Fraud or Mistake? And How It Can Effect a Claim Against a Professional Designer.

Generally, a provision in a construction contract for private work limiting the contractor's right to recover additional costs arising from delays outside of the contractor's control may be enforceable. However, under the Public Bid Law, such a provision has been found to be against public policy. La. R.S. 38:2216 prohibits any public contract provision that purports to waive, release or extinguish the rights of a contractor to recover delay damages if the delay was caused in whole or in part by the acts or omission of the public entity.

A recent First Circuit decision struck down a contract provision that purported to limit a contractor's right to damages in a public contract. In F.H. Myers Const. Corp. v. State, Div. of Admin. Office of Facility Planning & Control, 2013-2153 (La.App. 1 Cir. 6/18/14), reh'g denied (July 22, 2014), a general contractor brought an action against the State for breach of contract, seeking payments for extended-fixed job site overhead.

The State argued that the contract contemplated that the contractor could recover extended-fixed job site overhead only if there was a complete stoppage of work solely attributable to the State. The contractor argued that the contract provision was in violation of La. R.S. 38:2216.

The court found that La. R.S. 38:2216 contemplates that a contractor who is a party to a public contract shall be able to recover for any delay they may suffer from the fault of the State entity. Because the contract waived the contractor's rights to seek damages for extended-fixed job site overhead for any delay short of a complete stoppage of work, the contract imposed a stricter limit on damages than the statute allows. The court also noted that the contract only allowed for damages where the State was 100% at fault, whereas the statute allows recovery even if the State is only partially at fault. As such, the provisions at issue were held to be void and unenforceable.

As a general rule in Louisiana, a party involved in business dealings may keep silent, but exceptions exist. Sure, where information is volunteered that may influence the other party’s conduct, that information must be truthful, but is there a duty to disclose information harmful to your position? According to one recent decision, the answer may be “yes.”

In Parkcrest Builders, LLC v. Housing Authority of New Orleans, 2017 WL 193500 (E.D. La. 2017), the court highlighted a wrinkle in the general rule of silence. According to the Parkcrest court, a party to a proposed transaction may have a duty to disclose any information that an ethical person would disclose. This duty complicates matters for a party wishing to disclose as little as possible in order to protect its interests in an arms-length negotiation. It also raises a question: can a party be sued in fraud if they don’t divulge enough information to satisfy the other party?

“Fraud” is defined as a misrepresentation or suppression of a material fact, made with the intent to obtain an unjust advantage or to cause a loss or inconvenience to the other party. La. Civil Code article 1953. In order to prove fraud by silence, there must exist a duty to disclose.

Parkcrest involved a public project to construct new affordable housing units where the owner terminated its contract with the contractor and sued the contractor’s bond company. In the suit against the bond company, the owner alleged fraud and claimed that the bond company improperly concealed (1) its intent to rehire the defaulted contractor to complete the project, and (2) the nature of the bond company’s agreement with the contractor. According to Parkcrest, these allegations, if proven, were sufficient to prove fraud by silence.

Given that the law allows recovery of economic losses arising from a party’s reasonable reliance upon information provided by another, businesses need to be careful in what they say, and even in what they don’t say.

All claims against professional designers are perempted (extinguished) under La. R.S. 9:5607 five years after the project is completed with an exception for fraud. In cases of fraud, an otherwise untimely lawsuit can go forward. For this reason, plaintiffs often allege fraud when the claim may be perempted. This scenario was present in the recent First Circuit decision in Markiewicz v. Sun Constr., L.L.C, 2019-1590 (La. App. 1 Cir. 9/18/20), 2020 WL 5587265. The decision helps to explain when a designer’s alleged conduct falls outside of ordinary negligence based upon the standard of care and becomes fraudulent.

Broadly, fraud is designed as “a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other.” La. C.C. art. 1953. Fraudulent intent or intent to deceive is a necessary element of a fraudulent misrepresentation. Therefore, fraud cannot be predicated on a mere mistake or negligence, however gross.

In Markiewicz, the plaintiff homeowners filed a class action lawsuit in 2006 arising from flooding of their neighborhood. Ten years later, plaintiffs added as defendants the engineers involved in the design of the drainage system, including the engineers who prepared the surveys for the development. Absent fraud, the newly added claims would be untimely. Plaintiffs alleged that the engineers fraudulently provided incorrect or misleading survey certificates, despite their knowledge that the certificates were incorrect.

The engineers filed a motion for summary judgment on peremption because more than five years had passed from the completion of their services. The engineers argued that plaintiffs could not prove fraud under facts of the case such that the fraud exception would not apply.

The Markiewicz court ruled for defendants. Although there was a dispute as to whether the engineers’ measurements were erroneous, the court found that plaintiffs failed to prove that the services were fraudulent. The plaintiffs provided no evidence that the engineers were aware of any discrepancy in preparing the surveys or that they knowingly misrepresented the surveys. As such, the court found that the fraud exception did not apply, and plaintiffs’ claims against the engineers were perempted. Through its analysis, the Markiewicz court made clear that labelling allegedly negligent conduct as fraudulent is insufficient to defeat a supported motion. While fraud may be established by circumstantial evidence, including highly suspicious facts and circumstances, the court found the record devoid of such facts.