It is no secret that Plaintiffs are becoming increasingly sophisticated and creative in their attempts to find liability when a transaction goes bad. Whether due to lack of collectability, immunity issues, or the search for deeper pockets (i.e. insurance), Plaintiffs have spurned traditional avenues of tort recovery in favor of unique, and often outlandish, theories of liability against other parties to the transaction. Of course, in the case of economic loss, which is the usual suspect in a business or real estate transaction, traditional tort principles require contractual privity in order to afford the Plaintiff an avenue of recovery. The defense bar and insurance industry have long-hoped that Ohio courts would recognize the continued viability of this privity concept.
There are a myriad of non-medical professionals in the state of Ohio who perform thousands of transactions a day across this state: accountants, real estate agents, title agents, appraisers, construction contractors, mortgage brokers, and the like. Often times, in multi- party transactions, the scope of the professional’s duties are less than clear. A recurring issue is whether and to what extent these professionals owed duties to third parties, who are outside the specific contractual relationship, when some aspect of the transaction at issue goes south.
Two recent cases highlight not only the unique theories asserted by zealous plaintiffs, but also Ohio appellate courts’ reconfirmation of the privity concept. In the first case, Caruso v. National City Mortgage Company, 187 Ohio App.3d 329, 931 N.E.2d 1167, 2010-Ohio-1878, a disgruntled real estate investor brought suit against his bank lender and the lender’s appraisal company based upon an allegedly faulty appraisal. The plaintiff purchased a developmental lot in a start-up subdivision with the hopes that rental of the property back to the developer and continued growth of the neighborhood would ultimately result in a return on his investment. Understanding that the purchase price with the developer was non-negotiable, the plaintiff made the purchase without ever having visited the property.
Of course, the plaintiff had to obtain financing for the purchase. In the usual course of these transactions, the plaintiff’s lender ordered an appraisal which resulted in an appraised value of $442,000. Plaintiff never saw the appraisal prior to purchase. The developer subsequently decided to pull out of the development and would not renew the plaintiff’s lease agreement. At that point, the plaintiff performed his own appraisal ($326,400) and determined that the lender’s appraisal must have been faulty. The trial court granted summary judgment for the lender and appraisal company on the plaintiff’s negligent misrepresentation and third party beneficiary claims.
On appeal, it was apparent that plaintiff lacked contractual privity with the lender and appraisal company. After all, it was the bank who had ordered the appraisal simply for purposes of determining whether to lend money to plaintiff and in what amount. Plaintiff had a mortgage loan with the bank, but no contractual relationship related to the appraisal. As creative plaintiffs always do, the plaintiff in Caruso argued the lender and appraiser were liable based upon a loophole in the traditional privity rule: the defendants had negligently misrepresented the true value of the property by virtue of the faulty appraisal. Interestingly, the First Appellate District recognized that in certain circumstances, tort based liability for economic damages can apply in the case of faulty appraisals, despite the absence of contractual privity.
However, the plaintiff in Caruso failed to establish a critical element of his negligent misrepresentation claim: justifiable reliance. To this end, the plaintiff had agreed to purchase the property long before the appraisal was even conducted. As such, plaintiff could not demonstrate as a matter of law that he had relied upon the allegedly botched appraisal.
Finally, the plaintiff’s last-ditch effort to stave off summary judgment was an allegation that he was a third party beneficiary to the contract between the lender and appraiser to perform the appraisal. However, this claim was specious in light of the fact that the contract itself provided that the appraisal was performed solely for the lender to evaluate the property for a mortgage finance transaction. As such, the plaintiff, a relative stranger to the contract between the lender and appraiser, was denied recovery based upon the purportedly inflated property appraisal.
The second case, Faber v. Ronald Chaffman General Construction, Inc., 186 Ohio App.3d 778, 930 N.E.2d 831, 2010-Ohio-1035, examined a similar privity issue under a separate set of facts. In Faber, the plaintiffs purchased a home from Josef Fodor in April of 2005. Prior to that time, Fodor had a new roof installed by defendants’ general construction company in July of 2000. Interestingly, when Fodor sold the home to plaintiffs he attempted to assign “all his rights, title and interest in and to sue on behalf of any defaults found in the construction of the roof at [the property].” After plaintiffs began experiencing problems with the roof in May of 2007, they sued defendants, despite the lack of any fathomable contractual privity. The trial court granted the defendants’ motion to dismiss for lack of privity.
On appeal, the plaintiffs attempted to convince the court to apply a narrow exception to the privity requirement in negligence cases involving hidden defects brought by a subsequent buyer of real property. In cases recognizing the exception, the courts apply tort theories of recovery rather than contract. These courts justify their holdings in waiving the contractual privity requirement by recognizing that an alternative rule would permit builder-vendors to insulate themselves from liability for latent defects by creating a “strawman” purchaser.
However, the plaintiffs in Faber were not vendees of a pre-constructed home and therefore did not fit within the strictures of the narrow exception to the strict-privity requirement. The court explained it rationale for refusing to further stretch the privity concept as such:
The high court’s obviation of the requirement of privity has been confined to cases of product liability and the purchase of fully constructed real property from a builder-vendor who might unscrupulously attempt to escape potential liability for unworkmanlike construction by selling to a “strawman” vendee who would then sell to the intended customer class. The Supreme Court declined to further “relax[] the strictures of privity” when it addressed a situation involving a contract for the future construction of a home by a builder-vendor.
Id. at 782. The court declined to create further exceptions to the strict privity requirement, recognizing that the plaintiffs lacked contractual privity with the defendants for construction of the roof.
Although Caruso and Faber represent steps in the right direction in defending miscellaneous professionals, a word of caution is in order. As noted in the decisions, various exceptions to the strict contractual privity requirements exist and are often asserted by zealous plaintiffs. For example, if the plaintiff had reviewed and relied upon the appraisal in Caruso, perhaps the result of his negligent misrepresentation claim would have been different. The Faber decision likewise recognizes an exception to the strict-privity rule in home construction cases where a vendee of a preconstructed home has a negligence claim against the builder-vendor for unworkmanlike construction. Nevertheless, in any situation wherein professionals are sued by third-parties outside the strict contractual relationship, defenses based on lack of privity must be examined, plead as an affirmative defense, and asserted in the litigation.
For further information regarding the implications of the Caruso or Faber decisions, or other general inquiries regarding Ohio’s strict privity requirements both in professional liability and construction engagements, please contact one of the members of our Professional Liability or Construction and Design Liability Practice Groups.
