Ability of contractor to bring suit involving differing site conditions directly against geotechnical engineering firm, by Hugh Anderson

Issue: Ability of contractor to bring suit involving differing site conditions directly against geotechnical engineering firm. Apex Directional Drilling, LLC, v. SHN Consulting Engineers & Geologists, Inc. U.S. District Court for the Northern District of California (2015).

Summary: Wastewater pipeline project for the City of Eureka, California, using horizontal directional drilling. SHN was the city’s geotechnical consultant. Based on a single test bore some distance from the actual route of the pipeline, SHN prepared a Geotechnical Baseline Report (GBR) that was furnished to bidders, including the eventual low bidder, Apex. The GBR indicated stable soils. According to Apex, the great majority of the soils were in fact mud, flowing sands, and other difficult conditions, and yet SHN insisted that conditions were stable, and issued “illogical instructions” on proceeding with the horizontal drilling.

In reliance on advice from SHN, the city terminated Apex; this led to an arbitration between the city and Apex. On a separate track, Apex sued SHN in federal court based on breach of professional duty and negligent misrepresentation. SHN moved to dismiss the claims against it, citing the lack of a contract or any contractual duty between Apex and SHN.

Decision: The federal district court based its decision in Apex’s favor in part on the 2014 Beacon Residential Community Association v. Skidmore Owings & Merrill case, discussed in a prior case summary, citing that case’s recognition of the “declining significance of [contractual] privity” in California construction law. The court noted that Apex and a limited group of other prospective contractors was the intended beneficiary of SHN’s geotechnical report. There was no “specter of vast numbers of suits” if the court ruled that a duty of care was owed by SHN to Apex. The court also held that it was significant that Apex and other bidders had only a short amount of time to put together a bid and little practical opportunity to independently investigate the site conditions—thus suggesting that Apex was reasonable in relying on SHN’s GBR. The court acknowledged the value of commercial disputes being resolved under a series of related contract claims, but held that in general there was no specific legal requirement that the parties be limited to contract claims.

As to negligent representation, the court held that a 1961 California case, in which an engineering firm (Dames & Moore) was held accountable for a soil report that it had provided to a contractor, was “timeworn” but remained good law.

Comment: Many jurisdictions limit or restrict the ability of contractors to make direct claims against design professionals, in the absence of a contract between them. One of the interesting aspects of the situation in this case is the potential for inconsistent results. Apex may fail in its arbitrated claim against the city, but prevail in its federal court case against SHN, concerning the exact same subject matter. There are also potential inefficiencies—if the city is found liable to Apex in the arbitration, it may need to initiate a separate action against SHN for reimbursement of the city’s damages.