This is a consolidated construction defect action arising out of a construction project located at 3471 North First Street, San Jose, CA and 251 Brandon Street, San Jose, CA, commonly referred to as the Riverview Parcel 4 Project (the “Riverview Project”).

The instant demurrer by defendant/cross-defendant KTGY Group, Inc. (“KTGY”) challenges a negligence cause of action brought by plaintiff/cross-complainant/cross-defendant Silverline Construction, Inc. (“Silverline”). In Silverline’s Complaint in the lead case (Silverline Construction, inc. v. Coyle/Reno Case No. 1-13-CV-256329) and Silverline’s Cross-Complaint in Coyle/Reno Joint Venture v. Silverline Construction, Inc. Case No. 1-14-CV-270049, Silverline alleges that it is a licensed contractor who was retained to act as the concrete subcontractor for the Riverview Project. Silverline alleges that defendant Coyle/Reno Joint Venture (“Coyle/Reno JV”) and Coyle/Reno, a California General Partnership (“Coyle/Reno GP”) acted as the general contractor for the Riverview Project (“Coyle/Reno”), and defendant Riverview Capital Investment, LLC and/or WTI, Inc. were the “Project Owner” of the Riverview Project. Silverline alleges that KTGY was the architect hired by either Coyle/Reno or the Project Owner who prepared the Riverview Project construction plans and specifications.

Silverline alleges that Coyle/Reno committed various breaches of contract with Silverline, including but not limited to failing to pay Silverline for its performance under the contract, directing Silverline to perform extra work and failing to pay for the cost of the extra work, and providing plans and specifications that were defective, ambiguous and/or incomplete.

In the sixteenth cause of action against KTGY, Silverline alleges that the Project Owner and/or Coyle/Reno entered into contracts with various design professionals for the design, development, testing, inspection and construction of the Riverview Project; that KTGY was retained by either Coyle/Reno and/or the Project Owner to prepare the Riverview Project construction plans and specifications, and KTGY’s duties also included review and approval of submittals and shop drawings, responding to Requests for Information and construction supervision and reviewing, coordinating and approving any and all changes to the construction plans and specifications; that KTGY had a duty to exercise ordinary care and to avoid reasonably foreseeable injury and/or damage to foreseeable users of its construction plans and specifications, but KTGY failed to perform its duties in a good, proper and workmanlike manner. Silverline alleges that as a direct and proximate result of KTGY’s negligence, Silverline has been damaged and continues to suffer damage in an amount not presently known but which is reasonably believed to be not less than $2,267,384.00, in addition to interest, court costs, expert fees and attorney’s fees.

Discussion

KTGY now demurs to the sixteenth cause of action in Silverline’s Complaint (1-13-CV-256329) and Cross-Complaint (1-14-CV-270049) on the grounds of failure to state sufficient facts to constitute a cause of action.

KTGY argues the negligence claim fails as a matter of law because a design professional such as KTGY hired by an owner or general contractor does not owe a duty in negligence to a subcontractor such as Silverline hired by the general contractor. KTGY argues that the factors for determining the existence of a duty of care as set forth in Biakanja v. Irving (1958) 49 Cal.2d 647 do not support finding that KTGY owed a tort a duty to Silverline because: (1) KTGY’s agreement with Coyle/Reno to prepare plans and specifications for the project was to assist the Project Owner and/or Coyle/Reno, not subcontractors like Silverline; (2) the alleged economic harm to Silverline was not foreseeable; (3) Silverline’s harm is strictly economic; (4) there is no connection between KTGY’s alleged conduct and any alleged economic harm suffered by Silverline; (5) there is no moral blame attached to KTGY’s conduct; and (6) imposition of a duty from a design professional to a remote subcontractor not in privity serves no public policy purpose.

KTGY additionally argues that Silverline’s negligence claim fails under the economic loss rule because Silverline alleges only lost money or pure economic damages, which are not recoverable in a negligence claim against a party with whom Silverline is not in contractual privity.

In opposition, Silverline cites Huber, Hunt & Nichols, Inc. v. Moore (1977) 67 Cal.App.3d 278 for the position that an architect may be sued for negligence in the preparation of plans and specifications either by his client or by third persons. Silverline argues that under Biakanja, foreseeability and proximate cause replace the former requirement of privity of contract, and here, it was foreseeable that contractors would rely on an architect’s plans to their potential detriment. Silverline argues it has sufficiently alleged that KTGY was the proximate cause of Silverline’s damages. Silverline argues there is an immediate connection between KTGY’s conduct of desigining defective plans and the reliance and damages suffered by Silverline. Finally, Silverline argues that public policy considerations dictate that an architect should be held liable to downstream contractors for negligence in preparing defective design plans because otherwise, contractors would be precluded from recovering for those damages they incurred as a result of reliance on defective plans.

