Key Intern. Mfg., Inc. v. Morse/Diesel, Inc.

• Citation: 536 N.Y.S.2d 792,142 A.D.2d 448
• Parties: KEY INTERNATIONAL MANUFACTURING, INC., Appellant, v. MORSE/DIESEL, INC., et al., Defendants, Albert Melniker, et al., Respondents (and two other actions).
• Decision Date: 30 December 1988
• Court: New York Supreme Court Appellate Division

Page 792

536 N.Y.S.2d 792

142 A.D.2d 448

KEY INTERNATIONAL MANUFACTURING, INC., Appellant, v. MORSE/DIESEL, INC., et al., Defendants Albert Melniker, et al., Respondents (and two other actions).

Supreme Court, Appellate Division Second Department.

Dec. 30, 1988.

Paul, Weiss, Rivkind, Wharton & Garrison, New York City (Lewis A. Kaplan and Jay L. Himes, of counsel), for appellant.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (Stephen M. Marcellino, Frank E. DeGrim and Helmut Beron, of counsel), for respondent Albert Melniker.

Rivkin, Radler, Dunne & Bayh, Uniondale (Michael S. Cohen, of counsel), for respondent Toder/Schwartz.

Before BRACKEN, J.P., and KUNZEMAN, RUBIN and SPATT, JJ.

BRACKEN, Justice Presiding.

The plaintiff Key International Manufacturing, Inc. (hereinafter Key), a New York corporation, commenced the present action in order to recover compensation for the economic losses it suffered in connection with a construction project on Staten Island. In its complaint, Key alleged that it was forced to remedy, "at substantial cost", various design and construction defects caused by the negligence and breach of contract committed by several defendants, including the respondents Albert Melniker, an architect, and Toder/Schwartz, a professional engineering firm. The Supreme Court, finding that the respondents were not in privity of contract with Key, and holding that the absence of privity bars Key from recovering for its economic losses against the respondents, awarded summary judgment to them. On this appeal by Key, we find that issues of fact as to whether privity exists and as to whether Key may have standing to sue on a contract theory based on its status as a third-party beneficiary preclude the awarding of summary judgment.

I

The Supreme Court properly held, in light of controlling precedent, that the owner of a construction project may not recover compensation for economic damages caused by the negligence of an architect or engineer with whom it is not in privity of contract. This rule is analogous to the well-settled rule that the manufacturer of a product may not be held liable to a party with whom it is not in privity for economic losses suffered as a result of a defect in the product.

In the area of products liability, the majority rule, as reflected in the seminal case of Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145, has always been that a product owner has no tort remedy for economic losses, as distinguished from personal injury or property damage, against a product manufacturer. An owner of a product who suffers economic loss is limited to whatever remedy the owner may have in contract. This rule has recently been embraced by the Supreme Court of the United States as an aspect of general maritime law (see, East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865). As discussed in these cases, the rationale for this rule is based upon the perception that to allow tort recovery in the absence of privity for economic losses would virtually negate the law of warranty, as codified in the provisions of the Uniform Commercial Code. Those courts which have adopted the majority rule have done so based on "the need to keep products liability and contract law in separate spheres and to maintain a realistic limitation on damages" (East River S.S. Corp. v. Transamerica Delaval, supra, at 870-871, 106 S.Ct. at 2302; see also, Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443). It is thought that abandonment of the doctrine of privity in cases of economic loss would cause "contract law drown in a sea of tort" (East River S.S. v. Transamerica Delaval, supra, 476 U.S. at 866, 106 S.Ct. at 2300).

The New York Court of Appeals has adhered to the majority view outlined above (see, Schiavone Constr. Co. v. Elgood Mayo Corp., 56 N.Y.2d 667, 451 N.Y.S.2d 720, 436 N.E.2d 1322, revg. 81 A.D.2d 221, 439 N.Y.S.2d 933, on dissenting opn. below). In his dissent in the Schiavone case (supra ), later adopted by the Court of Appeals, Justice Silverman quoted approvingly from the language of the California Supreme Court in the Seely case (supra ), as follows: "The law of sales has been carefully articulated to govern the economic relations between suppliers and consumers of goods * * *. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone" (Seely v. White Motor Co., 63 Cal.2d 9, 15-18, 45 Cal.Rptr. 17, 403 P.2d 145, 149-151, supra; Schiavone Constr. Co. v. Elgood Mayo Corp., 81 A.D.2d 221, 230-231, 439 N.Y.S.2d 933 ). Thus, the rule is settled in New York that a plaintiff has no tort cause of action, sounding in strict products liability or in negligence, for economic loss suffered as the result of a defective product; the plaintiff's sole remedy is in contract (see also, Cayuga Harvester v. Allis-Chalmers Corp., 95 A.D.2d 5, 25-26, 465 N.Y.S.2d 606; Hole v. General Motors Corp., 83 A.D.2d 715, 717, 442 N.Y.S.2d 638).

