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By: Gregory J. Spaun Published: March 2020

Contractor's Claims Against Designer Permitted to Stand on a Functional Equivalent of Privity Theory

When a contractor is sued, it is only natural to look to others who may share (or have primary, or sole) responsibility and bring them into the lawsuit so as to mitigate that contractor’s ultimate payout. Where a designer is the party to be brought in, the contractor faces the obstacle pronounced by the Court of Appeals 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 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. However, in the recent case of Steadfast Ins. Co. v Allan Briteway Electrical Contractors, a court rejected the designer’s attempt to avail itself of the Ossining defense.

Briteway, an electrical contractor, contracted with Turner Construction Co. to perform the electrical scope of work for the renovation of the Whitney Museum of Art for approximately $24 million. Despite that the plans were represented to be in final form (and would result in code-compliant construction), the electrical scope was changed drastically during construction such that the completion cost ballooned to over $35 million. Briteway advised Turner that it would not complete the modified scope without additional funds, and Turner declared Briteway in default under the contract. With that default, Turner submitted a claim under its subcontractor default insurance policy with Steadfast (which Steadfast paid). Turner subsequently re-hired Briteway to complete the contract with the additional funds paid by Steadfast, and Briteway completed the project.

Years later, Steadfast, as subrogee of Turner, sued Briteway to recover the monies it paid out on the default claim. Briteway brought the designers into the lawsuit, alleging that the cost overruns were the direct result of an unbuildable set of plans, coupled with extensive redesigns during construction—which resulted in Briteway having to rip out work already in place and install replacement work according to new plans—and outright abuse of architect’s supplemental instructions (which are ordinarily used to simply clarify what the existing plans call for, and not to set forth new plans).

Like most all designers in this situation, these designers moved to dismiss the lawsuit claiming that there was neither contractual privity, nor a relationship approaching such privity. Briteway opposed, noting that it had a construction obligation to bid on the plans, as presented, and that the designers knew or should have known that the plans would be used to construct a code-compliant electrical system. Briteway also demonstrated that the designers here specifically knew of Briteway’s presence on the project (and not just that the electrical work would be completed by “some” contractor) by requiring Briteway to rip out its own work and replace it with a completely redesigned scope. Based on these facts, coupled with Briteway’s reasonable reliance on the plans produced by the designers to submit its bid (and Briteway’s successfully distinguishing this work from site work, where the contractor may have been said to have an obligation to conduct its own site visit and investigation), the court found the functional equivalent of privity sufficient to get around the Ossining defense. (After doing so, the court nevertheless granted the motion to dismiss, finding that the claims against the designer were time barred.)

The functional equivalent of privity, for the longest time, was a brick wall against claims asserted by contractors against designers. However, given the extent of involvement of designers on modern construction projects, particularly where they also function as project administrators, it is increasingly possible to reach over that brick wall and bring designers into these lawsuits. As this case (and a case this author wrote about several years ago, where I described a similar situation of designer interference, https://www.wbgllp.com/single-publication.php?type=5&id=105) demonstrates, the key is not the defects in the initial plans, but the changes and interference by the designer afterwards, which support the claim. A contractor who finds themselves caught up in this situation would be well advised to seek out experienced construction counsel to determine whether the designer’s actions would support a finding that there is such a functional equivalent of privity (and how to document the facts which would support that finding). Likewise, because of the wide discrepancy between the six-year contractual statute of limitations, which is what governs an upstream contractor’s (or its subcontractor default insurance carrier’s) claim against the contractor, and the three-year negligent misrepresentation statute of limitations, which is what would govern many of the contractor’s claims against other potentially responsible parties, a contractor who is the subject of a claim under a subcontractor default insurance policy would be well advised to consult with experienced construction counsel to best preserve such claims-over so that they may be viable when the eventual contract or subrogation action is commenced.

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