United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
January 3, 2007
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
_________________________ Clerk
No. 05-60898
_________________________
LYNDON PROPERTY INSURANCE CO.
Plaintiff-Appellant,
versus
DUKE LEVY AND ASSOCIATES LLC
Defendant-Appellee.
__________________________________________________
Appeal from the United States District Court
for the Southern District of Mississippi
(No. 1:03-CV-310)
__________________________________________________
Before HIGGINBOTHAM, DENNIS, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
Before the court is an appeal of the district court’s grant of summary judgment in favor of
Duke Levy and Associates, LLC (“DLA”). We REVERSE the judgment of the district court
regarding the negligence claim and REMAND for proceedings not inconsistent with this opinion.
I. FACTS AND PROCEEDINGS
The Hancock County Water and Sewer District (“District”) entered into a contract with
Panther Utilities of Mississippi, Inc. (“Panther”) to construct a sewage collection system. This
contract included two relevant documents: the Standard Form of Agreement Between Owner and
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Contractor and the Standard General Conditions of the Construction Contract. The contract required
that Panther achieve substantial completion by October 12, 2000, and final completion by November
11, 2000. Panther obtained a bond from Lyndon Property Insurance Company (“Lyndon”), the
surety. The District also entered into a contract with DLA to serve as the engineer of record on the
project. This contract included a standard document known as the Standard Form Agreement
Between Owner and Engineer for Professional Services.
The project did not proceed as planned. On October 24, 2000, the District terminated
Panther. At that time, DLA had accumulated $266,822.50 in inspection fees and $71,250.00 in
contract administration fees. Lyndon, as the surety, funded the completion of the project. After a
bidding process, Lyndon awarded the contract for completing the project to Cooley Contracting, Inc.
(“Cooley”). Cooley subsequently completed the project, which involved substantial correction of
Panther’s work. Lyndon alleges that it paid more than $900,000 to fix and test work done by Panther
that had been inspected and approved by DLA.
Lyndon filed a complaint against DLA in which it sought damages for negligence, breach of
contract, and breach of warranty. DLA filed a motion for summary judgment. The district court
granted DLA’s motion on all claims and entered a final judgment. Lyndon timely filed a notice of
appeal.1
II. STANDARD OF REVIEW
This court reviews the district court’s grant of summary judgment de novo. Shell Offshore
1
Lyndon has abandoned its breach of contract and breach of warranty claims on appeal by
failing to brief them. See FED. R. APP. P. 28(a)(9)(A); Robinson v. Guarantee Trust Life Ins. Co.,
389 F.3d 475, 481 n.3 (5th Cir. 2004) (“Failure adequately to brief an issue on appeal constitutes
waiver of that argument.”).
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Inc. v. Babbitt, 238 F.3d 622, 627 (5th Cir. 2001). The district court’s grant of “[s]ummary judgment
is appropriate if the record shows ‘that there is no genuine issue as to any material fact and the
moving party is entitled to judgment as a matter of law.’” Id. (quoting FED. R. CIV. P. 56(c)).
III. DISCUSSION
A. Equitable subrogation
Lyndon argues that it should be able to recover in tort against DLA under the doctrine of
equitable subrogation. Equitable subrogation is a doctrine whereby a surety is permitted to stand in
the shoes of the party that benefitted from its performance of the surety obligation in order to prevent
unjust enrichment on the part of a wrongdoer who caused the surety’s expense. Pearlman v.
Reliance Ins. Co., 371 U.S. 132, 136 (1962). “[P]robably there are few doctrines better established
than that a surety who pays the debt of another is entitled to all the rights of the person he paid to
enforce his right to be reimbursed.” Id. at 136–37. Subrogees, however, have no greater rights than
those of the assignor. St. Paul Prop. & Liab. Ins. Co. v. Nance, 577 So. 2d 1238, 1241 (Miss. 1991).
The caselaw supports the notion that Lyndon can stand in the shoes of the District.
Subrogation requires (1) the party to have paid a debt to a third party on behalf of the other party and
(2) that he must have been compelled to do so, such as by a surety agreement. Prairie State Nat.
Bank v. United States, 164 U.S. 227, 231 (1896); see also Nance, 577 So. 2d at 1240–41 (noting
that “[s]ubrogation is the substitution of one person in place of another, whether as a creditor or as
the possessor of any rightful claim”). Lyndon paid expenses for the District pursuant to the surety
agreement and, therefore, can stand in the shoes of the District for the purpose of this action against
DLA.
