The Breakdown of the Defense
Negligent Misrepresentation Claims
The most common exception to the privity of contract requirement is for claims of “negligent misrepresentation” made by contractors against a design professional. These states allow a contractor or subcontractor who relies on a design professional’s plans to make a claim for “negligent misrepresentations” contained within the professional’s plans or specifications. Such theory of liability is based upon §522 of the Restatement (Second) of Torts, which allows a person to sue another who negligently provides guidance to others as part of their business. Section 522 reads as follows:
§ 552 Information Negligently Supplied for the Guidance of Others
- One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
- Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
- by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
- through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
- The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.
Negligent Misrepresentation Is an Exception to the Economic Loss Rule—Bilt-Rite v. The Architectural Studio
Pennsylvania law, for instance, allows a claim to be made by a contractor if it relied on incorrect plans and specifications based on the Restatement (Second) of Torts provision set forth above.
In Bilt-Rite Contractors, Inc. v. The Architectural Studio, a school district entered into a contract with an architect to design a new school. The architect prepared plans, drawings, and specifications that were used by contractors to prepare bids for the project. In preparing its bid, Bilt-Rite relied on the plans and specifications and its bid was accepted. The plans and specifications stated that the “standard construction means and methods” could be used to build the required aluminum curtain wall system, slope glazing system, and metal support system. However, standard construction means and methods could not successfully be used and the required changes significantly increased the cost of construction. Bilt-Rite’s initial bid, therefore, was too low to cover the cost of construction. Bilt-Rite sued the design firm for negligent misrepresentation despite the absence of a direct contractual relationship. The Court held that § 552 of the Restatement (Second) of Torts provided support for Bilt-Rite’s negligence claim and therefore allowed recovery of economic damages without the existence of privity of contract. The Court reasoned that one who supplies information to others for pecuniary gain and “intends or knows that the information will be used by others in the course of their own business activities” is grounds for the existence of a duty to those who are foreseeable users of such information in furtherance of their own business. The Court further held that negligent misrepresentation claims are an exception to the economic loss rule, therefore allowing a contractor or subcontractor to recover monetary losses from relying on plans or specifications prepared by a design professional.
Negligent Misrpresentation—Guardian v. Tetra
Similarly, Delaware allows negligent misrepresentation claims to be made against design professionals based on § 552 of the Restatement (Second) of Torts. Guardian Construction Co. v. Tetra Tech Richardson, Inc. has a very similar fact pattern to the Bilt-Rite case discussed above. In Guardian Construction, a design professional was hired to prepare plans and specifications for a breakwater structure and the contractor used those plans to submit a bid to the owner of the project. After the contractor was awarded the bid, it hired its own subcontractors to complete the project. Neither the contractor nor the subcontractors had a contract with the design professional. The height calculations and benchmarks contained within the design professional’s plans and specifications were incorrect, causing the bid to be significantly lower than actual costs to complete the project. The contractor sued the design professional for negligent misrepresentation and the Court held that the design professional should be liable for foreseeable economic losses by parties who they could reasonably expect to rely on their plans and specifications. Specifically, the Court held that, based on §552 of the Restatement (Second) of Torts, that the design professional could be held liable for negligent misrepresentation because the design professional:
negligently obtained and communicated incorrect information specifically known and intended to be for the guidance of Plaintiffs, and if it is specifically known and intended that Plaintiffs would rely in calculating their project bids on that information, and if Plaintiffs rely thereon to their detriment, then [the design professional] should be liable for foreseeable economic losses sustained by Plaintiffs regardless of whether privity of contract exists.
Massachusetts is yet another jurisdiction that follows the negligent misrepresentation exception to the privity of contract requirement. In Nota Constr. Corp. v. Keyes Assocs., which again has an almost identical fact pattern as Bilt-Rite and Guardian Construction, the Court held that there is “no reason why a design professional such as an architect should be exempt from liability for negligent misrepresentation to one where there is no privity of contract.”
