We often represent general contractors, construction managers and subcontractors in claims against owners for defects in the project’s plans and specifications which in some way increased construction costs. Generally, the plans and specifications in dispute were prepared by the owner’s design professional (i.e., the owner’s architect or engineer) and provided to the contractor by the owner.
In these situations, the contractor has completed construction of the owner’s project under protest and is bringing a claim against the owner to recover the increased costs of construction and other damages (such as delay damages, increased home overhead expenses and lost profits). If the owner does not have the financial wherewithal to pay the contractor’s increased construction costs or has filed for bankruptcy protection (rendering the general contractor’s claim against the owner valueless), our contractor clients often wonder why they cannot bring suit directly against the owner’s design professional. After all, the owner’s design professional prepared the defective plans or specifications which resulted in the contractor’s damages; moreover, the professional architect or engineer most likely has malpractice insurance which may provide coverage for the contractor’s damages. Under Idaho law, the short answer is that a contractor who did not directly contract with the design professional cannot maintain a lawsuit against the design professional for defective plans or specifications because of two long-standing legal principles: (1) the “economic loss doctrine”, and (2) the “privity of contract” rule.
The economic loss doctrine provides that a party cannot bring suit against another party in tort (i.e., for negligence B such as the negligent preparation of plans and specifications — or professional malpractice — which is a form of negligence) for purely economic losses, such as increased construction costs, lost profits or delay damages. In Idaho, to maintain a tort claim the claiming party must have suffered some personal injury (i.e., bodily injury), or property damage (i.e., destruction of property), or there must be a special relationship between the parties (i.e., an attorney-client relationship or accountant-client relationship). If the claiming party suffered only economic losses, he can only bring a claim for breach of contract. The problem in Idaho is that to bring a claim for breach of contract, the claiming party must have actually contracted with the breaching party or the claiming party must be an intended third party beneficiary of the contract. If neither situation exists, the claiming party cannot maintain a breach of contract action. This concept is known as privity of contract.
In the construction setting, the owner typically enters into a contract with a design professional to prepare plans and specifications. The owner also enters into a separate contract with the general contractor to build the project based upon the plans and specifications which the owner provides to the contractor. Typically, the owner is in privity of contract with the design professional and the general contractor, but there is no privity of contract between the design professional and the general contractor and the contractor is not an intended third party beneficiary of the contract between the owner and design professional. Therefore, the general contractor cannot maintain an action against the owner’s design professional for breach of contract. Likewise, because the general contractor’s damages for increased construction costs due to defective specifications are purely economic losses, the contractor also cannot maintain a negligence action against the owner’s design professional. In the typical construction setting, the contractor has no basis to make a recovery in law or in equity against the owner’s design professional.
The economic loss doctrine and the privity of contract rule which operate in Idaho to prevent a claim by a contractor against the owner’s design professional exist in a majority of the 50 states. Several states have eliminated the privity of contract requirement and economic loss doctrine and allowed contractors to sue the owner’s design professional for negligence and/or negligent misrepresentation in the preparation of construction plans and specifications. Those states which allow lawsuits directly against the design professional do so on the theory that a professional architect and/or engineer knows that the contractor building the project is relying upon his plans and specifications and owes a professional duty to those relying on the plans and specifications to make sure they are not defective. Most recently, the Pennsylvania Supreme Court in Bilt-Rite Constructors Inc. v. The Architectural Studio, 866 A.2d 270, 2005 PA Lexis 99 (January 19, 2005) eliminated the privity of contract requirement and economic loss doctrine and allowed a general contractor to bring a negligence claim directly against the owner’s architect to recover damages. Other states which have rejected the privity of contract requirement and economic loss doctrine include Massachusetts, Arizona, Georgia, Montana, North Carolina, South Carolina and Tennessee.
While the Idaho Supreme Court has not directly addressed the issue of whether a contractor not in privity of contract with the owner’s design professional can bring a cause of action for negligence against the design professional, it is unlikely that such a claim will be allowed. Traditionally, the Idaho Supreme Court has upheld the economic loss doctrine and the privity of contract rule and has only allowed limited exceptions to those rules. It is important for contractors to understand the limitations under Idaho law regarding claims against an owner’s design professional. An experienced construction attorney can answer any questions about the contractor’s rights.
Jeff Sykes is an attorney with the law firm McConnell Wagner Sykes + Stacey PLLC. He represents businesses and individuals with legal problems and concerns involving contracts, construction, insurance, employment, and real property matters.
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