John Martin Co., Inc. v. Morse/Diesel, Inc.

• Decision Date: 28 October 1991
• Citation: 819 S.W.2d 428,60 U.S.L.W. 2356
• Parties: JOHN MARTIN COMPANY, INC., Plaintiff/Appellee, v. MORSE/DIESEL, INC., Morse/Diesel, Inc., of Illinois, and Leslie Littlefield, Defendants/Appellants. 819 S.W.2d 428, 60 U.S.L.W. 2356
• Court: Tennessee Supreme Court

Page 428

819 S.W.2d 428

JOHN MARTIN COMPANY, INC., Plaintiff/Appellee, v. MORSE/DIESEL, INC., Morse/Diesel, Inc., of Illinois, and Leslie Littlefield, Defendants/Appellants.

819 S.W.2d 428, 60 U.S.L.W. 2356

Supreme Court of Tennessee,

at Knoxville.

Oct. 28, 1991.

Hugh Garner, Garner, Lewis & Prickett, Chattanooga, David M. Meister, and Timothy J. Patenode, Katten, Muchin & Zavis, Chicago, Ill., for defendants-appellants.

American Institute of Architects, Nat. Soc. of Professional Engineers, American Consulting Engineers Council, Tennessee Soc. of Architects, Tennessee Soc. of Professional Engineers, Consulting Engineers of Tennessee, East Tennessee Chapter of the American Institute of Architects, amici curiae.

David N. Garst, Lewis, King, Krieg & Waldrop, Knoxville, for brief of amici curiae.

William T. Alt, Chattanooga, for plaintiff-appellee.

Associated Gen. Contractors of Tennessee and East Tennessee Chapter of the Ass'n of Gen. Contractors, amici curiae.

Dan D. Rhea, Arnett, Draper & Hagood and Wanda Sobieski, Baker, Worthington, Crossley, Stansberry & Woolf, Knoxville, for brief of amici curiae.

OPINION

GARY R. WADE, Special Judge.

Permission to appeal to this Court has been granted to the defendants, Morse/Diesel, Inc., Morse/Diesel, Inc., of Illinois, and Leslie Littlefield, under Rule 11 of the Tennessee Rules of Appellate Procedure. The issue is whether a subcontractor who has been fully paid by the owner for the performance of his contractual duties may make a separate claim in tort against a construction manager for economic loss caused by negligent misrepresentations.

We hold that a subcontractor, despite a lack of privity, may make such a claim against the construction manager based upon negligent misrepresentation, whether the negligence is in the form of direction or supervision. The judgment of the Court of Appeals, vacating the grant of summary judgment in favor of the defendant and remanding the cause for trial, is affirmed. Costs are adjudged against the defendant, Morse/Diesel, Inc.

Provident Insurance Company ("Provident") initially contracted with the defendant, Morse/Diesel, Inc., as a consultant to assist in the planning of an addition to its offices in Hamilton County. The defendant reviewed the proposed architectural designs, suggested modifications, and prepared cost estimates for construction.

When the decision was made to proceed with the project, Provident engaged the defendant as construction manager. By the terms of their construction management contract, the defendant was to act in behalf of the owner in the employment of the necessary subcontractors, the coordination of their schedule, and the supervision of their work. The defendant had the specific responsibility to review, consider, and approve the plans and specifications used by the subcontractors in the performance of their tasks. Leslie Littlefield was the defendant's on-site construction superintendent.

The plan of construction was in two phases: first, the substructure, which included excavation of the site and construction of the foundation and basement; and second, the superstructure, which included all construction above street level. The entire project was to be constructed by the "fast track" method. That is, construction began on each phase of the building addition as component architectural plans and specifications were completed and approved.

Provident, through the defendant, entered into a number of contracts with various contractors. On August 19, 1981, the defendant, acting as agent for Provident executed a subcontract employing the plaintiff, John Martin and Company, Inc., to provide concrete and rough carpentry for the superstructure. Although not a party to the agreement, the defendant was to supervise and direct the work. As such, the defendant was authorized to act on behalf of Provident in determining the means, techniques, sequences, and procedures for construction. The defendant had the responsibility to review and approve all shop drawings, the plaintiff's subcontractors and suppliers, and plaintiff's daily work progress.

