Construction manager held liable for contractor’s delay damages, labor inefficiency, and pending change orders.

The opinion in TRAX Construction Company v. Village of Reminderville, 2021-Ohio-3481 (11th Dist. 2021) is an interesting one for Ohio construction lawyers.  The project’s construction manager was held liable for over $1 million for the contractor’s delay damages, labor inefficiency, and pending change orders.  In addition to the compensatory damages, the construction manager was held liable for punitive damages and attorney’s fees.  The contractor did not have a contract with the construction manager.

The construction contractor, TRAX Construction Company, contracted with the owner, Village of Reminderville, for underground utility construction work.  The contractor was instructed in preconstruction meetings that all pay requests and change orders had to be submitted to the construction manager, OHM Advisors.  The construction manager had done the design work for the project.  The construction manager was also to administer the contract during the project.

The contractor began excavation and discovered the design was flawed.  The utilities depicted in the design were not in the location identified.  And what was shown as an abandoned water line was actually not abandoned, which required plan revisions.

During the postponement, the contractor was on standby, remaining on the job and incurring additional time and resource costs.  The construction manager had directed the contractor to stay on site and do what work was available.  The construction manager during this time assured the contractor it would be paid for the additional costs.

The contractor along the way sent numerous letters advising of the issues it was facing, that change orders were unprocessed, and requesting meetings.  The owner and construction manager were largely unresponsive.   When the contractor submitted its change orders for the additional work, the construction manager eventually responded that only an extension of time would be considered.

At the end of the resulting trial, the jury found in favor of the contractor and against the construction manager for fraud.  The jury found that the construction manager exclusively caused the damages due to its concealments and fraudulent actions.

On appeal, the construction manager challenged the jury verdict on several grounds.  The construction manager contended the economic loss doctrine (also called the economic loss rule) was a bar even to the intentional tort of fraud.  The court found that the economic loss rule separates contract and tort claims by preventing a plaintiff from bringing a tort claim when the matter is properly resolved in contract.  The “crucial difference” explained the court was the “source of the duty imposed.”  Specifically, “contractual duties emanate from bargained-for agreements between specific parties who allocate risks and benefits” whereas “alternatively, tort duties arise from public policy consideration” that are “imposed by law to protect the broad interests of social policy.”  As a result, the economic loss rule would not bar a tort claim where the tort duty is independent of the contract.  The court found that the construction manager had an independent duty not to defraud the contractor.  According to the court, no societal interest would be served by promoting concealment of material facts with the intent to mislead or the affirmative flow of information not genuinely believed by its source to be true.  Rather the court determined public policy would be best served by acknowledging an independent duty not to commit fraud.  With the finding of an independent duty not to commit fraud, the court ruled that the contractor’s fraud claim against the construction manager was not barred by the economic loss doctrine.

The construction manager additionally contended that the contractor had failed to present evidence on all of the necessary elements for its fraud claim.  The elements of fraudulent concealment in Ohio, according to the court, were (a) a representation or, where there is a duty to disclose, concealment of a fact, (b) which is material to the transaction at hand, (c) made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (d) with the intent of misleading another into relying upon it, (e) justifiable reliance upon the representation or concealment, and (f) a resulting injury proximately caused by the reliance.

Addressing the element of the construction manager’s concealment, the court found that generally in business transactions neither party has an obligation to disclose material information to the other.  A duty to disclose arises in business dealings, however, when “full disclosure is necessary to dispel misleading impressions that are or might have been created by partial revelation of the facts.”  The jury could have concluded, found the court, that a duty to disclose arose because full disclosure was necessary to dispel misleading or false impressions created by the construction manager’s partial revelation of facts.  This could have arisen from the construction manager’s assurances change orders would be paid.  Further, the contractor had continued to work on the project in reliance on the construction manager’s assurances of payment.

On fraudulent concealment’s intent element, the court first clarified that the contractor was not required to provide direct evidence of intent to defraud.  Direct evidence of someone’s intent being difficult, circumstantial evidence of intent may be used.  The circumstantial evidence cited by the court was the contractor’s numerous written communications to the construction manager that the construction manager seemingly did not respond to.  There were the contractor’s routine requests for meetings that only resulted in two meetings.  The contractor had also been telling the construction manager that it claimed additional compensation without the construction manager responding that it disagreed.  The jury from this circumstantial evidence could have inferred that the construction manager intended to keep information from the contractor and keep the contractor on the project as long as it could without processing its paperwork or paying for the additional work and idle time.

Based on the preceding finds, the court affirmed the construction manager’s fraud liability.  The fraud claim was not categorically barred by the economic loss rule and the elements of the fraud claim had been met.

Nick Schwandner is a construction lawyer in Cincinnati, Ohio.  His practice is focused exclusively on representing companies in the construction industry.