Western Technologies, Inc. v. Sverdrup & Parcel, Inc.

• Decision Date: 16 October 1986
• Docket Number: No. 1,CA-CIV,1
• Citation: 739 P.2d 1318,154 Ariz. 1
• Parties: WESTERN TECHNOLOGIES, INC., an Arizona corporation, formerly known as Engineers Testing Laboratories, Inc., Plaintiff-Appellant, v. SVERDRUP & PARCEL, INC. aka Sverdrup & Parcel and Associates, Inc., a Delaware corporation, doing business in Arizona; Joe Wise; John F. Fischer and Anna Fischer, husband and wife; William E. Gustafsen and Elizabeth Gustafsen, husband and wife; James A. Larsen and Mildred I. Larsen, husband and wife, Defendants-Appellees. 8645.
• Court: Arizona Court of Appeals

Page 1318

739 P.2d 1318

154 Ariz. 1

WESTERN TECHNOLOGIES, INC., an Arizona corporation, formerly known as Engineers Testing Laboratories, Inc., Plaintiff-Appellant, v. SVERDRUP & PARCEL, INC. aka Sverdrup & Parcel and Associates, Inc., a Delaware corporation, doing business in Arizona; Joe Wise; John F. Fischer and Anna Fischer, husband and wife; William E. Gustafsen and Elizabeth Gustafsen, husband and wife; James A. Larsen and Mildred I. Larsen, husband and wife, Defendants-Appellees.

No. 1 CA-CIV 8645.

Court of Appeals of Arizona Division 1, Department B.

Oct. 16, 1986.

Review Denied July 9, 1987.

[154 Ariz. 2] Gallagher & Kennedy, P.A. by Kevin E. O'Malley, Elliot Talenfeld, Phoenix, for defendants-appellees.

Shimmel, Hill, Bishop & Gruender, P.C. by Daniel F. Gruender, Richard B. Kelly, Charles E. Maxwell, Phoenix, for plaintiff-appellant.

OPINION

KLEINSCHMIDT, Judge.

In the early 1970's, the Arizona Board of Regents (Board) retained Western Technologies, Inc. (Western) to perform geotechnical engineering testing for the proposed expansion of Sun Devil Stadium. Western based its testing on designs provided by the Board. The stadium expansion was completed in the late 1970's.

Shortly after completion, cracks developed in the stadium. The Board hired Fox and Associates, another engineering firm, to investigate the cause of the cracks. Fox originally retained Sverdrup & Parcel, Inc. (Sverdrup) to assist in its analysis. Sverdrup eventually replaced Fox altogether. Sverdrup's report to the Board criticized Western's work and blamed Western, at least in part, for the stadium's structural defects.

The Board, seeking compensation for the expense of repairing the stadium, sued a number of parties, including Western. Western and the Board settled. Western subsequently filed suit against Sverdrup to recover for what it paid the Board in settlement, for attorney's fees it expended in the suit against the Board, and damages for loss of business it allegedly suffered. Western also joined a number of individual employees of Sverdrup as defendants. For the sake of convenience we refer to all the defendants as "Sverdrup."

Western alleged that Sverdrup conducted its studies of Western's work negligently and in disregard of accepted engineering practices. Western claimed that Sverdrup's report to the Board constituted fraudulent and negligent misrepresentation, as well as intentional interference with prospective contractual relations. Western's complaint also alleged that it was the third-party beneficiary of the contract between the Board and Sverdrup and that Sverdrup had breached that contract. Western did not raise this issue in its briefs on appeal, however, and we therefore deem it waived. See Van Loan v. Van Loan, 116 Ariz. 272, 274, 569 P.2d 214, 216 (1977).

The trial court granted Sverdrup's motion for judgment on the pleadings. Western then moved to amend its complaint to clarify its claim of intentional interference with contractual relations. The court denied the motion, and Western appealed.

On review we must assume the truth of Western's allegations. We can uphold the dismissal only if Western would not be entitled to any relief if it proved its allegations. Donnelly Construction Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 186, 677 P.2d 1292, 1294 (1984).

MISREPRESENTATION

The majority of claims in Western's complaint assert that Sverdrup harmed Western by its evaluation of Western's work. The essence of these counts is that Sverdrup negligently, recklessly or intentionally supplied the Board with false and misleading information. While the record in this case indicates that at times Western seemed to assert a negligence claim separate and apart from these representations, we are unable to glean from the complaint any negligence claim other than a claim for negligent misrepresentation.

Western's brief concentrates on foreseeability of harm as a component of the duty owed by Sverdrup to Western in making these representations. The trial court also focused on foreseeability in dismissing the complaint. This approach is slightly off the mark.

In Arizona the rule is as follows:

The question of duty is decided by the court. The question is whether the relationship of the parties was such that the defendant was under an obligation to use some care to avoid or prevent injury to the plaintiff. If the answer is no, the defendant is not liable even though he may have acted negligently in light of foreseeable risks.

