Floor Craft Floor Covering, Inc. v. Parma Community General Hospital Ass'n

560 N.E.2d 206, 54 Ohio St. 3d 1, 1990 Ohio LEXIS 1052

• Court: Ohio Supreme Court
• Decided: September 19, 1990
• Docket: Nos. 89-1044 and 89-1045
• Status: Published

Opinions

Holmes, J.

The key issue presented in this case is whether a contractor may sue an architect for economic injury in the absence of privity of contract between the parties. For the reasons which follow we answer such query in the negative.

In the absence of privity of contract between two disputing .parties the general rule is “there is no * * * duty to exercise reasonable care to avoid intangible economic loss or losses to others that do not arise from tangible physical harm to persons and tangible things.” Prosser & Keeton, Law of Torts (5 Ed. 1984) 657, Section 92. In addressing the propriety of economic damages arising from a products liability claim this court in Chemtrol Adhesives, Inc. v. American Mfrs. Mut. Ins. Co. (1989), 42 Ohio St. 3d 40, 44-45, 537 N.E. 2d 624, 630, noted:

“For actions sounding in negligence, ‘[t]he well established general rule is that a plaintiff who has suffered only economic loss due to another’s negligence has not been injured in a manner which is legally cognizable or compensable.’ Nebraska InnKeepers, Inc. v. Pittsburgh-Des Moines Corp. (Iowa 1984), 345 N.W. 2d 124, 126. Accord Local Joint Exec. Bd. of Las Vegas, Culinary Workers Union, Local No. 226 v. Stern (1982), 98 Nev. 409, 410-411, 651 P. 2d 637, 638. See, also, Note, Economic Loss [in Products Liability Jurisprudence (1966), 66 Colum. L. Rev. 917,] * * * 929 (noting that ‘[n]egligence has proved to be among the least fruitful avenues for recovery of economic loss’).”

This court has not previously addressed this issue of the right of contractors to recover economic damages where design professionals have allegedly drafted defective plans and specifications. In a general review of the case law on this subject, including some of our Ohio appellate court decisions, we conclude that tort liability may not be imposed for purely economic damages. In L.R. Patrick, Inc. v. Karlsberger & Assoc. (Dec. 27, 1983), Franklin App. No. 82AP-1008, unreported,² the court of appeals found that architects and engineers could be held accountable for negligence in the preparation of plans and specifications and design of the construction upon which a contractor relies to its detriment. The L.R. Patrick, Inc. court relied on this court’s decision in Haddon View Investment Co. v. Coopers & Lybrand (1982), 70 Ohio St. 2d 154, 24 O.O. 3d 268, 436 N.E. 2d 212. In Haddon View this court held that “[a]n accountant may be held liable by a third party for professional negligence when that third party is a member of a limited class whose reliance on the accountant’s representation is specifically foreseen.” Id. at syllabus. In Haddon View the plaintiffs were individual, limited partners who detrimentally relied upon representations the accounting firm made to its client, the limited partnership. The Haddon View court only partially withdrew the privity requirement with respect to malpractice actions taken against accountants.

As the court of appeals in this case • correctly recognized, Haddon View is not dispositive of the issue before us. In Columbus City School Dist. Bd. of Edn. v. Fry, Inc. (1984), 22 Ohio App. 3d 94, 95, 22 OBR 281, 283, 489 N.E. 2d 294, 296, the court of appeals was faced with an analogous situation to the one presented here. In Fry, a contractor which installed a roof on a school was sued by the school board for damages resulting from allegedly defective work. The roofing contractor filed a third-party action against the architect that prepared the plans and specifications for the roof. The contractor claimed that the architect negligently prepared the plans and specifications. The Fry court held:

“Presumably, [the contractor] is proceeding upon a theory similar to that of Haddon View Investment Co. v. Coopers & Lybrand (1982), 70 Ohio St. 2d 154 [24 O.O. 3d 268]. However, assuming that the principle of Haddon View applies to [architects and] engineers as well as accountants, the fact situation here differs substantially in that Fry [the contractor] does not seek an independent recovery against Lawrence [the architect], but, instead, seeks only indemnification from Lawrence for any liability that Fry may have to plaintiff board because of negligent design by Lawrence. No such liability can exist in this case. Plaintiff board, in contracting with Fry for the construction of the Linden Park building, adopted the specifications of the architect, Lawrence; hence, if Fry complied with the specifications so furnished, it cannot be found to be in breach of its contract with plaintiff board. In short, there [is] no set of circumstances under which the liability of Fry to plaintiff board could be predicated upon the negligence of Lawrence in designing the building. Accordingly, the trial court did not err in sustaining third-party defendant Lawrence’s motion to dismiss.”