As to the economic loss rule, Silverline argues the rule does not apply because Silverline seeks to recover damages based on defective plans, not breach of contract.

Duty of Care

In Biakanja, supra, 49 Cal.2d 647, the California Supreme Court held that a notary public breached a duty of care to the plaintiff (decedent’s brother) for failing to have the decedent’s will properly attested, even though the plaintiff lacked privity with the notary. The court reasoned that the passing of the decedent’s estate to the plaintiff had been the “end aim” of the notary’s undertaking to prepare the decedent’s will, and thus, the transaction was clearly intended to affect the plaintiff. Furthermore, the plaintiff’s harm was foreseeable to the notary and was directly caused by the notary’s negligence. Finally, the court felt that “[s]uch conduct should be discouraged and not protected by immunity from civil liability.” (Biakanja, supra, 49 Cal.2d at p. 651.) The court provided the following factors for analysis:

The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.

(Biakanja, supra, 49 Cal.2d at p. 650.)

In Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, the California Supreme Court held that an auditor does not owe a duty of care to third persons in the preparation of an independent audit of a client’s financial statements. The court based its decision on the Biakanja factors, as well as “three central concerns”: (1) an auditor exposed to negligence claims from all foreseeable third parties would face potential liability far out of proportion to its fault; (2) “the generally more sophisticated class of plaintiffs in auditor liability cases … permits the effective use of contract rather than tort liability to control and adjust the relevant risks through ‘private ordering’ ”; and (3) “the asserted advantages of more accurate auditing and more efficient loss spreading relied upon by those who advocate a pure foreseeability approach are unlikely to occur.” (Bily, supra, 3 Cal.4th at p. 398.) The Bily court also discussed the diminished importance of the foreseeability factor in determining whether a duty exists. “Foreseeability of injury, however, is but one factor to be considered in the imposition of negligence liability. Even when foreseeability was present, we have on several recent occasions declined to allow recovery on a negligence theory when damage awards threatened to impose liability out of proportion to fault or to promote virtually unlimited responsibility for intangible injury.” (Id. at p. 399.)

In Weseloh Family Ltd. Partnership v. K.L. Wessel Const. Co. (2004) 125 Cal.App.4th 152, the Court of Appeal applied the Biakanja and Bily factors to conclude that design engineers hired by a subcontractor to design a retaining wall for a car dealership owed no duty to the general contractor hired to build the dealership or to the property owner who hired the subcontractor. With regard to the Biakanja factors, the court held that while it was foreseeable that design defects could cause a retaining wall to fail, the property owner and general contractor failed to produce any evidence showing (1) the engineers’ design was primarily intended to affect the property owner and general contractor; (2) the closeness of the plaintiffs’ injuries to the engineers’ conduct; (3) any moral blame implicated by the engineers’ conduct; or (4) how, by imposing expanded liability on design engineers under similar circumstances, future harm would be prevented. (See Weseloh, supra, 125 Cal.App.4th at pp. 172-173.) The appellate court also applied the Bily factors and found that: (1) the imposition of a duty of care on the engineers to the plaintiffs would expose the engineers to liability far out of proportion to fault; (2) unlike makers of a consumer product, the design engineers did not have complete control over the creation of the retaining walls, and the plaintiffs were sophisticated parties who could have contracted to pursue claims directly against subcontractors; and (3) consistent with the fifth Biakanja factor, there was no evidence supporting a policy to favor the alleged tortfeasor over the alleged victim as an effective distributor of loss. (Id. at pp. 170-172.)

As a threshold matter, Huber is not dispositive of the issue of duty here. The case merely recognized that an architect may be sued for negligence in the preparation of plans and specifications either by his client or by third persons, but the case recognizes that Biakanja provides the governing test. (See Huber, supra, 67 Cal.App.3d at p. 301.)

The first Biakanja factor asks to what extent the transaction in question was intended to affect the plaintiff. “[W]here the ‘end and aim’ of the contractual transaction between a defendant and the contracting party is the achievement or delivery of a benefit to a known third party or the protection of that party’s interests, then liability will be imposed on the defendant for his or her negligent failure to carry out the obligations undertaken in the contract even though the third party is not a party thereto.” (Adelman v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 352, 363.) Silverline’s Complaint and Cross-Complaint both acknowledge that KTGY was hired by Coyle/Reno (the general contractor) and/or the Project Owner, Riverview. to prepare the Riverview Project construction plans and specifications. The reasonable implication of this allegation is that KTGY’s agreement was intended to benefit Coyle/Reno and/or the Project Owner, not other subcontractors and third parties working on the construction project. Even if other third parties beyond the Project Owner or Coyle/Reno would at some point rely on the architect’s plans during the construction process, that does not constitute “the achievement or delivery of a benefit” to those third parties.

