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Professional Negligence Claim Against Georgia Design Professional Survives Economic Loss Rule

Posted on: November 27th, 2017

By: Cheryl H. Shaw

Georgia’s economic loss rule bars recovery in tort for economic losses arising from a contract.  The idea behind the rule is that simple: When a dispute involves strictly economic losses, the parties should resolve their claims based on the standards set out in their contract and not judicially-created tort duties.  The economic loss rule offers significant protection to design professionals, but a recent decision by the Georgia Court of Appeals signals further erosion of that protection.

In Atlantic Geoscience, Inc. v. Phoenix Development & Land Investment, LLC,[1] a residential developer hired an engineering firm to perform an environmental site assessment for a 45-acre property under consideration for purchase and development.  The engineer’s report concluded that an adjacent landowner had encroached on and was using a small portion of the property as a “soil/stone storage yard,” but did not recommend any additional investigation.  Relying on the report, the developer bought the property and began pre-development work.

During discussions with the adjacent landowner the following year, it came to light that the “encroachment” was actually a “landfill” that rendered the property not viable for development as originally planned.  Business deals fell through, the developer was unable to secure financing, and the bank ultimately foreclosed on the property.

The developer sued the engineer for professional negligence, a tort-based claim. The engineer moved for summary judgment under Georgia’s economic loss rule which provides that “a contracting party who suffers purely economic losses must seek its remedy in contract and not in tort.”  The engineer argued the developer did not suffer any personal injury and did not claim any injury to property or diminution in value; instead, the developer sought to recover the money it would have received had the development proceeded as intended, plus pre-development expenses (i.e., purely economic losses).  Thus, the engineer reasoned, the claims were barred by the economic loss rule.

The trial court agreed with the engineer, but the Court of Appeals reversed, citing the “misrepresentation exception” to Georgia’s economic loss rule and holding that the case, at its core, involved the engineer’s alleged misrepresentation in failing to disclose the presence of the landfill.  It was of no consequence that the alleged misrepresentation was made by the engineer in breach of its professional duties: “Georgia law permits the recovery of certain types of economic losses in an action, such as this, were the plaintiff alleges professional negligence resulting in a misrepresentation.”[2]  The Court then sent the case back to the trial court to determine liability and damages.

The Atlantic Geoscience case is further evidence that Georgia’s economic loss rule does not insulate design professionals from the tort of negligent misrepresentation; thus, an allegation of misrepresentation can allow plaintiff to escape the rule’s operation. This can result not only in increased exposure to direct clients, but liability to third-parties who claim economic losses as a result of the design professional’s services.  Against this backdrop, it is important for design professionals to understand how the laws of each state apply and utilize contractual provisions that help mitigate risk.  For more information, contact Cheryl H. Shaw at [email protected].

[1]   341 Ga. App. 81 (2017).

[2]   Id. at 86.

 

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