New York’s First Department Circumscribes
Design Professionals’ Liability for Negligent Misrepresentation

By Alexander M. Kipnis, Esq.

A recent appellate decision may have significantly raised the bar for negligent misrepresentation claims against design professionals. In Sykes v. RFD Third Ave. 1 Assocs., LLC,1 a sharply divided court rejected purchasers’ claim against an HVAC engineer who provided information to the condominium developer for inclusion in the condominium offering documents. The court held that the relationship between the condominium purchaser and the HVAC engineer does not amount to a “functional equivalent of privity,” and is therefore too attenuated to maintain a negligent misrepresentation claim.

According to the Sykes complaint, the plaintiffs purchased a penthouse from a condominium developer. In doing so, the purchasers claimed to rely on a condominium offering document furnished by the Developer. The offering document represented that the condominium’s HVAC system had the ability to maintain interior temperature and humidity within certain parameters. The offering document stated that the HVAC system was designed by a named mechanical engineering firm, which was described as a quality firm that was highly experienced with many other luxury projects throughout the city. In addition to doing the substantive work on the HVAC system, the engineer had provided information about the HVAC system to the developer for inclusion in the offering document. According to the purchasers, the HVAC system did not perform within the advertised parameters.

Among other claims, the purchasers asserted a negligent misrepresentation claim against the engineer on the basis of the HVAC system described in the offering document. The engineer argued that the purchasers could not maintain their negligent misrepresentation claim because the purchasers were not in privity or the “functional equivalent of privity” with the engineer. The purchasers argued that they were in the “functional equivalent of privity” with the engineer because the engineer knew that the information it provided to the developer was meant for the offering document, on which prospective buyers would rely.

On a 3-2 vote, the court held that the purchasers cannot maintain a negligent misrepresentation claim against the engineer unless the purchasers show that the engineer knew not only that its information would be used by prospective condominium buyers generally, but that it would be relied upon by these specific purchasers. The court held that “before a stranger to the contract can claim harm from negligent misrepresentation, there must be (1) an awareness by the maker of the statement that it is to be used for a particular purpose, (2) reliance by a known party on the statement in furtherance of that purpose, and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance.” A showing that the engineer was merely aware that its HVAC information would be used in the offering document to be provided to some undetermined prospective buyers does not meet the second or third requirement. In other words, the engineer’s mere knowledge that prospective buyers, in the abstract, would rely on the engineer’s statements in the offering document was insufficient to transform the specific purchasers into “known parties,” and therefore did not permit them to assert a negligent misrepresentation claim against the engineer. In arriving at this conclusion, the majority cited cases involving accounting professionals, which similarly limit the liability of accountants to parties who rely on their reports but with whom they are not in privity. The majority relied extensively on Parrott v. Coopers & Lybrand.2 In Parrott, an employer contracted with an independent accounting firm to provide periodic valuations of the employer’s stock. Separately, the employer had a contract with an employee, which provided that the employer had the right to repurchase stock under certain circumstances at a price set by the accounting firm’s independent valuation. In reliance on the valuation, the employee consented to the repurchase at a price that was lower than the value of the stock, and subsequently sued the accounting firm to recover the difference. The court found that the fact that the accounting firm did not know that its report would be relied upon by the specific plaintiff for the specific purpose insulated it from negligent misrepresentation liability. The majority was clearly concerned with expanding liability for negligent misrepresentation to all “foreseeable” plaintiffs, which would result in “limitless liability” that is “vast and unbounded, wholly disproportionate to a defendant’s undertaking or wrongdoing.”

The majority in Sykes noted that the privity requirements are not limited to accountants, but instead apply to all professionals, including design professionals in the construction industry. In particular, the First Department cited its earlier decision in Bri-Den Constr. Co., Inc. v. Kappell & Kostow Architects P.C.,3 which held that a design professional’s generalized knowledge that a class of persons might rely on its representation is insufficient to meet the privity requirement. The court held that where “defendant would only have been aware in the most general way that some buyer would rely on that information to purchase a particular unit…[t]his is clearly insufficient” to impose negligent misrepresentation liability.

The First Department appears to have abrogated – if not overruled – its own past decision in Board of Managers of Astor Terrace Condo. v. Shuman, Lichtenstein, Claman & Efron,4 which had often been cited to allow negligent misrepresentation suits against design professionals to proceed. The majority distinguished Astor because there, the contract at issue expressly conferred third-party beneficiary status on plaintiffs, which satisfied the “known party” requirement of the negligent misrepresentation claim. Moreover, the First Department expressed doubt that Astor remains good law in light of the Court of Appeals precedent in Parrott and related cases.

By limiting a design professional’s liability for negligent misrepresentation to parties that are specifically known to the design professional, the First Department’s decision significantly circumscribes the scope of plaintiffs who can bring negligent misrepresentation claims against architects and engineers. However, because Sykes significantly abrogates prior precedent from the same court, it is very likely to be appealed.

The above article is an overview only, should not be considered legal advice and application of any laws regarding the aforementioned will be dependent upon specific facts and circumstances. For more information, please contact Michael De Chiara or Alexander Kipnis at 212-682-6800, mkd@zdlaw.com or akipnis@zdlaw.com.



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JANUARY 2010