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July 2nd, 2018
architects and engineers
THE SECOND CIRCUIT HOLDS A PROVISION FOR SEALED DRAWINGS DOES NOT SUFFICIENTLY LINK THE OWNER AND DESIGN PROFESSIONAL FOR PURPOSES OF CONTRACTUAL PRIVITY EQUIVALENCE TO ALLOW A DIRECT SUIT BY THE OWNER AGAINST THE DESIGN PROFESSIONAL

In Stapleton v. Barret Crane Design & Engineering, 2018 WL 985775, (2nd Cir. 2018), the United States Court of Appeals for the Second Circuit found that contractual privity, or its functional equivalent, did not exist between an owner and engineering firm retained by the design-builder, because there was no contract between the parties and the parties did not communicate directly to sufficiently “link” them.

SGK Ventures, LLC (“SGK”) contracted with Pavilion Building Systems, Ltd. (“Pavilion”) to design, manufacture and construct a pre-fabricated building for SGK’s business operations. Following the completion of the Project, SGK alleged the structure was under-designed or improperly constructed and sued Pavilion and Barrett Crane Design & Engineering (“Barrett”), a design engineer hired by Pavilion to review and seal its prototype drawings to ensure they complied with the building code. Barrett argued it owed no contractual or common law duty to SGK and the U.S. District Court for the Western District of New York granted summary judgment in its favor. SGK appealed to the Second Circuit Court of Appeals.

New York law only allows breach of contract and professional negligence claims, such as SGK’s claims against Barrett, if there is contractual privity between the parties, or where the relationship between the plaintiff and defendant is the “functional equivalent of privity”. In determining whether the functional equivalent of privity exists, Courts apply a three-part test to determine: “(1) awareness that the [work product was] 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 defendants linking them to the party or parties and evincing defendant’s understanding of their reliance. Ossining Union Free Sch. Dist. v. Anderson LaRocca Anderson, 539 N.E.2d 91, 95 (1989).

It was undisputed the Master Agreement between SGK and Pavilion did not establish contractual privity with Barrett, because only SGK and Pavilion were parties to the contract. The Court instead focused on whether the functional equivalent of contractual privity existed. While Barrett likely was aware its drawings would be used for a particular purpose, the Court focused on conduct of Barrett linking it to SGK. SGK argued such “linking conduct” was established by Barrett stamping design drawings for the Project. The Court stated, however, that there was no evidence Barrett directly conveyed the drawings to SGK or had any direct contact or communication with SGK concerning the drawings. Due to the lack of true “linking conduct”, the Court upheld the District Court’s ruling and affirmed summary judgment in favor of Barrett.

This decision demonstrates a significant ruling with respect to the functional equivalent of contractual privity requirement in New York. Design professionals should realize, in a design build situation where they are retained by the design build entity, that communicating with the owner directly may create a duty in situations where it may otherwise not exist.

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