditor beneficiary, has standing to sue on a contract; an incidental beneficiary does not acquire such right.¹²

Although privity is no longer required to maintain a tort action,¹³ “one who is not a party to the contract or in privity thereto may not maintain an action for negligence which consists merely in the breach of the contract.”¹⁴ Accordingly, unless Presnell breached some duty to EH apart from its duties to DeLor under the contract — i.e. an independent duty — EH, who was, at the most, an incidental beneficiary of the contract between DeLor and Presnell, cannot maintain an action in negligence against Presnell. In order to determine whether such an independent duty exists, we next turn to the tort of negligent misrepresentation.

B. NEGLIGENT MISREPRESENTATION

A majority of jurisdictions have adopted Restatement (Second) of Torts § 552, which outlines the elements of negligent misrepresentation as follows:

(1) 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.

(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and

(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.

(3)The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.¹⁵

Although Kentucky appellate courts have long recognized the tort of fraudulent misrepresentation and delineated its elements,¹⁶ we have neither adopted § 552 nor explicitly recognized the tort of negligent misrepresentation as it relates to either economic loss or physical harm.¹⁷ Nevertheless, Kentucky’s appellate courts have cited § 552 with approval, and have otherwise suggested that Kentucky recognizes a tort action for negligent misrepresentation. In Seigle v. Jasper,18 the Court of Appeals held that an attorney’s duty to exercise ordinary care in the performance of a title examination for the lending bank extended to the purchasers of the real property, and the Court noted that its “holding is consistent with” § 552.¹⁹ Then, in Morton v. Bank of the Bluegrass and Trust Co.,²⁰ the Court of Appeals indicated that negligent misrepresentation was a recognized tort in this jurisdiction when it ruled that “[t]o the extent that the complaint asserts a cause of action for negligent misrepresentation, summary judgment in favor of the appellees/cross-appellants was appropriate, as only compensatory damages are allowed for this claim.”²¹ And, in Chernick v. Fasig-Tipton Kentucky, Inc.,22 the Court of Appeals ruled that Fasig-Tipton had a duty to use ordinary care to ensure that information provided a prospective purchaser at its consignment auction sale was as accurate as possible, and that its “fail[ure] to do so, breach[ed] its duty, and thereby exhibited negligent behavior toward the purchasers who justifiably relied upon the information contained in the catalog of sale.”²³ The Chemick court “did not use the term ‘negligent misrepresentation,’ nor did it cite the Restatement, but its message was certainly consistent!!,]”²⁴ i.e., negligent misrepresentation is actionable in Kentucky.

The federal courts have made different predictions as to whether this Court would recognize the tort of negligent misrepresentation as set forth in § 552.²⁵ Although the federal decisions are persuasive, they are not binding precedent; however, we take particular notice of Ingram Industries, Inc. v. Nowicki,²⁶ In that case, which involved “the scope of liability of an accountant for negligence causing loss to a third party,”²⁷ then-Federal District Judge Scott Reed, former Chief Justice of this Court and an eminent Kentucky jurist, concluded that this Court, “if it were confronted with the issue” would adopt the standards set out in § 552.²⁸ Judge Reed noted that “[tjhere has been a steady and continuing development in this area of law[,]”²⁹ and that “the strict and restrictive view ... is no longer completely viable.”³⁰ And, in accordance with the “steady and continuing development” to which Judge Reed alluded, “many courts have now recognized that under some restrictive circumstances the defendant may be under a duty of care to make his representations accurately and may be liable for a limited measure of damages to a limited group of persons if his negligent misrepresentations induce justifiable reliance to the plaintiffs loss.”³¹ In fact, “[m]ost courts have adopted the Restatement’s position or something close to it.”³² Because we find § 552 to be consistent with Kentucky case law, we join the majority of jurisdictions and hereby adopt § 552’s standards for negligent misrepresentation claims in this jurisdiction.

C. APPLICATION OF LAW TO PRESENT CASE

After noting that no privity existed between Presnell and EH, the trial court held that Presnell owed “duties and responsibilities under its contract” only to DeLor. And, as Presnell “had no duty to [EH],” the trial court ruled that “[r]elief, if any, for [EH] would be against DeLor.” Accordingly, the trial court granted summary judgment to Presnell on EH’s tort claims against it. In its appeal to the Court of Appeals, EH argued that the existence of a duty on Presnell’s part did not require privity and urged the adoption of § 552.³³ The Court of Appeals agreed that privity is not a prerequisite for a tort action in Kentucky, and then, being persuaded to follow the lead of the Tennessee Supreme Court in John Martin Co. v. Morse/Diesel, Inc.,34 it adopted § 552. Accordingly, the Court of Appeals held “that the trial court erred in determining that EH, a contractor, could not maintain an action for negligent misrepresentation and supervision against Presnell, the construction manager, with whom EH had no privity of contract.” We agree that privity is not necessary to maintain a tort action, and, by adopting § 552, we agree that the tort of negligent representation defines an independent duty for which recovery in tort for economic loss is available. Therefore, we agree with the Court of Appeals’s conclusion that EH could maintain a tort action for negligent misrepresentation against Presnell under the pleadings in this case and the limited facts developed to this point.

