Federal Court in Indiana Permits City to Sue Design Subconsultant Despite Lack Of Privity

by Pepper Hamilton LLP
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City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnani, LLC, 2015 U.S. Dist. LEXIS 150229 (N.D. Ind. Nov. 5, 2015)

The City of Whiting, Indiana (the “City”) contracted with American Structurepoint, Inc. (“Engineer”) to design a lakefront park that would protect its shoreline from erosion (the “Project”).  Engineer subcontracted with Whitney, Bailey, Cox, & Magnani, LLC (“Subconsultant”) to serve as the marine engineer for the Project (the “Subcontract”).  Pursuant to the Subcontract, Subconsultant designed a revetment to protect the Project shoreline.  The revetment failed, damaging the City’s property and necessitating remediation.

Engineer assigned to the City any claims Engineer might have had against Subconsultant relating to the Subcontract and the revetment failure.  The City then sued Subconsultant, asserting three counts as Engineer’s assignee, and asserting breach of the Subcontract, negligence, and negligent misrepresentation in its own capacity.  Subconsultant filed a motion to dismiss, arguing that the City’s complaint failed to state a claim.

The district court granted Subconsultant’s motion in part and denied it in part.  The court first observed that Indiana law both permitted assignment of claims and recognized the causes of action the City asserted through the assignment.  While the City had erred by pleading that it sought to recover “its own damages” through these causes of action, the liberal federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.”  The court denied Subconsultant’s motion to dismiss the causes of action the City asserted through the assignment.

The court next explained that the City’s claim for breach of the Subcontract, which the City asserted on the theory that it was a third party beneficiary of the Subcontract,  survived Subconsultant’s motion to dismiss if the City had shown clear intent by Engineer and Subconsultant to directly benefit the City.  Intent could be shown by Subcontract language.  The Subcontract specifically named the City as the recipient of Engineer’s services, obligated Subconsultant to assist Engineer with those services using a professional standard of care, and incorporated the terms of Engineer’s contract with the City.  The court denied Subconsultant’s motion to dismiss the City’s claim for breach of the Subcontract.

Turning to the City’s negligence count, the court concurred with Subconsultant’s position that Indiana’s “economic loss rule” precluded the City’s ability to recover in tort for “disappointed contractual or commercial expectations,” which included any damage to the Project.  The City’s complaint alleged that it had suffered extensive damage to its “property at the Project, including the . . . pavilion, gazebo, and fishing pier.”  The court held that, regardless of whether damage to the pavilion, gazebo, and pier constituted damage to the Project, the City’s allegations had not foreclosed its ability to recover for damage to other property because the word “including” signified a non-exhaustive list.  The court denied Subconsultant’s motion to dismiss the City’s negligence count.

Finally, the court observed that Indiana recognized the tort of negligent misrepresentation, and that it may be actionable even when a plaintiff has suffered only economic loss.  However, Indiana’s economic loss rule precluded the owner of a construction project from recovering in tort for pure economic loss caused unintentionally by design professionals with whom the owner is connected through a network of contracts.  The City and Subconsultant were connected through a network of contracts, and nothing about the facts of the parties’ dispute warranted the court creating an exception to the rule.  The court granted Subconsultant’s motion to dismiss the City’s negligent misrepresentation count.

To view the full text of the court’s decision, courtesy of Lexis ®,click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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