The rule which eliminates tort liability for economic losses in the context of defective products has been applied in New York to defective buildings as well. This is logical, since "there is no visible reason for any distinction between the liability of one who supplies a chattel and one who erects a structure" (Inman v. Binghamton Housing Auth., 3 N.Y.2d 137, 144, 164 N.Y.S.2d 699, 143 N.E.2d 895, quoting Prosser, Torts § 85, at 517; see also, Cubito v. Kreisberg, 69 A.D.2d 738, 745, 419 N.Y.S.2d 578, affd. 51 N.Y.2d 900, 434 N.Y.S.2d 991, 415 N.E.2d 979).

In Alvord & Swift v. Muller Constr. Co. (NYLJ, Sept. 15, 1976, at 7, col 4, affd. 56 A.D.2d 761, 391 N.Y.S.2d 1012, on opn. of Greenfield, J. at Special Term, affd. 46 N.Y.2d 276, 413 N.Y.S.2d 309, 385 N.E.2d 1238), a negligence action brought by a subcontractor for damages resulting from construction delays was dismissed, insofar as it was asserted against the owner's architect. One basis for dismissal was the absence of privity between the architect, whose only duty was to the owner, and the plaintiff-subcontractor (see also, Crow-Crimmins-Wolff & Munier v. County of Westchester, 90 A.D.2d 785, 786, 455 N.Y.S.2d 390).

Consistent with the Alvord & Swift case (supra ), this court held, in Ossining Union Free School Dist. v. Anderson LaRocca Anderson, 135 A.D.2d 518, 521 N.Y.S.2d 747, that an owner of a building had no cause of action for economic injuries against a firm of engineers with whom it was not in privity. Citing Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441, the court stated that "recovery will not be granted to a third person for pecuniary loss arising from the negligent representations of a professional with whom he or she has had no contractual relationship" (Ossining Union Free School Dist. v. Anderson LaRocca Anderson, supra, 135 A.D.2d at 520, 521 N.Y.S.2d 747, see also, Plancher v. Gladstein, 143 A.D.2d 740, 533 N.Y.S.2d 730; Fitzpatrick, Jr., Constr. Corp. v. County of Suffolk, 138 A.D.2d 446, 525 N.Y.S.2d 863).

Also, in Lake Placid Club Attached Lodges v. Elizabethtown Bldrs., 131 A.D.2d 159, 521 N.Y.S.2d 165, the Appellate Division, Third Department held that the plaintiff, an unincorporated joint venture which consisted of the owners of condominium units, had no negligence cause of action for economic losses against either the builder of the condominium or its architects. The court stated that the plaintiff "has not claimed any damages other than direct and consequential nonaccidental economic loss, i.e., the cost of repair to make the condominium units of * * * habitable quality and loss of market value, for which there is no recovery in negligence" (Lake Placid Club Attached Lodges v. Elizabethtown Bldrs., supra, at 162, 521 N.Y.S.2d 165, citing Butler v. Caldwell & Cook, 122 A.D.2d 559, 505 N.Y.S.2d 288; Burnell v. Morning Star Homes, 114 A.D.2d 657, 659, 494 N.Y.S.2d 488; Hemming v. Certainteed Corp., 97 A.D.2d 976, 468 N.Y.S.2d 789, appeal dismissed 61 N.Y.2d 758; Queensbury Union Free School Dist. v. Walter Corp., 94 A.D.2d 834, 463 N.Y.S.2d 114; Schiavone Constr. Co. v. Elgood Mayo Corp., 81 A.D.2d 221, 227-234, 439 N.Y.S.2d 933 revd. on dissenting opn. 56 N.Y.2d 667, 451 N.Y.S.2d 720, 436 N.E.2d 1322). The court also held that the plaintiff had no remedy in contract, since there was no privity between it or its members and either the builder or the architect (Lake Placid Club Attached Lodges v. Elizabethtown Bldrs., supra, 131 A.D.2d at 161-162, 521 N.Y.S.2d 165).

Thus, the rule which bars recovery for economic losses in the absence of privity as applied to actions against architects or engineers is also settled as a matter of New York law. We note that analogous rules apply in actions against other professionals as well (see, Viscardi v. Lerner, 125 A.D.2d 662, 663-664, 510 N.Y.S.2d 183 Calamari v. Grace, 98 A.D.2d 74, 469 N.Y.S.2d 942 cf., Credit Alliance Corp. v. Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 ). The Supreme Court therefore properly held in this case that in the absence of privity of contract, the respondents would be immune from liability for the pecuniary injuries suffered by Key. However, issues of fact exist with respect to whether Key may properly be considered to be in privity with the respondents and, for this reason, the award of summary judgment to them was unwarranted.

II

Key was not a named party to any written contract with the respondents. However, the respondents did enter into written contracts with a wholly-owned subsidiary of Key, i.e., Key Land Development Corporation (hereinafter Key Land). Christopher Jeffries, an officer of both Key and Key Land stated that the latter corporation's activities in connection with the project were "at the direction of, and under the control of, Key, the property's owner". Jeffries also averred that he had...