Specifically, Presnell’s duty under § 552 was not to supply false information,³⁵ and EH’s complaint alleges that “Presnell ... supplied faulty information and guidance” to the Project’s contractors. This allegation was sufficient to avoid what was essentially a dismissal for failure to state a claim for relief. It may develop during discovery or trial that EH cannot prove the elements of the independent tort of negligent misrepresentation, but at this time, EH’s complaint sufficiently states a claim against Presnell for negligent misrepresentation. However, EH’s claim for negligent supervision of the Project does not articulate a claim that is independent of Presnell’s contractual duties. Accordingly, the trial court did not err in dismissing that claim.

IV. CONCLUSION

For the foregoing reasons, we affirm the Court of Appeals and vacate the trial court’s summary judgment dismissing the complaint.

All concur. KELLER, J., also concurs by separate opinion in which GRAVES, J., joins.

1 . "Economic loss” means "[a] monetary loss such as lost wages or lost profits.” BLACK’S LAW DICTIONARY 530 (7th ed.1999).

2 . Article 14 of the contact between DeLor and EH provides that all disputes "relating to this contract or the breach thereof” shall first be mediated and, if the mediation is unsuccessful, submitted to binding arbitration. Accordingly, EH’s claim against DeLor was dismissed by the trial court because of the arbitration clause in their contract and referred to arbitration. Consequently, this claim is not before this Court.

3 . The owners of the real estate on which the building was located and another lienholder were joined as necessary parties to the lawsuit because of their interests in the real property. EH did not seek a personal judgment against these other parties.

4 . EH also alleged a breach of contract claim against Presnell. This claim was dismissed by the trial court and EH does not contest the trial court's ruling.

5 . We would note that no discovery was taken by the parties on EH's claim against Presnell, and that Presnell, in fact, did not file an answer to EH's complaint. However, since the trial court considered matters outside the complaint in connection with Presnell’s motion to dismiss, it appropriately treated Pres-nell’s motion to dismiss as a motion for summary judgment. CR 12.02 ("If, on a motion asserting the defense that the pleading fails to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment....”); Johnson v. Lohre, Ky., 508 S.W.2d 785, 788 (1974) ("[CR 12.02] provides that if a motion to dismiss is made and matters outside the pleadings are presented, the motion shall be treated as one for summary judgment with supporting affidavits.”); Craft v. Simmons, Ky.App., 777 S.W.2d 618 (1989).

6 .It is unclear from the Court of Appeals's opinion whether the opinion reinstated EH's separate claim against Presnell for negligent supervision. Although it appears that the Court of Appeals’s reversal of the trial court was premised solely on its adoption of § 552, the language of the opinion, i.e., "In so doing, we hold that the trial court erred in determining that EH, a contractor, could not maintain an action for negligent misrepresentation and supervision against Presnell, the construction manager, with whom EH had no privity of contract[,]” (emphasis added) might be construed as reinstating what EH refers to as its "ordinary negligence claim against Presnell.” We find it more likely that the Court of Appeals erroneously treated EH's negligent supervision allegations as part of its negligent misrepresentation claim.

7 . BLACK’S LAW DICTIONARY 1217 (7th ed.1999).

8 . 17A AM. JUR. 2D, Contracts § 425 (1991).

9 . Id. See also Sexton v. Taylor County, Ky.App., 692 S.W.2d 808, 810 (1985) ("It is the law in this jurisdiction that no stranger to a contract may sue for its breach unless the contract was made for his benefit.”).

10 . 17A AM. JUR. 2D, Contracts § 435 (1991).

11 . B & C Construction Co. v. Grain Handling Corp., 521 S.W.2d 98, 101 (Tex.Civ.App.1975).

12 . Sexton, 692 S.W.2d at 810 (“Parties for whom these contracts are made fall into two classes—donee beneficiaries and creditor beneficiaries. 'One is a donee beneficiary if the purpose of the promisee in buying the promise is to make a gift to the beneficiary. A person is a creditor beneficiary if the promis-ee’s expressed intent is that the third party is to receive the performance of the contract in satisfaction of any actual or supposed duty or liability of the promisee to the beneficiary.” ') (quoting King v. National Industries, Inc., 512 F.2d 29, 33 (6th Cir.1975)); B & C Construction Co., 521 S.W.2d at 101-2.

