Source: http://www.bizjournals.com, July 5, 2016
By: Earl Cantwell
There has been a trend in recent New York court decisions to expand (not limit) zones of potential legal liability. A recent case decided by the Appellate Division, 1st Department, is part of that trend and raises significant issues for New York contractors and design professionals with respect to alleged construction defects.
The case is Dormitory Authority of the State of New York v. Samson Construction Co. and Perkins Eastman Architects P.C., 2016 WL 820960 (First Department, March 3, 2016).
The City of New York wanted to build a modern forensic lab in Manhattan, but in this case the CSI facility became the crime scene. The project was actually undertaken by the Dormitory Authority of the State of New York (DASNY), and DASNY was to manage and finance the planning, design and construction. DASNY retained Perkins as the architect and Samson Construction was the foundation contractor. In May 2002, when Samson began driving piles for the foundation, an adjacent hospital building began to settle. Over the next two years, that building settled up to 8 inches in some areas. Other structures adjacent to the project site sustained damage due to settlement and foundation work. Approximately $37 million in costs for fixing damage to the site and adjacent structures were incurred.
A trial court in New York County dismissed the City of New York’s breach-of-contract suit against Perkins but denied Perkins’ motion to dismiss a negligence claim brought by DASNY. The Appellate Division affirmed the decision with respect to the negligence claim but reinstated the city’s breach-of-contract claim.
The court first rejected Perkins’ argument that it had contracted with DASNY and the city was not a party to the contract. The trial court accepted this argument but was reversed by the Appellate Division on grounds that the city could be an intended “third party beneficiary” of the architect’s engagement contract. The Appellate Court argued that the city would eventually operate the crime laboratory, and the city retained some control over various aspects of the project.
This is certainly a dubious legal holding since owners are almost always “beneficiaries” of construction projects, and they often retain some degree of control over contract parameters.
In this case, the architect contracted with DASNY, and DASNY should have been the only party with standing to assert a breach-of-contract claim against Perkins. Owners are almost always an ultimate “beneficiary” of a construction project. The question raised by this case is whether an owner can directly sue subcontractors, suppliers and design professionals for breach of contract who contracted not with the owner but, for example, with a general contractor or construction manager.
The 1st Department next affirmed permitting the negligence claim to proceed against Perkins. Although there was a contractual engagement, it was held the architect could also be subject to “tort liability” based on failure to exercise “due care” in performance of its duties. Not only is this possibility shocking, equally so was the rationale.
The Appellate Court cited authority to the effect that, if a project is “so affected with the public interest” that failure to perform could have “catastrophic consequences,” a design professional could be subject to tort as well as contractual liability. It’s all the more puzzling in this case because the alleged tort liability was not to some third party but to DASNY, the very party with whom Perkins contracted. The Appellate Court held that allegations that Perkins’ failure to conduct an adequate site investigation, provide an adequate foundation design, etc., violated the relevant standard of professional care, resulting in delays and increased costs on the order of $37 million, represented such “public interest” and “catastrophic consequences” as to allow a tort/negligence claim in addition to breach-of-contract claims.
The question is raised whether and when a severe design defect on a construction site becomes so “catastrophic” in terms of property damage or personal injury that a contractor or design professional can be sued not only for breach of contract but for negligence. Subjectively, what determines or defines “public interest” or “catastrophic consequences”? The amount of damage, the “suddenness” of the failure, whether public property is damaged, a personal injury, more than one personal injury, a fatality?
Justice Peter Tom dissented from this part of the decision and would not have allowed the negligence claim because the causes of action for breach of contract and negligence were essentially the same. The dissent noted that the contract between DASNY and Perkins provided a contractual remedy for DASNY’s extra costs resulting from design errors or omissions from Perkins and its professional liability insurance carrier, so DASNY had a contractual cost-recovery avenue. The dissent differentiated this case from where an event was caused by a sudden calamity requiring emergency safety measures because no sudden or “catastrophic harm” occurred. The settling of the hospital building took place over a period of years and posed no threat to public safety.
A final blow was the court’s summary rejection of the “economic loss doctrine.” That rule in a construction context typically states that a negligence claim cannot be brought by someone in contractual privity with a contractor for purely “economic loss” and relegates the parties to their respective contractual rights and remedies. The argument by Perkins was that it had a contract with DASNY, that the parties should be limited to their contractual rights and remedies and the economic loss rule precluded DASNY’s negligence claim.
In conclusion, this case allowed suit by the city against the architect in a situation where the architect had contracted with DASNY, a third party. Second, this case allowed a negligence claim to proceed against the architect by a direct contracting party based on a subjective “public interest” and “disastrous consequences” argument, which could be applied in any number of construction defect claims involving significant contract delays, property damage or personal injuries.
The decision can be read as holding that design professionals don’t have standing to assert the economic loss doctrine to dismiss negligence claims brought by parties with whom they are in direct contractual privity.
With one dissent, this case cannot be appealed as of right to the Court of Appeals (two would have been necessary). But given one strong dissent and the legal issues and sums of money involved, the case could be taken up by the Court of Appeals, whose review of the decision should be closely followed by the construction industry.