DLA argues that Lyndon cannot prove that the District suffered a loss, apparently because
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Lyndon itself, as the surety, had to pay the costs of completion of the project. For support, DLA
cites to Bagwell Coatings, Inc. v. Middle-South Energy, Inc., 797 F.2d 1298 (5th Cir. 1986), but an
examination of this case shows it to be inapposite. In Bagwell, the Fifth Circuit affirmed a judgment
of no liability in favor of an engineer that allegedly interfered with a subcontractor’s ability to
complete its work in a timely fashion. Id. at 1313. The contractor alleged that mistakes by the
engineer led to a breach of the contract between the owner and the contractor. Id. at 1301–02. The
court found that the contractor had not proven a breach of the engineer’s duty to the owner because
in a large, complicated construction project, a change with respect to one contractor may itself cost
money but may ultimately save the owner money in the overall construction process. Id. at 1312.
DLA’s argument bears no meaningful relationship to the facts of Bagwell. DLA’s argument
is simply that, regardless of whether or not there was a breach, the District suffered no loss because
Lyndon, as the surety, paid the difference. This argument ignores the very principle behind the
doctrine of equitable subrogation. By definition, the party into whose shoes the surety steps has not
suffered a loss because the surety protected it from that loss. DLA cannot claim that the District
suffered no loss simply because Lyndon, rather than the District, paid the costs of DLA’s alleged
negligence. Lyndon should have been permitted to stand in the shoes of the District for the purpose
of this suit.
B. Exculpatory clause
The Standard General Conditions of the Construction Contract contain a so-called
exculpatory clause which reads as follows:
Neither ENGINEER’S authority to act under [the] Contract Documents nor any
decision made by ENGINEER in good faith either to exercise or not exercise such
authority shall give rise to any duty or responsibility of ENGINEER to
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CONTRACTOR, any Subcontractor, any Supplier, or any other person or
organization performing any of the Work, or to any surety for any of them.
The district court held that the exculpatory clause entitled DLA to “judgment as a matter of law on
Lyndon’s negligence claim.”
In U.R.S. Co. v. Gulfport-Biloxi Regional Airport Authority, the owner of a construction
project sued the project’s architect, the project’s contractor, and the contractor’s surety. 544 So. 2d
824, 824–25 (Miss. 1989). In addition, the surety filed a counterclaim against the architect for
retainage fees to account for costs the surety had paid because of faulty workmanship. The lower
court found for the surety and the Supreme Court of Mississippi affirmed. The supreme court stated
that “[a]n architect is required to exercise ordinary professional skills and diligence and such duty is
non-delegable.” Id. at 827.
DLA does not dispute this general characterization of duty but instead argues that the
exculpatory clause saves it from liability to anyone but the District. Essentially, DLA argues that it
disclaimed, by contract, potential liability to a surety standing in the shoes of the District. Under
Mississippi law, “[c]lauses that limit liability are given strict scrutiny by this Court and are not to be
enforced unless the limitation is fairly and honestly negotiated and understood by both parties.”
Royer Homes of Miss., Inc. v. Chandeleur Homes, Inc., 857 So. 2d 748, 754 (Miss. 2003).
The law does not look with favor on contracts intended to exculpate a party from the
liability of his or her own negligence although, with some exceptions, they are
enforceable. However, such agreements are subject to close judicial scrutiny and are
not upheld unless the intention of the parties is expressed in clear and unmistakable
language.
Turnbough v. Ladner, 754 So. 2d 467, 469 (Miss. 1999). When a project implicates the public
interest, courts are even less deferential to any limitations of liability. See Kroger Co. v. Chimneyville
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Props., Ltd., 784 F. Supp. 331, 348–49 (S.D. Miss. 1991). Here the exculpatory clause is not
sufficiently clear to act as a limitation of liability under Mississippi law. Furthermore, the District
cannot bargain away the engineer’s potential duty to a surety that would step into the District’s shoes
under the doctrine of equitable subrogation. DLA’s argument that the exculpatory clause insulates
it from liability to Lyndon is without merit.
DLA also directs attention to the portions of the agreement that limit the engineer’s liability
to the District for the contractor’s errors. DLA argues that these portions mean that “DLA owed
Lyndon no duty to require Panther to repair its work or withhold payment for deficient work, prior
to Panther’s default.” DLA tries to distinguish U.R.S. on a number of grounds, most prominently that
the architect in U.R.S. “certified the project as complete and acceptable with the full knowledge that
the roof had not been constructed according to the plans and specifications and was in fact defective,”
whereas here “Panther defaulted, and DLA did not have occasion to have the completed system
tested and review and certify the final product.”
These attempts to distinguish U.R.S. are unavailing, however, as Lyndon’s claims are not
based solely on DLA’s failure to perform a final inspection of Panther’s work. Lyndon instead claims
that DLA failed in other inspection and payment duties as well. The exculpatory clause does not
shield DLA from liability to Lyndon.