To arrive at the more correct result, we look to the analysis given this issue by other jurisdictions. In Blake Constr. Co. v. Alley (1987), 233 Va. 31, 353 S.E. 2d 724, the Supreme Court of Virginia held that the Virginia statute which allows for actions in negligence for damage to persons or property in the absence of privity is in derogation of the common law and, therefore, must be strictly construed. The court recognized that “[u]nder the common law there could be no recovery by * * * [the contractor] from * * * [the architectural firm] in tort for only economic loss in the absence of privity.* * *” Id. at 36, 353 S.E. 2d at 727. The court concluded inter alia that:

“The architect’s duties both to owner and contractor arise from and are governed by the contracts related to the construction project. While such a duty may be imposed by contract, no common-law duty requires an architect to protect the contractor from purely economic loss.* * *

i i * j}; *

“* * * Protection against economic losses caused by another’s failure properly to perform is but one provision the contractor may require in striking his bargain. Any duty on the architect in this regard is purely a creature of contract. * * * ” Id. at 34-35, 353 S.E. 2d at 726-727. See, also, Bryant Elec. Co. v. Fredericksburg (C.A.4, 1985), 762 F. 2d 1192 (no cause of action in tort exists under Virginia law for a contractor to recover against architectural and engineering firm for economic loss in the absence of privily); McKinney Drilling Co. v. Nello L. Teer Co. (1978), 38 N.C. App. 472, 248 S.E. 2d 444 (court observed that cases finding liability for negligent performance of contractual duty in absence of privity of contract were limited to actions for personal injury or property damage; no North Carolina precedent found for allowing recovery for loss of profits by third party as result of negligent breach of contract); Florida, Power & Light Co. v. Westinghouse Elec. Corp. (Fla. 1987), 510 So. 2d 899; R.H. Macy & Co., Inc. v. Williams Tile & Terrazzo Co. (N.D. Ga. 1984), 585 F. Supp. 175; R.J. Reagan Co. v. Kent (Tex. Civ. App. 1983), 654 S.W. 2d 532; State, ex rel. Smith, v. Tyonek Timber, Inc. (Alaska 1984), 680 P. 2d 1148; but, see, A.R. Moyer, Inc. v. Graham (Fla. 1973), 285 So. 2d 397, where the Supreme Court of Florida accepted a case certified by the United States Court of Appeals, Fifth Circuit, concerning whether a general contractor could maintain a direct action against the supervising architect for the general contractor’s damages proximately caused by the negligence of the architect in the absence of privity between the parties. The Moyer court noted, under the abbreviated facts on certification, that since the supervising architect wielded excessive control over the contractor, a consequent duty arose on the part of the architect “ ‘to perform without negligence his functions as they affect the contractor. The power of the architect to stop the work is tantamount to a power of economic life or death over the contractor. It is only just that such authority, exercised in such a relationship, carry commensurate legal responsibility.’ ” Id. at 401, quoting United States v. Rogers & Rogers (S.D. Cal. 1958), 161 F. Supp. 132, 136; see, generally, Donnelly Constr. Co. v. Oberg/Hunt/Gilleland (1984), 139 Ariz. 184, 677 P. 2d 1292; Milton J. Womack, Inc. v. State House of Representatives (La. App. 1987), 509 So. 2d 62, certiorari denied (1987), 513 So. 2d 1208; Owen v. Dodd (D.C. Miss. 1977), 431 F. Supp. 1239 (applying Mississippi law); Columbus v. Clark-Dietz & Assoc.-Eng., Inc. (N.D. Miss. 1982), 550 F. Supp. 610, appeal denied (C.A. 5, 1983), 702 F. 2d 67 (applying Mississippi law); Davidson & Jones, Inc. v. New Hanover (1979), 41 N.C. App. 661, 255 S.E. 2d 580, certiorari denied (1979), 259 S.E. 2d 911; Berkel & Co. Contractors, Inc. v. Providence Hosp. (Ala. 1984), 454 So. 2d 496.

