Privity of contract is a simple concept. One must possess privity in order to sue another party for contract-related damages… usually. The basic concept of privity essentially means that if you are not a party to the contract, then you cannot receive rights and remedies afforded under that contract. The idea makes sense if you really think about it. Contracts are suppose to bind and protect parties that agree to those terms. Why would other entities or individuals be allowed to involve themselves with contractual disputes and legal suits arising from a contract they did not draft nor agree to? Almost always, privity must exist in order for a contractual claim to be raised against another party, but the construction industry creates unique legal situations that call for exceptions. A federal court in Indiana explained an exception to this privity concept.
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On September 22, 2009, the City of Whiting, Indiana contracted with American Structurepoint, Inc. to design and construct Whiting Lakefront Park. This project was meant to protect the shoreline from erosion and revitalize the waterfront area along Lake Michigan. On June 7, 2010, Structurepoint subcontracted with Whitney, Bailery, Cox & Magnani, LLC to assist in its agreement with the City. WBCM would serve as the marine engineer on the project, providing design and construction phase services.
In early 2012, WBCM designed construction plans for a revetment at the Whiting Lakefront Park to provide shoreline protection. This revetment was done in pursuant of the subcontract. Unfortunately due to incorrect measurements of the mud-line elevation above sea level, the revetment failed and had to be redone or modified multiple times. The revetments caused many delays and even damage to the project. The estimated costs to the City in delays and repairs was around $1.3 million. Structurepoint assigned any claims it had against WBCM to the City. The City, in turn, sued WBCM for breach of the subcontract, negligence, and negligent misrepresentation. WBCM filed a motion to dismiss for failure to state a claim.
In City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnini, LLC, 2015 U.S. Dist. LEXIS 150229 (N.D. Ind. Nov. 5, 2015), the United States District Court of the Northern District of Indiana granted in part and denied in part WBCM’s motion to dismiss. The Court observed that Indiana law permitted the assignment of claims and recognized the causes of action the City asserted through the assignment. WBCM argued that the City erred in the wording of documents stating it sought to recover “its own damages.” The Court reasoned that simple imperfections do not take away from the legality of the causes of actions set forward.
The Court also explained that the City was correct in asserting that they are a third party beneficiary to WBCM’s subcontract. The claim for breach of the subcontract survived the motion to dismiss because the City was able to show clear intent that the subcontract was meant to directly benefit the City, despite not being an actual party to the subcontract. The subcontract specifically named the City on multiple occasions as the recipient of services. The Court stated
The City’s Amended Complaint highlights certain portions of the Subcontract to show that Structurepoint and WBCM intended the City to be a third-party beneficiary. The Subcontract identifies the City and states that “[WBCM] shall assist [Structurepoint] under its Professional Services Agreement with [the City]” for the Project. WBCM also agreed to act with a professional standard of care when working on the Project. Further, the Subcontract incorporates the Contract’s terms and conditions, which includes Structurepoint’s duties to the City.
The court also reasoned that the negligence claim survived the motion to dismiss. The negligent misrepresentation claim was dismissed, however. The bottom line is that the City of Whiting, Indiana was allowed to sue WBCM despite lack of privity.
Why Does This Matter?
This court decision is a good example of how even though you are not contracted with a party on a construction project, you still may be liable to them. Privity of contract usually has to exist, but exception can be found to this doctrine. The construction industry especially has more exception than most because of the unique contractual chain construction projects create. As a sub, or any construction party for that matter, certain clauses can protect you from some suits like the one discussed above. This particular court hints to one such clause in its decision: a “no third-party beneficiaries” clause. This clause does away with the exception to privity that the court granted above. Another way to protect yourself from suits of this kind would be to build a relationship with other parties on your construction project. Expanding your visibility on a project helps you to be proactive and not reactive, and being proactive can prevent and help avoid many disputes on a construction project.