C. Breach
The district court found that Lyndon failed to establish a breach of a duty to the District by
DLA. In the summary judgment context, the reviewing court “views the evidence in the light most
favorable to the non-movant.” Abarca v. Metro. Transit Auth., 404 F.3d 938, 940 (5th Cir. 2005).
It is clear that DLA owed at least some duty to the District. U.R.S., 544 So. 2d at 827
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(noting that architects are “required to exercise ordinary professional skills and diligence and such
duty is non-delegable”). DLA argues that “the scope of [its] responsibilities may be limited by
contract.” DLA cites to Hobson v. Waggoner Engineering, Inc., 878 So. 2d 68, 73–77 (Miss. Ct.
App. 2003), for this proposition. Hobson is an intermediate appellate court decision stating that, in
the absence of contractual provisions imposing such a duty, the engineer had “no duties or
responsibilities for supervision of the work or project safety.” Id. at 76. In Hobson, the plaintiff
brought a wrongful death action alleging that the engineer’s negligent supervision and design caused
the death of an employee of one of the subcontractors working on the project. Id. at 70. The court
found that the engineer had no duty to warn the employee. Id. at 76.
In Mayor and City Council of Columbus v. Clark-Dietz & Associates-Engineers, Inc., a
federal court in Mississippi stated that “in the absence of an active undertaking to guarantee the
contractor’s work, courts have ordinarily held that similar language absolves the architect of any
liability for the contractor’s poor workmanship.” 550 F. Supp. 610, 627 (N.D. Miss. 1982). On the
other hand, Clark-Dietz’s admonition that courts “ordinarily” do not impose liability on an engineer
in such circumstances suggests that in some extreme cases liability is appropriate.
In City of Mound Bayou v. Roy Collins Construction, the Supreme Court of Mississippi stated
that “[o]ne of the most important duties of an engineer/architect is to inspect the work to insure it is
fully performed by the contractor. In fact an engineer/architect will be liable if he improperly releases
funds to a contractor without adequately inspecting the construction site.” 499 So. 2d 1354, 1359
(Miss. 1986) (internal citation omitted). While the contractual provisions in Mound Bayou appear
to have imposed the duty to inspect on the engineer, the court’s straightforward expression of the
duty without reference to the specific contract in the case suggests it is not derived solely from such
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contracts.
Turning to the contractual provisions present here, DLA was required to “make visits to the
site at intervals appropriate to the various stages of construction as ENGINEER deems necessary in
order to observe as an experienced and qualified design professional the progress and quality of the
various aspects of Contractor(s)’ work.” In fact, DLA contacted Panther twice to note problems
with the timing of the construction. The contractual language also supports a duty on behalf of DLA
to inspect work before recommending payment.
The Supreme Court of Mississippi in Mound Bayou clearly stated that the engineer must
“adequately” inspect a project before a release of funds is proper. 499 So. 2d at 1359 (upholding the
lower court’s finding in favor of the contractor and against the engineer and the owner). An engineer
may be held liable at least in some egregious cases for failure to inspect and for improper
recommendations of payment if the engineer failed to meet the standard of employing ordinary
professional skills and diligence, even in the absence of contractual provisions specifically
guaranteeing the contractor’s work.
In opposition to the motion for summary judgment, Lyndon presented an expert’s report
articulating how DLA’s actions and inactions failed to meet this standard. This report contains
extensive detail about the actions and inactions of DLA as well as the expert’s opinion that DLA “did
not exercise ordinary professional skills and diligence in performing certain duties under the
Contracts” and that DLA “should have observed the deficiencies with the work performed by Panther
Utilities and either rejected the work or withheld payment for the work.”
Viewing this report in a manner favorable to Lyndon, see Abarca, 404 F.3d at 940, it raises
a genuine issue of material fact as to whether or not DLA breached its inspection and payment duties
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to the District. Accordingly, the district court erred in granting DLA’s motion for summary
judgment.
D. Economic loss rule
DLA argues that the economic loss rule shields it from liability. The economic loss rule is a
doctrine restricting recovery in products liability to damages for physical harm, thereby excluding
recovery for purely economic damages like those alleged here. DLA points to no Mississippi caselaw
applying this doctrine outside of the realm of products liability. In this diversity case, we seek to
apply the law of Mississippi as we believe the Supreme Court of Mississippi would. Shanks v.
AlliedSignal, Inc., 169 F.3d 988, 993 & n.7 (5th Cir. 1999). We therefore decline to apply the
economic loss doctrine to this tort case involving a duty shaped by contract. See Primrose Operating
Co. v. Nat. Am. Ins. Co., 382 F.3d 546, 565 (5th Cir. 2004) (quoting Webb v. City of Dallas, 314
F.3d 787, 795 (5th Cir. 2002)).
CONCLUSION
We REVERSE the judgment of the district court dismissing the negligence claim and
REMAND for further proceedings not inconsistent with this opinion.
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