The Winter 2005 CriticalPath In This Issue: New Risk for Architects and Engineers: Pennsylvania’s Message from the Editor-in-Chief… Highest Court Holds Economic Loss Doctrine No Longer a Digging below the frost line... Complete Defense to Contractor Claims in Unfortunately, we are at that time of the year again where we Pennsylvania—Page 2 must all concern ourselves with the possibility of inclement Projects in Profile—Page 3 weather in the form of sleet, ice, extreme cold and, let us not Breathing Life Into the forget, snow. Despite being a challenge for car tires, airplane Common Interest Doctrine: wings and water pipes, winter brings with it another set of A Fourth Circuit Opinion Offers Hope to Construction challenges for the construction industry. Included among the Lawyers—Page 4 appropriate methods of cold weather protection is digging and Non-Party Discovery in setting the foundation of a given structure deep enough in the Arbitration: Part 1—Are ground where it will be protected from the risks of frost heave Discovery Subpoenas to Non- Parties Enforceable?—Page 6 and other similar cold-induced impacts. In this issue, we, too, Developments in Virginia dig a little deeper to set a solid foundation of understanding on Public Procurement: Keeping issues of Attorney-Client Privilege, Discovery in Arbitration in Check the Blurring Line Proceedings, Public-Private Procurement in Virginia, and Pass- Between Public and Private Improvements—Page 8 Through Liability to Contractors and Subcontractors. We also are adding a new feature to The Critical Path. In this section, As BUILT… Intercepted Pass (Through) entitled “Projects in Profile,” we give you a glimpse of where we A Possible Limitation on have recently joined you in establishing a solid foundation for Indemnification Pass- your new developments, or an equally firm footing in your Throughs to Subcontractors Appears on the Horizon— construction-related disputes. However, we begin this issue with Page 10 very recent and breaking news, reporting on what has all the trappings of a landmark decision in Pennsylvania on the topic of the Economic Loss Doctrine. LONDON NEW YORK LOS ANGELES SAN FRANCISCO WASHINGTON, D.C. Edward B. Gentilcore PHILADELPHIA PITTSBURGH Pittsburgh Office OAKLAND PRINCETON NORTHERN VA WILMINGTON NEWARK MIDLANDS, U.K. CENTURY CITY RICHMOND reedsmith.com New Risk for Architects and Engineers: Pennsylvania’s Highest Court Holds Economic Loss Doctrine No Longer a Complete Defense to Contractor Claims in Pennsylvania A new year has brought to economic loss. Thus, in the Pennsylvania a significant shift in absence of property damage, per- the Commonwealth’s legal land- sonal injury, or a direct contractual scape. The economic loss doctrine remedy, architects and engineers is no longer a complete defense for were essentially immune from con- Pennsylvania design professionals tractors’ suits in Pennsylvania. facing contractor claims. In its first opinion directly on point, The Pennsylvania Supreme The Pennsylvania Supreme Court however, the Pennsylvania Supreme Court has very recently has very recently ruled that a Court has now ruled that the oppo- building contractor can bring a site is the law in Pennsylvania: ruled that a building negligent misrepresentation claim [W]e hereby adopt Section contractor can bring a against an architect for alleged 552 [of the Restatement, deficiencies in the architect’s plans negligent misrepresentation Second, of Torts] as the law in for a public construction project. claim against an architect Pennsylvania in cases where Such a claim is viable even where for alleged deficiencies in information is negligently there was no contract between the supplied by one in the busi- the architect’s plans for a architect and the contractor, but ness of supplying information, public construction project. where the contractor reasonably such as an architect or design relied upon the deficiencies in sub- Such a claim is viable professional, and where it is mitting its winning bid and conse- even where there was foreseeable that the informa- quently suffered purely economic tion will be used and relied no contract between damages as a result. the architect and the upon by third persons, even if The January 19, 2005, decision, the third persons have no contractor, but where the rendered in Bilt-Rite Contractors, direct contractual relationship contractor reasonably Inc. v. The Architectural Studio, with the supplier of informa- relied upon the deficiencies specifically abrogates a 1992 opin- tion. In doing so, we empha- in submitting its winning ion from Pennsylvania’s intermedi- size that we do not view ate state appellate court, Linde Section 552 as supplanting the bid and consequently Enterprises, Inc. v. Hazelton City common law tort of negligent suffered purely economic Authority. In the absence of a misrepresentation, but rather, damages as a result. Pennsylvania Supreme Court deci- as clarifying the contours of sion, state and federal trial and the tort as it applies to those intermediate appeals courts had in the business of