The concrete floors to the superstructure were required to reach specific elevations provided for by the architectural plans. The defendant measured the floor elevations. As the plaintiff poured the concrete, the elevations were consistently low. More concrete was required. As a result, the plaintiff experienced additional costs and delays. The plaintiff claimed the extra labor and material were due to faulty plans. The defendant responded that the need for more concrete was due to the natural sag of the steel which, by the terms of the subcontract, was the responsibility of the plaintiff; its position was that the plaintiff had miscalculated the amount of concrete necessary. In consequence, the defendant refused to approve change orders for the additional concrete. The plaintiff did not finish its work until over a year beyond its contracted completion date.

The plaintiff, seeking compensation for its losses, filed suit against Provident and the defendant on both contractual and tort theories. Eventually, the plaintiff settled with Provident; it received the payments authorized by either the contract or approved change orders. The plaintiff and Provident signed a covenant not to sue.

The trial court granted the defendant's motion for summary judgment based upon its status as agent for Provident. The Eastern Section of the Court of Appeals reversed, holding that the plaintiff's claims of negligent misrepresentation and supervision by the defendant were independent of any liability on the part of Provident; it ruled that Counts Two and Four of the complaint were held to have survived the execution of the plaintiff's covenant not to sue. John Martin Company, Inc. v. Morse/Diesel, Inc., No. 809, 1988 WL 133474 (Tenn.App., December 15, 1988). The question of whether the plaintiff was entitled to claim economic loss in tort was not an issue in the first appeal.

On remand, the defendant filed a supplemental motion for summary judgment on the ground that economic losses are not recoverable for negligence absent privity. The trial court granted the motion. The Court of Appeals again reversed, ruling that economic loss may be recoverable by parties not in privity upon a showing of "negligence, misrepresentation, and justifiable reliance." John Martin Co., Inc. v. Morse/Diesel, Inc., No. 918, 1990 WL 28776 (Tenn.App., March 20, 1990), slip op. at 21. The grant of the defendant's application for permission to appeal is based upon our view that this specific issue is one of first impression in this state.

The defendant's principal argument is that the plaintiff cannot recover on a theory of negligence because any losses were purely commercial in nature. It contends that principles of negligence should not be applied to contract-based interests. The defendant submits that there are sound public policy reasons, not considered by the Court of Appeals, which should preclude recovery for economic losses in the absence of privity. The amicus curiae brief in support of the defendant's position argues in favor of the "economic loss doctrine": a general principle that prohibits the recovery of purely economic damages for negligence when the plaintiff lacks privity of contract with the defendant. See United Textile Workers of America v. Lear Siegler Seating Corp., No. 143, 1990 WL 171508 (Tenn.App., November 8, 1990) (APTA filed January 7, 1991). The amicus contends that it is a time-honored rule. The only exception, it submits, is in connection with an action for negligent misrepresentation, limited to those instances where the plaintiff has justifiably relied upon misinformation, usually provided by a professional, in determining whether to enter into or participate in a business transaction. See Restatement (2d) of Torts Sec. 552. Because the negligent misrepresentation alleged here is not in regard to "the transaction" but relates to the day-to-day performance of an executed contract, the amicus asserts that the doctrine's exception would not apply. To permit this action, it contends, would altogether do away with the economic loss doctrine and would subject architects, engineers, and construction managers to an unlimited number of potential claimants not remotely involved in the original transaction.

The plaintiff submits that the defendant, as construction manager with exclusive control over the project, had the continuing duty to properly supervise and direct. It argues that it had no choice but to rely upon the defendant's negligent misrepresentations in relation to the design and negligent supervision in regard to the construction. An amicus curiae, who filed its brief in support of the plaintiff, maintains that the holding of the Court of Appeals is in accordance with the established law of this state and should be sustained based upon public policy reasons. Because this state's lawyers, title examiners, accountants, and surveyors, despite the lack of privity, have all been held responsible for economic losses suffered by their negligence, the plaintiff asserts that no special consideration should be afforded to architects, engineers, or professional construction managers. See Stinson v. Brand, 738 S.W.2d 186 (Tenn.1987).

I

This is not a products liability case. In this instance, the theory of recovery is that the defendant negligently supplied information intended for the guidance of others; the plaintiff relied upon the misrepresentation in the performance of his contracted service and experienced business losses as a result. Many of those cases relied upon by the defendant involve claims of product liability in respect to design defects; the losses suffered were caused by defective products, not misguidance or misdirection in the performance of services. See, e.g., MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916). The question here is not one...