Terracon Consultants v. Mandalay Resort

• Decision Date: 26 March 2009
• Docket Number: No. 47844.,47844.
• Citation: 206 P.3d 81
• Parties: TERRACON CONSULTANTS WESTERN, INC.; Terracon, Inc.; Lochsa, LLC; and Klai-Juba Architects, Ltd., Appellants, v. MANDALAY RESORT GROUP, f/k/a Circus Circus Enterprises, Inc.; Mandalay Development, f/k/a Circus Circus Development Corp.; and Mandalay Corporation, Respondents.
• Court: Nevada Supreme Court

206 P.3d 81

TERRACON CONSULTANTS WESTERN, INC.; Terracon, Inc.; Lochsa, LLC; and Klai-Juba Architects, Ltd., Appellants, v. MANDALAY RESORT GROUP, f/k/a Circus Circus Enterprises, Inc.; Mandalay Development, f/k/a Circus Circus Development Corp.; and Mandalay Corporation, Respondents.

No. 47844.

Supreme Court of Nevada.

March 26, 2009.

Holland & Hart, LLP, and Gregory S. Gilbert and Sean D. Thueson, Las Vegas; McDowell, Rice, Smith & Buchanan and Thomas R. Buchanan, Kansas City, MO, for Appellants, Terracon Consultants Western, Inc., and Terracon, Inc.

Weil & Drage, APC, and Jean A. Weil, Colin R. Harlow, and Anthony D. Platt, Las Vegas, for Appellants, Lochsa, LLC, and Klai-Juba Architects, Ltd.

Haney, Woloson & Mullins and Wade B. Gochnour, Las Vegas; Santoro, Driggs, Walch, Kearney, Holley & Thompson and Dennis R. Haney and Shemilly A. Briscoe, Las Vegas; Niddrie, Fish & Buchanan and Martin N. Buchanan, San Diego, CA; Girardi & Keese and David R. Lira and Shahram A. Shayesteh, Los Angeles, CA, for Respondents.

Beckley Singleton, Chtd., and Daniel F. Polsenberg, Las Vegas; Morris Polich Purdy, LLP, and Nicholas M. Wieczorek, Las Vegas, for Amici Curiae.

BEFORE THE COURT EN BANC.

OPINION

By the Court, GIBBONS, J.:

The United States District Court for the District of Nevada has certified, under NRAP 5, the following questions to this court. Does the economic loss doctrine apply to contractors who solely provide services in construction defect cases? Does the economic loss doctrine apply in construction defect cases to design professionals, such as engineers and architects, who solely provide services, regardless of whether the services are rendered before or during construction? Although we accept the federal court's referral, we do so by reframing its two questions as one in order to address precisely the particular negligence claim and factual scenario that led to the certification order and to avoid any overly broad conclusions about claims against "contractors," a term that the federal district court did not define in its certification order. Thus, we answer the following question. Does the economic loss doctrine apply to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in the commercial property development or improvement process, when the plaintiffs seek to recover purely economic losses?

The answer to the question is yes. "Purely economic loss" has been defined as "`the loss of the benefit of the user's bargain ... including ... pecuniary damage for inadequate value, the cost of repair and replacement of [a] defective product, or consequent loss of profits, without any claim of personal injury or damage to other property.'" Calloway v. City of Reno, 116 Nev. 250, 257, 993 P.2d 1259, 1263 (2000) (first and second alterations in original) (quoting American Law of Products Liability (3d) § 60:36, at 66 (1991)), overruled on other grounds by Olson v. Richard, 120 Nev. 240, 241-44, 89 P.3d 31, 31-33 (2004). After examining relevant authority and contemplating the policy considerations behind the economic loss doctrine, we have determined that the doctrine's purpose—to shield defendants from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable—would be furthered by applying it to preclude the professional negligence claims at issue here. Thus, we conclude that the economic loss doctrine bars professional negligence claims against design professionals who provided services in the process of developing or improving commercial property when the plaintiffs' damages are purely financial.

PROCEDURAL HISTORY AND FACTS

This matter arises from a removed diversity case in which a property owner brought a breach of contract and professional negligence action against certain design professionals (engineering and architectural firms). The property owner alleged that the design professionals provided negligent design advice upon which the property owner relied in making major improvements to its commercial real property, causing the property owner economic losses.