The second Biakanja factor pertains to foreseeability of harm to Silverline. As discussed above, after Bily, this factor has limited weight. Furthermore, if we look carefully at the allegations of injury in the Silverline Complaint and Cross-Complaint, the foreseeability of harm to Silverline flowing from KTGY’s conduct seems tenuous. The amount of damages sought in both the second cause of action for quantum meruit (against the Coyle/Reno defendants) and the sixteenth cause of action for negligence against KTGY is the same: $2,267,384.00. The quantum meruit cause of action alleges that this amount is the outstanding balance due on the reasonable value of the services and materials provided by Silverline to Coyle/Reno. In other words, Silverline is attributing Coyle/Reno’s failure to pay the full outstanding balance of Silverline’s services and materials both to Coyle/Reno as well as KTGY. It is questionable whether it was foreseeable that KTGY’s failure to provide defect-free architectural plans could result in Coyle/Reno refusing to pay Silverline in full for its work and materials. The Complaint seems to suggest that Coyle/Reno required Silverline to do more work than was originally contracted for, perhaps because the plans were not sufficiently complete, but it doubtful that such circumstances are foreseeable for incomplete plans. Arguably, Coyle/Reno could have still paid Silverline for all of its services and materials and attempted to hold KTGY responsible for the costs of additional work attributable to the defective plans. It is not a very foreseeable event that Coyle/Reno would shift the blame onto a subcontractor like Silverline (who had no contract with KTGY) and then refuse to pay Silverline for KTGY’s mistakes.

The third Biakanja factor is the degree of certainty that Silverline suffered injury. Again, as currently alleged in the Complaint and Cross-Complaint, the amount of damages sought for KTGY’s alleged negligence is the same amount that Silverline seeks from Coyle/Reno for non-payment of Silverline’s services and materials. This is pure economic loss, which is by nature less certain than personal injury or property damage. (See Bily, supra, 3 Cal.4th at p. 400 [finding that negligence claims against auditor for economic loss from investment and credit decisions introduced further uncertainties].) Furthermore, in Silverline’s Complaint and Cross-Complaint, the specific allegations of breach of contract far outnumber the general allegations that Silverline relied on KTGY’s defective plans. Because Silverline’s alleged injury appears to flow mainly from the alleged breaches of contract, it is not certain that Silverline suffered injury from KTGY’s conduct.

The fourth Biakanja factor is the closeness of connection between KTGY’s conduct and injury. Here again, to the extent Silverline’s injury is the outstanding balance for services and materials due from Coyle/Reno, it is difficult to attribute a close connection between KTGY’s conduct and Silverline’s injury when it was Coyle/Reno’s decision not to pay Silverline in full that caused Silverline injury. In the Complaint and Cross-Complaint’s sixteenth cause of action, Silverline alleges that KTGY was retained not only to prepare the plans and specifications but also to review and approve submittals and shop drawings, respond to Requests for Information, supervise construction, and review, coordinate and approve any and all changes to the construction plans and specifications. However, Silverline does not allege that KTGY was negligent in its review and supervisory role.

The fifth Biakanja factor is moral blame. In Biakanja, the court found moral blame in the notary public’s unauthorized practice of law, a misdemeanor. (See Biakanja, supra, 49 Cal.2d at p. 651.) No such criminal conduct is alleged here with respect to KTGY’s conduct. There seem to be no moral implications in KTGY’s alleged failure to provide complete and defect-free architectural plans.

The sixth Biakanja factor is the policy of preventing future harm. Silverline argues that policy considerations dictate that an architect owes a duty to downstream contractors because otherwise, those contractors would be precluded from recovering for damages they incurred as a result of reliance on defective plans. A similar argument was made in Weseloh that not recognizing a tort duty for design engineers would insulate them from liability for negligence to third parties. The court rejected this argument, finding that the property owner plaintiffs were not without the remedy of pursuing claims for damages against their general contractor, the general contractor was not without the remedy of pursuing its claims for damages against its subcontractor, and the design engineers would, in turn, be accountable to the subcontractor. (See Weseloh, supra, 125 Cal.App.4th at p. 170.) Likewise, KTGY would not be completely insulated from liability for its negligent plans and specifications because Coyle/Reno could pursue a claim against KTGY and Coyle/Reno would have every incentive to do so if KTGY’s plans were defective. Thus, it is not likely that greater care in the preparation of architectural designs would arise by expanding the architect’s duty to include downstream subcontractors.

