The Growing Trend of Contractor Negligence Liability Despite Lack of Contract Privity
Historically, courts typically refused to impose liability for negligence in the performance of a contract unless the plaintiff was a party to the contract. Thus, whenever a contractor provided services at a particular property, only the party hiring the contractor would have the ability to hold the contractor accountable for negligently performing those services. Often the party hiring the contractor is not the property owner (for example, general contractor) and the lack of contract privity between the property owner and negligent contractor historically provided a barrier to the property owner suing the contractor for negligence.
That trend has changed course, and the courts have begun to recognize a property owner’s right to bring suit in many situations despite a lack of contract privity with the contractor. In a recent case called Lynch v. Peter & Associates, Engineers, Geologists, Surveyors, Inc., the court explored and then furthered that trend.
Facts of Lynch v. Peter & Associates, Engineers, Geologists, Surveyors, Inc.
Property owner Cheryl Lynch hired a general contractor to perform extensive home improvement construction and repairs on her property, pursuant to plans prepared by an architect. The project included plans for a remodel of the existing residence, building additions, a site retaining wall, underpinning of the existing foundation, a new deck, and hardscape improvements.
Before breaking ground, the general contractor hired Peter & Associates to perform a geotechnical inspection of a footing trench it had excavated for the proposed addition on the property. The contract for this work was written up on the Peter firm’s letterhead and provided the Peter firm would be paid $360 for this work. The contract did not mention the homeowner and contained no clause pertaining to third party beneficiaries. It did contain several provisions limiting the scope of the proposed inspection and contained a clause limiting the Peter firm’s liability to twice their fee.
The general contractor paid the Peter firm $360, and the Peter firm sent a licensed civil and geotechnical engineer to inspect the footing on the property. The inspection consisted only of a visual inspection and use of a steel probe to punch down into the trench and feel the soil. After the inspection, the engineer prepared a memo summarizing his findings, which was addressed to both the homeowner and general contractor. The memo indicated the soil was suitable for the intended project.
Relying on the Peter firm’s blessing, the general contractor poured the footing, but the soil proved inadequate to holding it up. The footing for the addition collapsed and the house subsided in that area.
Trial Court: Contractor Peter Firm Owed No Duty of Care to Homeowner
The property owner brought suit against the general contractor, Peter firm, and others, including a claim of negligence against the Peter firm for failing to perform an adequate inspection. The Peter firm argued it had no duty of care (a necessary element for negligence) because it had no contract directly with the homeowner. The Peter firm also pointed out that it was a small engineering firm hired to inspect a single footing for a small fee of $360, and pointed out the limited scope of its work, as provided in its contract with the general contractor. The trial court agreed and granted summary judgment in the Peter firm’s favor, concluding the Peter firm lacked privity of contract with the homeowner and owed no duty of care to the homeowner.
Court of Appeal: Overturned; Lack of Contract Privity Did Not Preclude Duty of Care Owed by Peter Firm to Homeowner
On appeal, the appellate court overturned the trial court’s decision and concluded that the Peter firm owed a duty of care to the homeowner despite not being in contract with the homeowner. The court started its analysis by acknowledging “[i]n times past, it was generally accepted that there was no liability for negligence committed in the performance of a contract in the absence of privity.” However, the court explained that “rule has been greatly liberalized” over time and the courts have begun allowing a plaintiff not in privity of contract to recover damages in many situations for the negligent performance of a contract. In analyzing each situation, the court balances a number of factors including (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm. Applied here, those factors weighed in favor of recognizing a duty of care owed by the Peter firm to the homeowner, despite the lack of a contract between them.
Lessons
In the context of complex construction projects and other real estate services, it is tempting to assume that liability is limited to the contracting parties. However, the Lynch case exposes the danger of that assumption. Both service providers and property owners should note the six factors described above. The first factor—the extent to which the transaction was intended to affect the plaintiff—seems to be a particularly noteworthy in the context of residential real estate. The Lynch court observed “contractors working on a residential project surely know their work directly impacts a person’s home, which changes the analysis substantially.” The historical trend shows courts are increasingly willing to recognize a path to tort liability despite the lack of a contractual relationship. In addition to expanding the pool of potential plaintiffs, tort liability without a contractual relationship often will mean contractual limitations on liability (such as the Peter firm’s cap on exposure to twice their fee) would not apply.