Respondents Mandalay Resort Group, Mandalay Development, and Mandalay Corporation (collectively, Mandalay) managed the construction of the approximately $1 billion Mandalay Resort and Casino (the resort) in Las Vegas. To complete the resort, Mandalay hired various subcontractors, including appellants Terracon Consultants Western, Inc., Terracon, Inc. (collectively, Terracon), Lochsa, LLC, and Klai-Juba Architects, Ltd. Mandalay entered into a written contract with Terracon, under which Terracon agreed to provide geotechnical engineering advice about the subsurface soil conditions and recommended a foundation design for the property. The parties do not dispute that Terracon's work was limited to providing professional engineering advice and that Terracon was not involved in physically constructing the property. Although Mandalay did not have written agreements with Klai-Juba or Lochsa, those firms, apparently acting in accordance with an oral arrangement with Mandalay, provided architectural and engineering services, respectively, by designing parts of the resort's structure. As with Terracon, Klai-Juba and Lochsa played no role in the resort's physical construction.

In accordance with the written contract's terms, Terracon prepared a geotechnical report with its foundation design recommendations, which Mandalay implemented as it began erecting the resort. Based upon Terracon's soil analysis and the anticipated weight of the building, Terracon predicted a certain amount of settling underneath the foundation. According to Mandalay's complaint, however, the ultimate amount of settling exceeded Terracon's projections. Because Clark County believed that the settling presented a potential danger to the resort's structural integrity, the county required Mandalay to repair and reinforce the foundation before proceeding with the construction. Consequently, Mandalay sued Terracon for damages in state court, alleging that the deficient engineering advice caused the resort's foundation problems.¹ Mandalay's theories of recovery included breach of contract, breach of the covenant of good faith and fair dealing, and professional negligence.

Terracon removed the matter to the United States District Court for the District of Nevada and, thereafter, moved for partial summary judgment on Mandalay's professional negligence claim, arguing that the claim was barred under the economic loss doctrine. Mandalay opposed the motion, arguing, among other things, that as a matter of law the economic loss doctrine did not apply to negligence claims against design professionals or contractors who solely provide services.

Terracon also filed a third-party complaint against, among others, Lochsa and Klai-Juba for negligence, contribution, and equitable indemnity. Terracon argued that if the economic loss doctrine did not bar Mandalay's negligence claim, then the doctrine likewise would not bar its claims against Lochsa and Klai-Juba. In response, Lochsa and Klai-Juba argued that the economic loss doctrine applied and moved the federal court to dismiss Terracon's third-party complaint on that basis.

The U.S. District Court denied without prejudice the motion for partial summary judgment and the motion to dismiss the third-party complaint, after determining that Nevada law was unclear on whether the economic loss doctrine applied to bar a claim grounded on allegations that design professionals negligently rendered services when the plaintiffs sought to recover purely economic losses.² The federal court thus asked this court to address the scope of Nevada's economic loss doctrine and, in particular, whether it applies to preclude negligence-based claims against engineers, architects, or other design professionals in construction defect cases, when the plaintiff seeks to recover purely economic losses.

Acknowledging that our caselaw addressing this doctrine contains nuanced ambiguities, we accept the federal court's referral. We reframe the questions presented therein, however, to answer directly whether the economic loss doctrine bars professional negligence claims against design professionals who provide only their services in the commercial property development or improvement process, when the plaintiffs are seeking to recover purely economic losses. In doing so, we point out that this opinion has no bearing on NRS Chapter 40's provisions governing actions brought based on construction defects in newly constructed residential property.³ Appellants and respondents have briefed the issue, as directed, and we permitted certain professional organizations to file a brief as amici curiae.⁴

DISCUSSION

NRAP 5

This court has discretion in determining whether to accept and answer a question certified by a federal court. NRAP 5; Volvo Cars of North America v. Ricci, 122 Nev. 746, 749-51, 137 P.3d 1161, 1163-64 (2006). In deciding whether to exercise that discretion, this court looks to whether (1) the certified question's answer may be determinative of part of the federal case, (2) there is controlling Nevada precedent, and (3) the answer will help settle important questions of law. See Volvo Cars, 122 Nev. at 749, 137 P.3d at 1163.

As noted, the federal district court certified two questions. The first question asked whether the economic loss doctrine precluded tort claims brought against contractors who solely provide services. As the defendants here were design professionals, namely engineers and architects, any issue concerning contractors would not fit within the scope of the unresolved legal issue raised in the parties' pleadings. The second question asked whether the economic loss doctrine precluded tort claims against design professionals. That question, however, did...