Certainly, the Restatement of (Second) of Torts has been interpreted by many courts, and can be expected to be used by more courts in the future, to provide support for holding a design professional liable to those who are not in privity of contract but who rely upon the design professional’s work to perform its own work. The Restatement of (Second) Torts, however, has not been interpreted to allow recovery, despite absence of privity, to injured third parties who are not involved in construction.
Liability for Duty Owed to those Based on Foreseeability— Flagstaff Affordable Housing v. Design Alliance
In Flagstaff Affordable Housing, L.P. v. Design Alliance, Inc., the Arizona Supreme Court re-visited a prior decision that held a design professional owes a duty to anyone for foreseeable injuries to foreseeable victims resulting from professional services. The earlier case, Donnelly Construction Co. v. Oberg/Hunt/Gilleland, involved a contractor that relied on an architect’s erroneous design and suffered damages as a result of relying on the design. The Arizona Supreme Court in Donnelly not only held that design professionals owe a duty to contractors who rely on the design professional’s work despite an absence of privity, but that “design professionals are liable for foreseeable injuries to foreseeable victims which proximately result from their negligent performance of their professional services.” and that a negligence claim can be made by anyone upon showing the existence of a duty, a breach of the duty, and resulting damages.
While the specific facts in the Flagstaff deal with a cause of action by an owner against an architect, the Court took the opportunity to revisit and confirm the existence of duties by architects to third parties as set forth in Donnelly, but clarified the applicability of the economic loss rule to those who do have a direct contract with a design professional. Flagstaff involved the construction of a low income housing project. The owner, in customary fashion, contracted directly with the architect and the architect had no contractual relationships with others involved on the project. The owner was eventually sued by the U.S. Department of Housing and Urban Development (HUD) because the low income housing did not meet applicable accessibility guidelines. The owner settled with HUD and brought claims for negligence and breach of contract against the architect. The owner argued that it was entitled to bring both contractual and tort claims against the architect and that the economic loss rule did not protect the architect from tort claims as a result of the special relationship between architects and their clients. The trial court dismissed the tort claims based on the economic loss rule, while the appellate court reversed and held that the economic loss rule did not apply to claims against design professionals. The owner argued that limiting it to contractual claims only conflicted with its decision in Donnelly. Ultimately, the Arizona Supreme Court held that the economic loss rule does apply to design professionals and because the owner and the architect had a direct contract, the owner was limited to contractual remedies. The Court explained that this does not conflict with its decision in Donnelly because in Donnelly, a contractor was allowed to proceed with a negligence claim against a design professional when it did not have a contract and implied that the economic loss doctrine “would not apply to negligence claims by a plaintiff who has no contractual relationship” with the design professional. The current state of Arizona law, therefore, is that privity of contract is not required to sue a design professional for foreseeable injuries to foreseeable victims. However, if a party does have privity of contract, it is limited to contractual remedies and cannot prevail on claims based in tort.
Architect Owes Duty to Ultimate Owner of Property— Beacon v. SOM
California officially joined the trend of states holding that a design professional owes a duty to individuals or entities without regard to the existence of privity. In Beacon Residential Cmty. Ass'n v. Skidmore, Owings & Merrill LLP, the California Supreme Court held that a design professional, providing plans and specifications on a project, owes a duty of care to homeowners, members of a community association, neither of whom had a contractual relationship with the design firm.” Beacon involved a homeowners’ association suing two architectural firms for damages allegedly caused by negligent architectural and engineering design, observation, and construction work related to water infiltration, fire separations, and structural cracks. The trial court granted the architects’ motion for summary judgment based on lack of privity of contract. The California Supreme Court noted that the architect had a “primary role in the design of the project” that bore a “close connection” to the claimed damages. The court pointed out several times the architect’s expertise in design. Relying upon its prior holdings, the Court noted the considerations in applying direct liability:
- Design is intended to benefit the ultimate owners of the property;
- Foreseeability that the future owners would be in the class of persons harmed by negligent design;
- Close connection between the design and the injury;
- Moral blame on design professional because of being well paid and having knowledge that owners would rely on design work; and
- A public policy directive to prevent future harm to others. While limited to the design of an architect, the holdings and policy implications clearly indicate that California is prepared to expand this holding to any level of subconsultants of the prime designer.