The parties do not discuss the Bily factors, but the Court finds that they tend to support a finding of no duty. Regarding whether KTGY’s potential liability would be out of proportion to its fault, it is once again noted that Silverline is seeking the same $2,267,384.00 from KTGY that it attributes to Coyle/Reno’s failure to pay for the value of Silverline’s uncompensated services and materials. It is not clear from the allegations of Silverline’s Complaint and Cross-Complaint how KTGY’s defective designs would render KTGY responsible for the entirety of this amount. For instance, in the first cause of action for breach of contract (which also alleges Coyle/Reno’s failure to pay Silverline for its performance under their contract), the allegedly defective plans and specifications comprise only a small portion of the alleged breaches. The Court finds that under the current allegations, an architect exposed to negligence claims from all foreseeable third parties utilizing the architect’s designs would face potential liability far out of proportion to the architect’s fault.

The second Bily factor asks whether the parties are sufficiently sophisticated to control and adjust risk through private contractual ordering. Here, because Silverline alleges that it contracted with Coyle/Reno, Silverline could have adjusted its risk of liability from reliance on the architect’s designs (although Silverline’s sophistication may be more of a question of fact).

The third Bily factor asks whether there would be more accurate plans/designs and more efficient loss-spreading by imposing a duty on architects to subcontractors and other third parties in a construction project who rely on the architect’s designs. For the reasons discussed above with regard to the Biakanja public policy factor, this factor does not strongly tilt in favor of a finding of duty.

For all of these reasons, the Court finds that Silverline’s Complaint (1-13-CV-256329) and Cross-Complaint (1-14-CV-270049) do not allege sufficient facts to support a negligence cause of action against KTGY.

Economic Loss Rule

As an additional ground for its demurrer, KTGY argues the negligence claim is barred by the economic loss rule. In Aas v. Superior Court (2000) 24 Cal.4th 627, the California Supreme Court held that in the area of construction defect litigation, where the defective products or negligent services have caused neither property damage nor personal injury and have merely diminished the value of the building, this loss is primarily the domain of contract and warranty law or the law of fraud, rather than of negligence or strict liability.

In opposition, Silverline argues that economic loss rule applies only to defective products cases, not negligent services cases. Silverline cites J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799 for the position that where a “special relationship” exists as defined by the Biakanja test, recovery of purely economic damages is permitted. KTGY counters that the economic loss rule has indeed been applied in negligent services cases such as the recent decision in State Ready Mix, Inc. v. Moffatt & Nichol (2015) 232 Cal.App.4th 1227.

In State Ready Mix, Bellingham Marine, Inc. (Bellingham) hired civil engineer, Moffatt & Nichol (Moffatt) to prepare plans for a harbor pier. Bellingham also hired Major Engineering Marine, Inc. (Major) as the general contractor to construct the pier. Major hired State Ready Mix, Inc. (State) to supply the concrete. After Major sued State to recoup the cost of replacing the concrete, State filed a cross-complaint for equitable indemnity and contribution against Moffatt, but the court found that the cross-complaint was barred by the economic loss rule because Moffatt had no contractual relationship with either State or Major, and no facts were alleged that the concrete injured a person or damaged other property. (State Ready Mix, supra, 232 Cal.App.4th at p. 1232.) The precise issue in State Ready Mix was whether State and Moffatt were joint tortfeasors to Major for purposes of State’s claims for equitable indemnity and contribution. “‘Without any action sounding in tort, there is no basis for a finding of potential joint and several liability on the part of defendants, thereby precluding a claim for equitable indemnity.’ [Citation.]” (State Ready Mix, supra, 232 Cal.App.4th at p. 1232.) Citing Aas and the economic loss rule, the court in State Ready Mix held that State “cannot recast Major’s complaint for breach of contract/breach of warranty as a tort action” in order to make State and Moffatt joint tortfeasors to Major, since State did not allege personal or property damage.

State Ready Mix is not as applicable as KTGY contends. First, it does not actually discuss the difference between defective products and negligent services cases. Second, it is factually distinguishable because Silverline is not trying to sue KTGY for equitable indemnity by claiming that the two are joint tortfeasors to Coyle/Reno based on a recasting Coyle/Reno’s breach of contract claims into tort claims in violation of the economic loss rule. The issue here is whether Silverline can directly sue KTGY in negligence for mere economic loss.