In Widett v. U.S. Fid. & Guar. Co. (C.A.2, 1987), 815 F. 2d 885, 886-887, a case arising in a state without a pertinent statute on the issue, as is the situation in Ohio, the Second Circuit Court of Appeals decided that under New York law a subcontractor could not maintain a negligence action against an architectural firm which prepared plans and specifications for a project as there was no contractual relationship between the architect and subcontractor. The Widett court stated: “[I]t is well settled in New York * * * that professionals are not liable either in tort or contract absent privity.” Id. at 886. In distinguishing cases where accountants were held liable to limited partners for negligent preparation of financial statements, the Widett court explained that despite the absence of a direct contractual relationship there was a sufficient nexus between the parties to permit an action by the individual, limited partners against the accountant. The contract between the limited partnership and the accountant rendered the beneficiaries both identifiable and fixed in number. Id. “ ‘Here, the services of the accountant were not extended to a faceless or unresolved class of persons, but rather to a known group possessed of vested rights, marked by a definable limit.’ ” Id., quoting White v. Guarente (1977) , 43 N.Y. 2d 356, 361, 401 N.Y. Supp. 2d 474, 477, 372 N.E. 2d 315, 318. Since the decision in White v. Guarente, supra, the New York Court of Appeals has affirmed the dismissal of other subcontractor claims against architects. See Alvord & Swift v. Stewart M. Miller Constr. Co. (1978), 46 N.Y. 2d 276, 413 N.Y. Supp. 2d 309, 385 N.E. 2d 1238; Underhill Constr. Corp. v. New York Telephone Co. (1978) , 56 App. Div. 2d 760, 391 N.Y. Supp. 2d 1000, affirmed (1978), 44 N.Y. 2d 666, 405 N.Y. Supp. 2d 40, 376 N.E. 2d 201. The Widett court pointed out with respect to Alvord and Underhill that, “[i]n both cases, no direct contractual relationship existed between the subcontractor and the architect. The subcontractor contracted only with the general contractor; the architect contracted only with the owner. In neither case was a sufficient nexus found between the subcontractors and the architect that could serve as a substitute for contractual privity.” Id. at 887; see, also, Ramey Constr. Co. v. Apache Tribe of Mescalero Reservation (C.A.10, 1982), 673 F. 2d 315 (negligence action by contractor against architect, trial court held to have properly determined that architect was not liable for damages caused by failure to manage and coordinate construction project, where the architect’s duties under the contract were limited primarily to “ ‘surveillance of project construction to assure compliance with plans, specifications and other contract documents,’ ” id. at 321, and there was no provision that architect undertake responsibility for project management); Bates & Rogers Constr. Corp. v. North Shore Sanitary Dist. (1984), 128 Ill. App. 3d 962, 471 N.E. 2d 915, affirmed (1985), 109 Ill. 2d 225, 486 N.E. 2d 902.

Floor Craft requests that this court adopt the Restatement of the Law 2d, Torts (1977) 126-127, Section 552,³ with respect to economic injury suffered by third parties not in privity with design professionals. Floor Craft relies on our prior decision in Haddon View, supra, for support. This court held in Haddon View, supra, at the syllabus, that “[a]n accountant may be held liable by a third party for professional negligence when that third party is a member of a limited class whose reliance on the accountant’s representation is specifically foreseen.” As noted previously in this opinion there is generally no nexus found between subcontractors (in this case a flooring contractor) and architects that can serve as a substitute for contractual privity. See Widett, supra. Although architects may anticipate that certain subcontractors will contribute to a construction project, the architects’ services are generally extended to an unresolved class of persons unfixed in number.

As the Supreme Court of Virginia stated in Sensenbrenner v. Rust, Orling & Neale (1988), 236 Va. 419, 425, 374 S.E. 2d 55, 58:

“The law of torts is well equipped to offer redress for losses suffered by reason of a ‘breach of some duty imposed by law to protect the broad interests of social policy.’ Kamlar [Corp. v. Haley (1983)], 224 Va. [699], at 706, 299 S.E. 2d [514] at 517. Tort law is not designed, however, to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement. That type of compensation necessitates an analysis of the damages which were within the contemplation of the parties when framing their agreement. It remains the particular province of the law of contracts. * * *

“The controlling policy consideration underlying tort law is the safety of persons and property — the protection of persons and property from losses resulting from injury. The controlling policy consideration underlying the law of contracts is the protection of expectations bargained for. If that distinction is kept in mind, the damages claimed in a particular case may more readily be classified between claims for injuries to persons or property on the one hand and economic losses on the other.”

Therefore, applying the Restatement in this context will encompass liability that is otherwise best suited for contract negotiation and assignment.

The circumstances of Bryant Elec. Co., supra, and Bates & Rogers Constr. Corp., supra, illustrate why the economic loss rule should be applied to bar tort' recovery in construction contract cases. One reason for applying the rule is to hold parties to their contracts. In Bryant Elec. Co., Bryant’s contract with the city provided that the Circuit Court for the city of Fredericksburg would be the only forum available to the parties. If the Fourth Circuit Court of Appeals had permitted Bryant to maintain a negligence claim against the architect, the case would have been tried in United States District Court, thereby avoiding the strict forum-selection clause in the contract between the parties. And, in Bates & Rogers Constr. Corp., the contractor’s agreement with the owner contained a “no damage for delay clause” as well as other potential limitations on damages. By asserting a tort claim, Bates & Rogers Construction may have tried to avoid its contract terms. Similarly, in the present case, Floor Craft contracted with the owner Parma Hospital (not the architect) to hold Parma Hospital and not the project architect liable for any economic damages arising from the plans and specifications.⁴

In applying the legal philosophy of these latter cases, we conclude that recovery for economic loss is strictly a subject for contract negotiation and assignment. Consequently, in the ■ absence of privity of contract no cause of action exists in tort to recover economic damages against design professionals involved in drafting plans and specifications.

