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James Rhodes, Esq.
ConstructionRisk Counsel, PLLC

A federal district court, applying Nebraska law, dismissed several causes of action by a prime contractor against its second-tier subcontractors due to the lack of a contractual relationship between them (in legal terminology, “privity of contract”).  Under Nebraska law, one cannot generally sue an entity for professional negligence if there is no contractual relationship between the parties.  The court held here that the prime contractor’s causes of actions against these second-tier subcontractors amounted to an “end-around” of this requirement.  The court found that the prime contractor’s claims—including breach of implied warranties, equitable indemnity, and equitable subrogation—amounted to claims of professional negligence that were barred by the lack of contract.   Hawkins Construction Company v. Peterson Contractors, Inc., 970 F. Supp. 2d 945 (D. Neb. Sept. 4, 2013).

Hawkins Construction entered into a highway construction contract with the state of Nebraska that included increasing the bearing capacity and stability of a Mechanically Stabilized Earth Wall (an “MSE Wall”).  Hawkins (the prime contractor) then entered into a subcontract agreement with Peterson Contractors, Inc. (the subcontractor) including the MSE Wall component.  The subcontractor in turn entered into two agreements with subcontractors of its own, Geopier and GIE (the second-tier subcontractors).  The prime contractor alleged that the subcontractor and the second-tier subcontractors all failed to properly design and build the improvements to the MSE Wall; the prime contractor subsequently remediated the work through its own personnel after the subcontractor’s refusal.

Lack of Contract Privity

The prime contractor then sued all three contractors, as well as their insurers, in federal court, citing over a dozen legal theories of liability.  The defendants sought to dismiss many of these claims.  The court gave particular consideration to one of the second-tier subcontractor’s arguments that several of the counts should be dismissed to the lack of a contractual relationship with the prime contractor.  The defendant argued that several claims by the plaintiff, including claims for implied warranties, equitable indemnity, and equitable subrogation, were in essence claims for professional negligence.

The defendant then pointed to Nebraska legal precedent holding that “professionals are not liable in negligence to third parties with whom they are not in privity of contract.” It should be noted that the damages sought by the prime contractor appeared to the court to be for the remediation to the work itself, as opposed to injuries or other property damage stemming from the improper work.

The plaintiff responded that despite any express agreement, the second-tier subcontractors were nonetheless subject to an implied warranty that their professional services would be performed in a reasonably good and workmanlike manner.  The plaintiff also argued that it had a “special relationship” with the second-tier subcontractors through working directly with these companies on the project and in relying on their design documents.  Lastly, the plaintiff tried to distinguish equitable indemnification and equitable subrogation actions from professional negligence.

The court rejected these arguments, typifying these prime contractor claims as an “end-around” to the bar on professional negligence actions against third parties.  The court was also skeptical of the plaintiff’s claim to the second-tier subcontractors for “negligent misrepresentation,” which also appeared to amount to a professional negligence action.  However, the court allowed the plaintiff the opportunity to amend its complaint to try to meet the higher threshold needed to allege a fraud or misrepresentation action.

Comment

This case illustrates efforts by prime contractors to apply various legal theories in an attempt to hold third party design professionals accountable for negligent work.  In the absence of a contract that can enforce the expectation that work is performed to the professional standard of care, many prime contractors have turned to various tort theories as an alternative way to recover for remedial work.  These efforts have received divergent treatment in different states, and plaintiffs should scrutinize which legal theories are available against third parties in these situations.

 

This article is published in ConstructionRisk.com Report, Vol. 16, No. 9 (November 2014).

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