Which Way the Wind Blows: You Don't Always Need A Contract Behind Your Lawsuit

Legal May 2018

Everyone depends on everyone else in construction. All parties rely on the designer for accurate drawings; the subcontractors trust other subs will not interfere with their work; and all subcontractors expect the general contractor to coordinate. When something goes wrong, the fact that you were beholden to another company does not mean you can sue it, because you could normally only sue a party with whom you had a contract.

Why this limitation? The concept is called “privity of contract,” a legal principle created by the courts to impose some degree of order in litigation.

You can file a lawsuit for breach of contract against anyone with whom you have a contract (are in privity). However, what about others with whom you don’t have a contract but caused your problems? What if the architect caused you financial harm? You do not have a contract with the architect, but can you sue it in negligence?

With some limitation, courts in several states have allowed contractors to sue design professionals even with no contract privity. These developments are important for subs. You may find you have the right to sue or pass through your claims against an architect or construction manager (CM). Subcontractors may be able to use these exceptions to privity by having the GC sponsor or pass through their claims to the architect.

There have long been exceptions to the privity rule. If another party’s negligence causes you or your company personal injury or property damages, a contract is not necessary for a lawsuit. You do not need a contract with the owner to file a mechanic’s lien or to sue a bonding company. Manufacturers’ warranties add another exception to privity.

Recently, courts in some states have started to change their minds about not requiring privity in other situations. This development enables some parties to file claims in negligence against parties where there is no privity. So far, these cases involve only professional negligence claims against architects and are based on the idea that the contractor must rely on the architect.

Why is reliance on a professional so different from reliance on another noncontracting party? As much as you rely on the architect, you also may rely on other subs to do their work in a timely manner.

This question does not have an easy answer. The courts have determined the professional has a duty to act in a non-negligent manner. In construction, those who rely on architects have no choice but to rely on the drawings and specifications.

In Pennsylvania, the courts allow a contractor to sue the design professional under a theory of negligent misrepresentation—that the architect’s drawings constitute an affirmative promise that they were prepared professionally and non-negligently.

Another question: Why is it important to be able to sue the architect if you can sue the owner for breach of contract? The liability of the architect is not limited by restrictive clauses in your contract with the owner. Because there is no contract between the contractor and the architect, the architect does not have these contract defenses to protect itself against the contractor’s claims. The owner would have those defenses because the lawsuit would be based on a contract, not negligence.

In the owner/contractor agreement, the owner may have a no-damages-for-delay clause or provisions that claims are waived unless they are made within a certain period of time. In a case against the architect by the contractor, these owner defenses are simply not there for the architect to use.

What about CMs? A recent decision in Louisiana found a contractor on a school claimed the owner’s CM—who was not in privity with the contractor—caused its excess costs. The contractor claimed the CM inadequately reviewed the architect’s drawings, that its quality control had not detected design errors, that it contributed to the delays with late responses to clarification requests, and that it was responsible for late project payments.

Even though it had a designer on its staff, the CM argued it did not have primary responsibility for the project design and that it was merely an advisor to the owner without any real authority. The CM contended that, by contract, its duties were only owed to the owner.

The Louisiana court applied the same logic of professional liability to the CM that it had applied to architects. The court reasoned that the CM knew, if it did not do its job without negligence, the contractor would be financially damaged. Therefore, the CM had a professional duty to the contractor to act without negligence.

This rationale could be applied to any noncontracting party who, because of experience, training or education, should be deemed to be in a superior position when making decisions or fulfilling obligations to a job. The courts created the privity concept, and the courts also make the exceptions.

Applying these new rulings has created confusion. How far the courts will take these expanding legal obligations of not-in-privity professionals remains open.

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