By: Gregory J. Spaun Published: August 2015

Owner/Designer Required to Defend Negligent Misrepresentation Claim on Functional Equivalent of Privity Theory

Contractors who undertake construction projects and follow the plans of the designer may nevertheless find themselves on the defending end of a construction defect lawsuit. In such situations, it is tempting for the contractor to bring the designer into the lawsuit on a theory that the designer negligently represented that the plans were free of defects when, ultimately, they may not have been. After all, if the contractor followed the plans, then where did the defects come from? However, contractors who have attempted to do so over the past 25 years have faced a significant obstacle in the form of the Court of Appeals’ holding in Ossining Union Free School District v Anderson LaRocca Anderson (73 NY2d 417 [1989]). The holding of Ossining is that absent a contract with the designer (which contractors almost never have), a contractor can only assert a negligent misrepresentation claim against the designer where the contractor has a relationship with that designer which is the “functional equivalent of contractual privity”. In Ossining, the Court of Appeals set forth a three part test for asserting such claims notwithstanding the lack of a contract: (1) an awareness that the plans were to be used for a particular purpose or purposes; (2) reliance by a known party or parties in furtherance of that purpose; and (3) some conduct by the designer linking it to the party or parties and evincing the designer’s understanding of their reliance. It is generally the second and third prongs, reliance by a known party and the conduct by the designer evincing its understanding of the known party’s reliance, where these claims ordinarily fail. Moreover, since these issues are questions of law for a court, the overwhelming majority of these lawsuits are dismissed at the outset.This author, in North Star Contracting Corp. v MTA Capital Construction Company (120 AD3d 1066 [1st Dept 2014]), recently had some success arguing the functional equivalent of privity theory against an owner/designer, overcoming the bar to such suits generally resulting from the holding in Ossining. The facts of North Star arose out of the MTA Capital Construction Company’s construction of the new South Ferry subway station in Manhattan. The MTA CC (a sister agency to MTA/New York City Transit) retained Judlau Contracting to build the new station and Judlau, in turn, retained North Star to perform the required track construction work. There was never any contractual relationship between the owner/designer and North Star.

The plans for the construction required Judlau (North Star) to use three types of a newly designed Low Vibration Track (LVT) block. All three types were designed by MTA/New York City Transit. The specifications required North Star to procure these specially designed blocks from a specific manufacturer, Permanent Way Corporation (PWC), which North Star did.

In October of 2007, when North Star was installing the Type A Blocks, it discovered that the blocks were defective in that the concrete screw inserts (which were crucial to attach the rails) were skewed. After the discovery of the defects, the owner/designer conducted an investigation into the origin of the defects (from which North Star was excluded, citing proprietary design and patent considerations). After this investigation, the owner/designer represented that it had reviewed PWC’s manufacturing process for the Type DXO blocks to ensure that they would be satisfactory, and that PWC modified its quality control measures to ensure that those blocks would be free from defects. Unfortunately, similar to the Type A blocks, the Type DXO blocks suffered from the same defects. These defects caused North Star to incur losses resulting from the extra work required to replace the blocks, as well as associated delays to the project.North Star sued the owner/designer asserting, amongst others, a claim for negligent misrepresentation. North Star alleged that it relied on the owner/designer’s representations as to the suitability of the LVT Blocks and the owner/designer’s investigation into (and assurances of the correction of) the defects with the blocks. The owner/designer moved to dismiss, citing the lack of a contractual relationship. The trial court dismissed the claims, finding that there was neither a contractual relationship nor a relationship which could be construed as the “functional equivalent of contractual privity”.

On appeal, North Star’s negligent misrepresentation claim was reinstated. In doing so, the Appellate Division found that there was the functional equivalent of contractual privity between North Star and the owner/designer. First, as to the awareness prong of the Ossining UFSD test, the appellate court noted that the owner/designer had a contractual relationship with Judlau, and that Judlau had a contractual relationship with North Star. That court also noted that the purpose of the North Star/Judlau subcontract was to further the purpose of the MTA/Judlau prime contract. As to the reliance prong of the Ossining test, North Star successfully argued that the owner/designer’s designation of a sole-source manufacturer, coupled with its conducting an investigation from which North Star was excluded, left North Star no choice but to rely on the owner/designer’s representations. Further, although contractually obligated to proceed with the installation, the appellate court found that North Star had the power to breach the contract if its demand for a written change order guaranteeing payment was not met, and that North Star refrained from doing so in reliance on the owner/designer’s representations. Finally, as to the conduct linking the owner/designer to North Star, the appellate court found that the designation of a sole-source manufacturer, coupled with the undertaking of an investigation from which North Star was excluded—an investigation which gave the owner/designer unique or specialized expertise with regard to the design and performance of the Type DXO blocks—was sufficient to link the two parties.

While the facts of North Star may seem somewhat narrow, they do provide an opening through the Ossining wall for contractors who are working under contracts which call for sole-source procurement. Where a contractor is working under such an agreement and a problem arises with the sole-source product, that contractor may be able to assert a claim against the designer who called for the use of that specifically designated product.

© Welby, Brady & Greenblatt, LLP.
All Rights Reserved. By visiting this site, you agree to our Terms of Service. For more information please read our Privacy Policy Attorney Advertising