Contractor Discovers the High Cost of Misrepresenting a Material Fact: Summary Judgment Denied in Part

On December 19, 2023, the United States District Court for the District of Utah denied summary judgment in part to Vanderlande Industries (Vanderlande), holding that a reasonable jury could find that Vanderlande negligently misrepresented the viability of subcontractor Ludvik Electric Co.’s (Ludvik) pass-through claims during the parties’ settlement negotiations over the claims. 

In 2013, the Salt Lake City Corporation awarded HDJV Big-D Construction (HDJV) a contract for construction at the Salt Lake City International Airport.  HDJV subcontracted installation of the bag handling system to Vanderlande, which subcontracted the mechanical and electrical portion to Ludvik.  In January 2019, Ludvik alerted Vanderlande that it had pass-through claims to assert against HDJV for changes in scheduling that allegedly caused $10 million in unanticipated losses.  Vanderlande and Ludvik eventually entered into a settlement agreement under which Vanderlande would pass through Ludvik’s delay claims and Ludvik would receive any recovery from HDJV.  In return, Ludvik released Vanderlande from any liability if HDJV rejected the pass-through claims.  Before Ludvik submitted its claims, however, Vanderlande and HDJV executed Change Order 22 with release language that failed to preserve Ludvik’s claims.  When Vanderlande later submitted Ludvik’s pass-through claims, HDJV rejected them as untimely and waived by Change Order 22. 

Ludvik filed suit against Vanderlande seeking to recover its losses, alleging negligent misrepresentation and breach of contract.  In its suit, Ludvik claimed that it was fraudulently induced into the settlement agreement by Vanderlande’s misrepresentation that the pass-through claims were viable.  Vanderlande then moved for summary judgment, arguing that Ludvik’s claims were barred by the release in the settlement agreement. 

The Court rejected Vanderlande’s motion, holding that a provision releasing a party from liability for negligent misrepresentation, when the provision itself was procured by a negligent misrepresentation, is unenforceable.  Additionally, the Court noted that, although Vanderlande shared a letter with Ludvik making it clear that the pass-through claims would be rejected, Vanderlande’s conduct after sharing the letter led Ludvik to believe that the claims remained viable.  Because Vanderlande was in a superior position to know material facts about the viability of the pass-through claims, Vanderlande had a duty to disclose such facts to the subcontractor.

This decision underscores the importance of clear communication and disclosure in contractual relationships, especially when one party is in a superior position to know material facts that could affect the other party’s decision-making.  Parties also should be aware that the efficacy of a release may be limited if a negligent misrepresentation is involved.   

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