Silverline’s distinction between defective products cases and negligent services cases is correct, but not dispositive. “[T]he law of construction defects…diverged into two theories: strict products liability, which we have discussed, and the tort recognized in J’Aire, supra, 24 Cal. 3d 799.” (Aas, supra, 24 Cal.4th at p. 643.) In J’Aire, the California Supreme Court “applied the Biakanja [citation] factors to conclude that the tenant of a building used as a restaurant could state a cause of action for negligence against a renovation contractor hired by the building’s owner for business income lost when the contractor ‘fail[ed] to complete the project with due diligence.’ [Citation.] Applying the Biakanja factors, the court held that a ‘special relationship’ [citation] permitting recovery of economic losses (i.e., the relationship defined by the Biakanja test) existed between the contractor and the tenant.” (Aas, supra, 24 Cal.4th at pp. 643-644.)

Nevertheless, to state a sufficient J’Aire claim for economic losses still requires the pleading of harm cognizable in tort. “We do not believe, however, that the J’Aire court intended to dispense with the rule that appreciable, nonspeculative, present injury is an essential element of a tort cause of action. [Citations.] Lacking that fundamental prerequisite to a tort claim, it is difficult to imagine what other factors, singly or in combination, might justify the court in finding liability.” (Aas, supra, 24 Cal.4th at p. 646.) “Construction defects that have not ripened into property damage, or at least into involuntary out-of-pocket losses, do not comfortably fit the definition of ‘ “appreciable harm” ’ –an essential element of a negligence claim. [Citations.] The breach of a duty causing only speculative harm or the threat of future harm does not normally suffice to create a cause of action. [Citation.] For the same reason–because the physical harm traditionally compensable in tort is lacking–to ask in the words of factor (2) whether the harm to plaintiffs was ‘foreseeab[le]’ [citation] simply begs the question: What harm?” (Ibid.)

As discussed above, Silverline’s allegations of harm are based on Coyle/Reno’s refusal to pay the full outstanding balance for Silverline’s services and materials, without any allegations closely connecting KTGY’s conduct with Coyle/Reno’s refusal to pay. Silverline does not allege out-of-pocket losses proximately caused by KTGY’s conduct, other than an amount of money that is more proximately related to Coyle/Reno’s refusal to pay Silverline. Under these allegations, any alleged harm attributable to KTGY remains too speculative and inappreciable to constitute the type of harm that is cognizable in tort. Thus, even as a J’Aire claim, Silverline’s sixteenth cause of action is defective.

Silverline argues that if the Court sustains the demurrer, it should grant Silverline leave to amend. At the end of its opposition brief, Silverline proposes to add new allegations of damages that suggest a closer connection between KTGY’s conduct and Silverline’s injury. For instance, Silverline proposes to allege that KTGY’s failure to prepare a “Slab Edge Drawing” caused Silverline to produce, at its own cost, a “Template Drawing.” Silverline also proposes to allege that KTGY reviewed but did not approve two of Silverline’s Template Drawings.

These allegations of harm are more closely connected with KTGY’s conduct than the allegations in the current Complaint and Cross-Complaint. Significantly, the proposed allegations implicate KTGY’s involvement in the review process. (See Oakes v. McCarthy Co. (1968) 267 Cal.App.2d 231, 248 [finding Biakanja analysis unnecessary where evidence supported jury’s finding that soil engineer’s role went beyond providing professional advice and included supervision and inspection of actual work].) Thus, to the extent KTGY was involved in the project in an active supervisory role, KTGY’s duty to subcontractors may stem from that role and from those interactions, as opposed to its role of merely providing the plans and specifications to the general contractor or Project Owner. (Compare Weseloh, supra, 125 Cal.App.4th at pp. 162, 171-172 [no facts or allegations that design engineers supervised or had control over actual work on retaining wall].)

Furthermore, any out-of-pocket costs incurred by Silverline as a result of deficiencies in KTGY’s plans (e.g., cost to produce a Template Drawing to make up for the lack of a Slab Edge Drawing) are no longer merely duplicative of the amounts owed to Silverline by Coyle/Reno for Silverline’s services and materials. Thus, the proposed new allegations would raise different questions about foreseeability, degree of certainty that Silverline suffered injury, and the closeness of the connection between the defendant’s conduct. Whether these allegations would suffice to survive another demurrer by KTGY is unclear, but Silverline should at least have the opportunity to better plead its claim.

For all of these reasons, KTGY’s demurrer to the sixteenth cause of action in Silverline’s Complaint and Cross-Complaint is SUSTAINED with 10 days’ leave to amend.