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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.
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.