Facts
- J’Aire Corporation operated a restaurant at the Sonoma County Airport under a lease from the County of Sonoma.
- The lease required the County to provide heating and air conditioning for the premises.
- The County hired contractor Craig A. Gregory to improve the restaurant premises, including renovation of the heating and air-conditioning systems and installation of insulation.
- The construction contract did not set a completion date; J’Aire alleged the work therefore had to be completed within a reasonable time.
- J’Aire alleged Gregory failed to complete the work with due diligence despite repeated requests, causing periods when the restaurant could not operate and longer periods without heat and air conditioning.
- J’Aire claimed resulting economic damages, including loss of business and lost profits.
- J’Aire sued Gregory asserting (1) a third-party beneficiary contract theory and (2) a negligence claim seeking economic loss damages.
- The trial court sustained Gregory’s demurrer without leave to amend and dismissed the action; on appeal, J’Aire challenged only dismissal of the negligence cause of action.
Issues
- Whether a contractor who contracts with a property owner owes a duty in negligence to a noncontracting lessee for foreseeable business losses caused by negligent delay in completing the work.
- Whether purely economic losses (lost profits) may be recovered in negligence absent physical injury or property damage when the harm is direct and foreseeable.
Decision
- The California Supreme Court reversed the dismissal and held the complaint stated a cause of action for negligence.
- The Court held a contractor may owe a duty of care to a lessee whose economic interests are foreseeably and directly affected by the contractor’s performance.
- The case was remanded for further proceedings on the negligence claim.
Legal Principles
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Duty in negligence is determined largely by foreseeability and the relationship between the parties, not solely by contractual privity.
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Purely economic damages may be recoverable in negligence when the injury is sufficiently certain and not remote, speculative, or contingent.
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Whether to impose tort liability for negligent performance of a contract affecting a third party depends on a multi-factor test considering:
- the extent the transaction was intended to affect the plaintiff;
- the foreseeability of harm to the plaintiff;
- the degree of certainty the plaintiff suffered injury;
- the closeness of the connection between the defendant’s conduct and the injury;
- the moral blame attached to the defendant’s conduct; and
- the policy of preventing future harm.
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Negligent performance of a contractual undertaking can support tort liability to nonparties when the defendant’s work is directed at premises or operations in a manner that makes third-party economic harm predictable and direct.
Conclusion
The court recognized a negligence claim for a lessee’s lost profits against a contractor hired by the lessor, holding that foreseeable and direct economic harm can support a duty of care under a six-factor analysis even without physical injury or property damage.