13 . Tabler v. Wallace, Ky., 704 S.W.2d 179, 186 (1985) (observing "the demise of the erroneous defense of privity in negligence cases”); C.D. Herme, Inc. v. R.C. Tway Co., Ky., 294 S.W.2d 534, 537 (1956) ("The ancient so-called 'general rule’ of the manufacturer’s non-liabiliiy for negligence to persons with whom he has no contractual relation, followed by this Court in Olds Motor [Works v. Shaffer, 145 Ky. 616, 140 S.W. 1047 (1911)], has been abandoned by substantially all modem authorities. Upon reconsideration, we now determine also to abandon it and we hereby expressly overrule the Olds Motor case.” (citation omitted)).

14 . Penco, Inc. v. Detrex Chemical Industries, Inc., Ky.App., 672 S.W.2d 948, 951 (1984) (quoting B & C Construction Co., 521 S.W.2d at 102-03). See also Kevin Tucker & Associates, Inc. v. Scott & Ritter, Inc., Ky.App., 842 S.W.2d 873, 874 (1992) (“Scott & Ritter conclude that any time an act constitutes both a tort and a breach of contract, the plaintiff must waive the tort and sue in contract. We do not believe that this is now or ever was the law.”).

15 . RESTATEMENT (SECOND) OF TORTS § 552 (1977).

16 . Cresent Grocery Co. v. Vick, 194 Ky. 727, 240 S.W. 388, 389 (1922) ("We have adopted the general rule that an action cannot be maintained for fraud or deceit unless it be made to appear (1) that defendant made a material representation; (2) that it was false; (3) that when he made it he knew it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with intention of inducing plaintiff to act, or that it should be acted upon by the plaintiff; (5)- that plaintiff acted in reliance upon it; and (6) that plaintiff thereby suffered injury. ”); Investors Heritage Life Ins. Co. v. Colson, Ky.App., 717 S.W.2d 840, 842 (1986) ("In order to sustain an action for fraud, there must be clear and convincing evidence of (a) a material representation, (b) which is false, (c) known to be false or made recklessly, (d) made with inducement to be acted upon, (e) acted in reliance thereon, and (f) causing injury."). See also RESTATEMENT (SECOND) OF TORTS § 525 (1965); 2 JOHN S. PALMORE, KENTUCKY INSTRUCTIONS TO JURIES (CIVIL) §§ 31.01-31.09 (Anderson Publishing Co. 1989).

17 . See generally RESTATEMENT (SECOND) OF TORTS § 311 (1965); Moore v. Commonwealth, Ky.App., 846 S.W.2d 715 (1992) (Johnson, J. dissenting).

18 . Ky.App., 867 S.W.2d 476 (1993).

19 . Id. at 482.

20 . Ky.App., 18 S.W.3d 353 (1999).

21 . Id. at 358.

22 . Ky.App., 703 S.W.2d 885 (1986).

23 . Id. at 890.

24 . 13 David J. Leibson, KY. PRACT. TORT LAW, § 19.3 (2003).

25 . See, e.g., Miller's Bottled Gas, Inc. v. Borg-Warner Corp., 955 F.2d 1043, 1053 (6th Cir. 1992) (divided court predicted that based on its conclusion that Kentucky would preclude Miller’s product-liability claim for negligence resulting in purely economic injury, it "likewise conclude[d] that [Kentucky] would not allow recovery under a theory of negligent misrepresentation.”); Scheck Mechanical Corp. v. Borden, Inc., 186 F.Supp.2d 724, 734 (W.D.Ky.,2001) ("We have recognized that, based upon Kentucky's general adoption of the Restatement in other tort situations, Kentucky would recognize this standard for negligent misrepresentation.”); Goldman Services Mechanical Contracting, Inc. v. Citizens Bank & Trust Co. of Paducah, 812 F.Supp. 738, 742 (W.D.Ky.,1992) ("Based upon Kentucky’s general adoption of the Restatement in other tort situations, the court concurs with that conclusion.”).

26 . 527 F.Supp. 683 (E.D.Ky., 1981).

27 . Id. at 684.

28 . Id. ("The Court concurs with the conclusions reached by Judge Siler in the apparently unreported case of American States Insurance Co. v. William D. Morris, et al., Civ. Action No. 2372 (E.D.Ky. May 31, 1978). In that case, Judge Siler declared that, in his view, Kentucky would adopt the standards set out in Restatement (Second) Torts, Section 552 (1977)”).

29 . Id.

30 . Id. (citation omitted).

31 . 2 Dan B. Dobbs, THE LAW OF TORTS § 472 (West Group 2001).

32 . Id. at § 480.

33 . Presnell does not oppose the adoption of § 552 and even concedes that it might apply to a construction manager under other circumstances.

34 . 819 S.W.2d 428 (Tenn.1991).

35 . See RESTATEMENT (SECOND) OF TORTS § 552 cmt. a ("[L]iability under the rule stated in this Section is based upon negligence of the actor in failing to exercise reasonable care or competence in supplying correct information .... ”).