by Sheila Sears (Upadhyay), Associate

In recent years, several jurisdictions have eased the restrictions on sureties and general contractors to bring direct lawsuits against design professionals absent privity of contract.  Traditionally, the defenses of non-privity and the economic loss doctrine have effectively insulated a design professional from direct negligence claims by both contractors and sureties.  Without a contract, monetary damages resulting from economic loss were often not recoverable against a design professional absent personal injury or property damage.  The rationale was that absent a contract, design professionals generally do not owe duties to prevent purely economic losses to contractors or sureties.  Thus, contractors and sureties were often left with no direct recourse against a negligent design professional despite substantial economic losses incurred on a project.

There is no consensus among the States as to whether a surety or a contractor may sue a design professional directly.  In several jurisdictions, courts have found creative ways around the economic loss doctrine and privity defenses reasoning that a design professional owes a special duty to contractors.  A recent decision from the U.S. District Court for the Southern District of West Virginia, Mid-State Surety Corporation v. Thrasher Engineering, Inc., expanded the rule to allow not only contractors, but also sureties, to sue design professionals directly.  2006 WL 1390430 (S.D. W.Va. 2006).  The Court did not address the economic loss doctrine; rather its analysis focused on the special relationship between the surety and the project engineer.

The Mid-State case reflects a recent trend in numerous jurisdictions not to be bound by traditional notions of privity, but to impose liability on design professionals for the foreseeable consequences of their work product and services.

Mid-State Surety v. Thrasher Engineering

The dispute in Mid-State arose out of the construction of a water treatment facility in West Virginia.  Thrasher Engineering designed the facility and served as the owner’s resident project representative during construction.  Mid- State Surety’s bonded contractor defaulted in its performance and Mid-State entered into a takeover agreement to complete construction of the facility.  Subsequently, Mid-State initiated an action in Federal Court against the engineer, Thrasher, alleging that Thrasher was negligent in carrying out its duties on the project.  Specifically, Mid-State alleged that Thrasher negligently certified and authorized contract payments to the subsequently defaulted contractor.  Thrasher moved for summary judgment asserting that Mid-State’s claim for negligence could not prevail inasmuch as Thrasher owed neither a contractual nor a common law duty to the surety, Mid-State.  The Federal Court rejected Thrasher’s argument and held that Thrasher did owe a duty to Mid- State based on the parties’ special relationship.  As a result, the Court denied Thrasher’s motion for summary judgment allowing Mid-State’s claim to proceed.

Does a Design Professional Owe a Special Duty to a Surety?

In Mid-State, the Court’s threshold inquiry was whether Thrasher, as project engineer, owed a duty to Mid-State, as surety.  The issue of whether a design professional owes a duty to a surety in the absence of privity of contract was one of first impression in West Virginia.  However, in Eastern Steel Constructors, Inc. v. City of Salem, the West Virginia Supreme Court had previously held that a special relationship existed between an engineer and a contractor, and as a result, the engineer owed a duty of care to the contractor.  549 S.E.2d 266 (W.Va. 2001).  While acknowledging that the Court in Eastern Steel was addressing the claim of a contractor, not a surety, the Mid-State Court applied the same principles to its analysis of Mid-State’s claim.

In determining the existence of a duty owed to Mid-State, the Court considered (1) the foreseeability of harm allegedly suffered by Mid-State; (2) the impact of contractual provisions; and (3) additional considerations of the likelihood of Mid-State’s injury, the magnitude of Thrasher’s burden in preventing the harm, and the consequences of placing any burden on Thrasher.

Thrasher’s Duty to Mid-State

Evaluating each consideration separately, the Court spent the greater part of its opinion analyzing foreseeability and additional considerations.  The Court recognized that it is foreseeable that a surety will be required to make payments pursuant to its bond obligation when an engineer fails to discover that a contractor is not paying suppliers.  It is also foreseeable that a surety would be harmed by a design professional that failed to monitor a contractor’s progress, yet approved payments to the contractor.  Moreover, the Court recognized that Thrasher must be deemed and expected to know that its services were for the protection of not only the owner, but also the surety.  Thus, it was foreseeable for the surety, that had no supervisory power of its own, to rely on the actions and representations of the project engineer.

The Court also recognized that certain provisions in the contract between the parties might limit the exact duty owed by a project engineer.  However, the Mid-State Court found nothing in the contract between the parties that expressly limited the duty of care owed by Thrasher.

Finally, the Court analyzed several additional considerations.  It found that not only was the harm suffered by Mid-State foreseeable, the likelihood of the harm Mid-State suffered was significant.  In addition, the Court found that imposing a duty on Thrasher to Mid-State did not force an additional burden on Thrasher.  Indeed, Thrasher already owed the same duty to the owner and the owner could bring the same negligence action against Thrasher.  Not allowing Mid-State to sue Thrasher directly, the Court explained, would effectively condone Thrasher’s negligent performance of its duties on the project.  Moreover, Thrasher would not be liable to Mid-State unless Mid-State demonstrated that Thrasher was negligent and its negligence was the proximate cause of Mid- State’s loss.  The Court’s decision held that a duty exists and it was Mid-State’s burden to prove that Thrasher breached that duty.  In light of the foregoing considerations, the Court found that there was a special relationship between Mid-State and Thrasher similar to the duty previously recognized in Eastern Steel between a contractor and an engineer.

The Impact of Mid-State

In recent years, the list of jurisdictions permitting contractors to sue design professionals directly for economic loss, despite an absence of contractual privity, has grown.  For example, under North Carolina law, an architect may be held liable to a general contractor and his subcontractors for economic loss resulting from the breach of the commonlaw duty of care, even in the absence of privity of contract.  As explained by a North Carolina court, such a duty of care “flow[s] from the parties’ working relationship” and the “power of economic life or death an architect holds over a contractor requires that such a duty of care be recognized, even in the absent of privity.” See Ellis-Don Construction, Inc. v. HKS, Inc., 353 F. Supp. 2d 603, 605 (M.D.N.C. 2004).  Likewise, a Pennsylvania court has recently held that design professionals have a duty to contractors, even without a direct contractual relationship, based on a contractor’s reliance on plans and specifications of a design professional in preparing its bid.  See Bilt-Rite Contractors, Inc. v. The Architectural Studio, 581 Pa. 454 (2005).  In essence, Pennsylvania recognizes a cause of action against a design professional for negligent misrepresentation because architects and engineers are in the business of supplying information to others for pecuniary gain.

The notion of a direct cause of action against a design professional absent privity of contract is no longer limited to claims asserted by contractors.  As evidenced by the holding in Mid-State, sureties also have the right to sue a design professional directly.  West Virginia joins Missouri, Rhode Island, Mississippi, Minnesota and Louisiana as jurisdictions that permit a surety to sue a design professional for negligence.  In contrast, jurisdictions such as Virginia, Nebraska, and Washington, among others, still require strict privity and recognize the economic loss rule as a defense to a contractor’s or surety’s negligence claim against a design professional.

Conclusion

As a result of Mid-State and decisions elsewhere, a contractor or a surety may, upon proper proof, recover purely economic damages in an action alleging negligence on the part of a design professional.  While several jurisdictions still adhere to the principle that strict privity is required, recent cases have opened the door to contractors and sureties to recover economic losses resulting from a design professional’s negligence.


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