Rhode Island Examines a Property Owner’s Intended Beneficiary Status and the Economic Loss Doctrine in the Context of a Construction Contract

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In Hexagon Holdings Inc. v. Carlisle Syntec, Inc. No. 2017-175-Appeal, 2019 R.I. Lexis 14 (January 17, 2019), the Supreme Court of Rhode Island, discussing claims associated with allegedly defective construction, addressed issues involving intended beneficiaries to contracts and the application of the economic loss doctrine. The court held that, based on the evidence presented, the building owner, Hexagon Holdings, Inc. (Hexagon) was not an intended third-party beneficiary of the subcontract between the general contractor (A/Z Corporation) and the subcontractor, defendant McKenna Roofing and Construction, Inc. (McKenna). In addition, the court held that, in the context of this commercial construction contract, the economic loss doctrine applied and barred Hexagon’s negligence claims against McKenna.

Approximately nine years after Hexagon entered into a contract with A/Z Corporation for the construction of a building, Hexagon filed suit against A/Z Corporation’s roofing installation subcontractor, McKenna, and the manufacturer of the roofing system. Hexagon alleged that the roof began to leak shortly after McKenna installed it. Notably, Hexagon did not sue A/Z Corporation.

McKenna moved for summary judgment, asserting that Hexagon’s claims for breach of contract and the implied warranty to construct in a good and workmanlike manner were not viable because there was no contract between the parties. In addition, raising the economic loss doctrine, McKenna asserted that Hexagon could not recover purely economic damages through a negligence claim.

In resolving Hexagon’s argument that it was an intended third-party beneficiary of the subcontract, the court considered whether there was sufficient evidence in the record to support Hexagon’s claim. To resolve this question, the court examined the Restatement (Second) Contracts § 302 (1981) to assist in distinguishing between intended and incidental beneficiaries.

The court found that the only evidence supporting Hexagon’s intended beneficiary theory was the assertion in the stipulated facts that the McKenna may have known who the property owner, the ultimate beneficiary of the work, was. Neither the prime contract nor the subcontract were included in the record. Hexagon’s failure to include the contract documents or other relevant evidence in the record made it difficult for the court to ascertain the purpose of the contract and the intention of the parties. Consequently, the court found an absence of any evidence that clearly proved that McKenna’s work was intended to directly benefit Hexagon and that the central purpose of the subcontract was to benefit Hexagon. Thus, the court affirmed the trial court’s dismissal of the breach of contract and breach of implied warranty claims that were brought against McKenna.

Next, the court considered whether the trial court, relying on the economic loss doctrine, properly granted summary judgment with respect to Hexagon’s negligence claim against McKenna. Hexagon argued that since there was no privity of contract between itself and McKenna, the economic loss doctrine did not apply. The court, relying on Boston Investment Property # 1 State v. E.W. Burman, Inc., 658 A.2d 515, 517 (R.I. 1995), held that contract law is the proper way to allocate economic risks between sophisticated commercial entities. Although E.W. Burman involved claims asserted by a subsequent purchaser of real estate against the original contractor who constructed the building that was the subject of the lawsuit, the court extended the principles from E.W. Burman to apply to claims asserted by a commercial building owner against a subcontractor. The court reasoned that, because the economic loss doctrine would preclude Hexagon from pursuing tort claims against A/Z Corporation, Hexagon should not be allowed to circumvent the doctrine by failing to name A/Z Corporation as a defendant in its lawsuit. Thus, the court rejected Hexagon’s argument that, because it was not in privity with McKenna, the economic loss doctrine did not apply.

The Hexagon case is a good example of the importance of exercising diligence in selecting defendants. It is also a reminder to create a clear record of facts by way of testimony, exhibits to pleadings and depositions in order to meet one’s evidentiary burden when asserting legal arguments. When bringing or opposing a dispositive motion, in particular, it is critical that the statement of facts be supportive of the position you intend to assert. If a contract or other important document has not been included in the record and cited in the statement of facts, do whatever is necessary to include it so that you do not risk having a sparse factual record, such as the one in Hexagon.

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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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