Markowitz v. Arizona Parks Board, 146 Ariz. 352, 356, 706 P.2d 364, 368 (1985). Contrary to Western's contention, a determination that its injury was foreseeable is not dispositive.

In the context of negligent misrepresentations, Arizona has adopted the Restatement of Torts' relatively restrictive view. According to this view, the party injured must have relied on the information the defendant supplied. Arizona Title Insurance & Trust Co. v. O'Malley Lumber Co., 14 Ariz.App. 486, 491, 484 P.2d 639, 644 (1971). See also Restatement (Second) of Torts, § 552 (1977). Western claims in only one of its counts that it relied on Sverdrup's representations; in its other counts Western claims it was injured by the Board's reliance on the information. Thus, these later counts do not state a cause of action for negligent misrepresentation.

Western cites Zampatori v. United Parcel Service, 125 Misc.2d 405, 479 N.Y.S.2d 470 (Sup.Ct.1984), in support of the opposite conclusion. Zampatori is simply not the law in Arizona.

The sole count in which Western alleges that it relied upon Sverdrup's representations also fails to state a claim for negligent misrepresentation. Reliance upon the representations in question is not enough to establish such a claim. Western must also demonstrate that this reliance caused its injuries. Echols v. Beauty Built Homes, Inc., 132 Ariz. 498, 500, 647 P.2d 629, 631 (1982). Western claims that it had to rely on Sverdrup's reports because it was barred from the stadium site. It is not apparent how this reliance harmed Western because it was the Board's action based on the reports that caused Western's alleged injuries. Therefore, Western cannot recover on any of its fraudulent misrepresentation claims.

INJURIOUS FALSEHOOD

While Western's allegations do not state a claim for fraudulent misrepresentation, they do establish a cause of action for injurious falsehood. Generally, injurious falsehood "consist[s] of the publication of matter derogatory to the plaintiff's ... business in general ..., of a kind calculated to prevent others from dealing with him or otherwise to interfere with his relations with others to his disadvantage." W. Prosser and W. Keeton, The Law of Torts § 128 at 963 (5th ed. 1984); see also Restatement (Second) of Torts § 623A.

One of the comments to the Restatement sets forth an example of injurious falsehood:

1. A, an employer, knowing his statement to be false, reports to income tax authorities that he has paid B, his employee, a salary of $10,000 for the year. As a result B, who has in fact received a salary of $5,000 and has so reported, is prosecuted by the United States government for tax evasion and suffers pecuniary loss in the defense of the suit. A is subject to liability to B.

Restatement § 623A comment a, illustration 2. This example is analogous to the present case. Western alleges that Sverdrup, knowing its statement to be false, reported to the Board that Western was at fault for the damage to Sun Devil Stadium. As a result, the Board sued Western, and Western suffered pecuniary loss in the defense of the suit. These allegations establish a cause of action for injurious falsehood.

However, § 635 of the Restatement states that the defense of absolute privilege is available in an action for injurious falsehood. Absolute privileges, commonly associated with defamation actions, recognize that " 'conduct which otherwise would be actionable is to escape liability because the defendant is acting in furtherance of some interest of social importance, which is entitled to protection.' " Green Acres Trust v. London, 141 Ariz. 609, 612, 688 P.2d 617, 620 (1984), (quoting Prosser, Law of Torts (4th ed. 1971) § 114, p. 776 (footnote omitted)).

An absolute privilege exists for participants in judicial proceedings. Our supreme court has explained this privilege:

The socially important interests promoted by the absolute privilege in this area include the fearless prosecution and defense of claims which leads to complete exposure of pertinent information for a tribunal's disposition. Prosser, Law of Torts (4th ed. 1971) § 114 p. 777-81. The privilege protects judges, parties, lawyers, witnesses and jurors. The defense is absolute in that the speaker's motive, purpose or reasonableness in uttering a false statement do not affect the defense. Id. Whether the privilege exists is a question of law for the court, Restatement (Second) of Torts, § 619, and may be properly raised in a motion to dismiss, if the facts establishing the occasion for the privilege appear in the pleadings. Sierra Madre Development, Inc. v. Via Entrada Townhouses Assn., 20 Ariz.App. 550, 514 P.2d 503 (1973), or in a motion for summary judgment. See Drummond v. Stahl, 127 Ariz. 122, 618 P.2d 616 (App.1980), cert. denied, 450 U.S. 967, 101 S.Ct. 1484, 67 L.Ed.2d 616 (1981).

Green Acres Trust, 141 Ariz. at 613, 688 P.2d at 621.

Western alleges that Sverdrup knew or reasonably should have known that the Board would use its reports and recommendations to decide whether to sue Western. Thus, we must determine whether Sverdrup's status as a potential witness in contemplated litigation made its statements absolutely privileged.

Our supreme court has stated that "to fall within the privilege, the defamatory publication must relate to, bear on or be connected with the proceeding.... The defamatory content of the communication need not be 'strictly relevant,' but need only have some...