If There Is No Other Remedy, Let the Architect Pay— Conforti v. Eisele
A New Jersey court has held that New Jersey law disfavors the privity of contract defense in favor of design professionals and prefers to allow tort claims to be made by contractors and injured third parties absent privity of contract. Conforti & Eisele, Inc. v. John C. Morris Associates involved a claim against a design professional by a contractor whose costs were too high as a result of relying on inaccurate specifications. The Court allowed a cause of action in tort despite the fact that there was no contractual relationship between the design professional and the contractor. The Court held that the following tests could be used to determine whether a valid negligence claim exists:
- The extent to which the transaction was intended to affect the plaintiff;
- The foreseeability of harm to the plaintiff;
- The degree of certainty that the plaintiff will suffer injury;
- The closeness of the connection between defendant's conduct and the injury suffered;
- The moral blame attached to defendant's conduct; and
- The policy of preventing future harm.
Without explanation or analysis, the Conforti Court held that such factors weigh in favor of recognizing a cognizable action by the contractor against the design professional.
This position, however, has been distinguished by two recent (unpublished) decisions, both of which held that a contractor can sue a design professional absent privity of contract when the contractor would have been left without a remedy. The Courts in Spectraserv, Inc. v. Middlesex Cnty. Util. Auth. and Horizon Group of New England, Inc. v. N.J. Sch. Constr. Corp. both state that in situations where there are comprehensive contractual relationships that allocate risk and remedies between the various parties of a construction project and a contractor has a valid remedy for the alleged harm against someone other than the design professional, even in the absence of a direct contractual relationship, the “economic loss doctrine will apply and serve its purpose of limiting the expansion of tort liability where contractual remedies exist.” New Jersey courts, therefore, may look to determine whether an injured party can recover elsewhere, but ultimately may hold the design professional liable if no alternate recovery is available.
 Bilt-Rite Contrs., Inc. v. Architectural Studio, 581 Pa. 454, 480-84, 866 A.2d 270, 286-88 (Pa. 2005).
 Guardian Construction Co. v. Tetra Tech Richardson, Inc., 583 A.2d 1378, 1386 (Del. Super. Ct. 1990).
 Nota Constr. Corp. v. Keyes Assocs., 45 Mass. App. Ct. 15, 21, 694 N.E.2d 401, 406 (Mass. App. Ct. 1998).
 Flagstaff Affordable Housing, L.P. v. Design Alliance, Inc., 223 Ariz. 320, 327, 223 P.3d 664, 671 (2010).
 Donnelly Construction Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 188, 677 P.2d 1292, 1296 (1984).
 Beacon Residential Cmty. Ass'n v. Skidmore, Owings & Merrill LLP, 327 P.3d 850, 59 Cal. 4th 568, 173 Cal. Rptr. 3d 752, (2014)
 Biakanja v. Irving, 49 Cal.2d 647, 320 P.2d 16, 1958 Cal. LEXIS 253 (1958).
 Conforti & Eisele, Inc. v. John C. Morris Associates, 175 N.J. Super. 341, 342-43, 418 A.2d 1290, 1291 (1980).
 Spectraserv, Inc. v. Middlesex Cnty. Util. Auth., 2013 N.J. Super. Unpub. LEXIS 2173, at *40-44 (N.J. Super. App. Div. July 25, 2013); Horizon Group of New England, Inc. v. N.J. Sch. Constr. Corp., 2011 N.J. Super. Unpub. LEXIS 2271, at *20-21 (App. Div. Aug. 24, 2011).