In the case sub judice there was no direct contractual relationship between Floor Craft (the contractor) and Braun & Spice (the architect). Floor Craft contracted directly with the owner Parma Hospital. There is no nexus here that can serve as a substitute for contractual privity. Therefore, since there was no privity of contract between Floor Craft and Braun & Spice, the court of appeals properly affirmed the trial court’s dismissal for failure to state a cause of action.

Further, we hold that the issue presented by both Floor Craft and Par-ma Hospital concerning the construction given to the arbitration clause in their agreement is moot and not properly before us for purposes of this appeal.⁵

Accordingly, the judgment of the court of appeals as to the issue on certification is affirmed.

Judgment affirmed.

Moyer, C.J., Wright and Res-nick, JJ., concur. Sweeney, J., dissents without opinion. Douglas and H. Brown, JJ., dissent.

2 The other case asserted to be in conflict with the appellate court decision below, Connolly Constr., supra, allowed a contractor to maintain a negligence action against the architect where no privity of contract existed based in part on this court’s reasoning in Haddon View, supra (which is distinguishable on its facts and the law as discussed, infra, in this opinion).

3 The Restatement of the Law 2d, Torts (1977) 126-127, Section 552, provides in pertinent part:

“(1) One who * * * 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.

“(2) Except as stated in Subsection

(3), the liability stated in Subsection (1) is limited to loss suffered

“(a) 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; and

“(b) 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.”

4 The A.I.A. contract between Parma Hospital and Floor Craft contains several provisions which explicitly served to shield the project architect, Braun & Spice, from liability. For example, Section 1.1.2 rejects the notion of a special duty of care going from Braun & Spice to Floor Craft. It states in part:

“The Contract Documents shall not be construed to create any contractual relationship of any kind between the Architect and the Contractor, between the Construction Manager and the Contractor or between the Architect and the Construction Manager, but the Architect and the Construction Manager shall be entitled to performance of the obligations of the Contractor intended for the benefit and to enforcement thereof. * * *” (Emphasis added.)

Further, under Section 2.3.5, the architect is not responsible for any construction methods or procedures used by the contractor or for the contractor’s failure to carry out work in accordance with the plans and specifications. Section 2.3.5 provides in pertinent part:

“Neither the Architect nor the Construction Manager will be responsible for or have control or charge of construction means, methods, techniques, sequences or procedures, or the safety precautions and programs in connection with the work, and neither will be responsible for the contractor’s failure to carry out the work in accordance with the Contract Documents.”

Also, under Section 2.3.16, “neither the Architect’s nor the Construction Manager’s authority to act under this Subparagraph 2.3.16, nor any decision made by them in good faith either to exercise or not exercise such authority [the architect was authorized to reject any of Floor Craft’s work that did not conform to the contract documents] shall give rise to any duty or responsibility of the Architect or the Construction Manager to the Contractor performing any of the work.”

Finally, at arbitration, if Floor Craft can demonstrate that it followed the plans and specifications provided by Braun & Spice, but nevertheless a defective result ensued because of the deficiency of the plans, then Floor Craft would not be held liable for the costs associated with the additional work. As stated in Section 4.2.1 of the A.I.A. contract, in relevant part:

“The Contractor shall not be liable to the Owner, the Architect or the Construction Manager for any damage resulting from any such errors, inconsistencies or omissions in the Contract Documents.”

5 The journal entry and judgment of the court of appeals as to Floor Craft, Parma Hospital and Braun & Spice were announced on March 16,1989. An application for reconsideration by Floor Craft was denied on April 17, 1989. Floor Craft then filed a motion for certification which was granted as to the architect liability issue on May 31, 1989. On July 19, 1989, this court granted a motion to certify the record and a claimed appeal as of right (case No. 89-1045) as to the issue of architect liability. Absent from the record is any request for jurisdiction on the arbitration issue by Floor Craft or Parma Hospital. Instead, Parma Hospital brought separate motions for summary judgment in the Cuyahoga County Common Pleas Court (case Nos. 126208 and 148810) pursuant to the remand for a stay pending arbitration from the court of appeals’ March 16, 1989 decision. The common pleas court granted summary judgment on August 18,1989 in favor of Parma Hospital on the arbitration issue.

Clearly, this court never had jurisdiction over the arbitration issue which was properly before the common pleas court. This court only accepted jurisdiction and allowed the appeal as of right on issues common to the architect liability question as reflected in the motion for certification. Therefore, we observe that the arbitration issue is moot and cannot be resurrected for purposes of this appeal.