providing looked to the Linde Enterprises information to others. case as the primary authority in Section 552 has been the source of Pennsylvania regarding whether a great deal of debate across the architects and engineers could be country, and there is a split among held liable for negligent preparation the states about whether contrac- of plans and specifications provided tors or other similarly situated to contractors. In Linde Enterprises, third parties who, without a direct the Superior Court had ruled that contractual relationship, suffer only architects and engineers could not money losses, can sue a design pro- be held liable to contractors where fessional in tort. Pennsylvania is the only injury suffered was purely 2 The Critical Path one of the last states to come down see a significant shake-out period, Editor’s Note: Bruce with a definitive ruling on the ranging from an initial increase in E. Stanley, a partner issue. However, its decision to direct contractor actions against in the Pittsburgh recognize such claims represents design professionals to exploration office, has litigated something of a recent trend. See, of alternative contracting arrange- numerous cases e.g., Eastern Steel Constructors, Inc. ments, particularly those involving involving construc- v. City of Salem, 549 S.E.2d 266 private sector design-bid-build proj- tion projects. He (W.Va. 2001) (even absent a con- ect delivery efforts. There will also also has extensive tract, design professional owes a likely be a reaction from the insur- experience in commercial and corpo- duty of care to contractor because ance community, who may now be rate litigation matters such as minori- of “special relationship” that exists called upon to respond to greater ty shareholder disputes, employment matters, contract disputes, and busi- between them). claims exposure of its insured ness torts. Bruce is an adjunct lectur- design professionals. Especially revealing is the Bilt-Rite er of law on construction law topics at court’s public policy rationale: Bruce E. Stanley the West Virginia University College Pittsburgh Office of Law. As is demonstrated by the existing case law from Pennsylvania and other juris- dictions, and given the tenor of modern business practices Projects in Profile with fewer generalists and more experts operating in the Here is a sample of the recent projects with which Reed Smith’s business world, business per- Construction Industry Group has been involved: sons have found themselves I $17 million addition and renovation of a Northern Virginia in a position of increasing Country Club reliance upon the guidance I of those possessing special A multi-million dollar collegiate arts and cultural center in expertise. Oftentimes, the Pittsburgh, Pennsylvania party ultimately relying upon I Public-Private Procurements for public safety and public school the specialized expertise has improvements throughout the Commonwealth of Virginia (be no direct contractual relation- certain to read Tom Folk’s article on the latest developments in ship with the expert supplier this area) of the information, and there- I fore, no contractual recourse LEEDS-Certified Developments including a $90 million high if the supplier of the informa- school replacement project in Alexandria, Virginia tion is well aware that the I Representing the owner in a multi-million dollar gas cleaning third party exists (even if the project for a steel mill in Gary, Indiana supplier is unaware of his I Claims involving the expansion and renovation of the Philadelphia specific identity) and well International Airport knows that the information it has provided was to be relied I Disputes over unjust enrichment and related claims on the Town of upon by that party. Section Upper Occoquan Sewage Authority in Virginia 552 is not radical or revolu- I Representing a major EPC contractor defending claims by subcon- tionary; reflecting modern tractors, as well as pursuing claims against a power producer over business realities, it merely construction of a 545 MW gas-fired, combined cycle facility in recognizes that it is reason- Eastern Pennsylvania able to hold such profession- als to a traditional duty of I Claims over supply of equipment on a major steel mill construc- care for foreseeable harm. tion project in Southern Alabama As a result of the Bilt-Rite decision, I Representing utility and designer of 2000 MW coal-fired plant in the construction community should West Virginia in defense of claims for delay damages and extras 3 Breathing Life Into the Common Interest Doctrine: A Fourth Circuit Opinion Offers Hope to Construction Lawyers While corporations and other privilege by doing so? The United business entities are entitled to States Court of Appeals for the protection under the attorney- Fourth Circuit (the “Fourth client privilege, the scope of that Circuit”) recently addressed this protection has been narrowed in question and stated that, at least the wake of the recent accounting under certain circumstances, the scandals at Enron, Worldcom, and answer is “no.” other companies.