"Who you gonna sue" (or be sued by)?

In the Ghostbusters movie, the popular refrain was, “Who you gonna call?” In the business world, when a company’s expectations are not met, the inquiry is often, “Who you gonna sue?”

Fortunately, for providers of professional services, the Massachusetts Appeals Court recently confirmed that there are limits on who can sue a professional. Even with these limits, professionals need to watch out for third-parties (i.e., parties with whom they are not in contract) that may seek to rely on, and attempt to sue based on, the professional’s services. This is important for consultants, engineers, architects, contractors, brokers, accountants, planners, and other professional service providers.

Facts of the Case

The Appeals Court case is called, “Meridian at Windchime, Inc. v. Earth Tech, Inc.” A real estate developer attempted to sue a professional engineering firm that had been hired by a town as a consultant to inspect the developer’s road and utility work. Importantly, the engineer’s contract was with the town, not the developer.

The developer alleged that the engineer’s inspections were negligent because they failed to identify deficiencies with the infrastructure work performed by the developer’s construction contractor. When the deficiencies were discovered later on, the developer was required to replace the road at far greater cost than if the deficiencies were discovered earlier.

When the road contractor went out of business, the developer was faced with the question, “Who you gonna sue?” It chose the engineer, even though it did not have a contract with the engineer.

What the Appeals Court Said

The Appeals Court held that the developer was not allowed to sue the engineer because there was no direct contract between the developer and the engineer (i.e., no “breach of contract” claim), and there are limits to the liability of a professional to a third-party for negligent performance of a contract.

Under the principle of “reasonable reliance”, a professional employed to provide a service does not owe a duty of care to a third-party with whom the professional has no contractual relationship unless (i) it was “foreseeable and reasonable” for the third-party to rely on the services provided by the professional to its client, and (ii) the professional had “actual knowledge” that the third-party was relying on the professional’s services.

The Court held that there was no “reasonable reliance” because the developer had hired its own project engineer to provide services on the project, the underlying contract between the town and the engineer provided that the engineer would have no responsibility for the construction methods selected by the developer, and the engineer had informed the developer of the engineer’s limited role in the project.

Things For the Professional to Consider

• When entering into a contract for professional services, the professional should consider whether the work product might be obtained and relied upon by a third-party who is not the intended client. For instance, this scenario can arise if the professional is engaged to make submittals to local or state agencies (which could then make the document accessible to the public, members of which might claim “reliance” on the submittal). Another scenario is when a professional submits work product to a client or lender, who then shares it with a buyer, borrower, customer or other “user”.

• Consider adding provisions in the contract as well as statements in the work product to clearly announce that the services and work product are only for the client’s use, the document may not be used or relied upon by any third-party, and there are no intended third-party beneficiaries of the contract. Such a statement should be considered for each submission prepared by the professional even if the submissions are numerous or frequent (e.g., periodic inspection or status reports).

• If there is reason to believe that a third-party might seek to rely on the services or work product that the professional is providing to its client, the professional should consider informing the third-party that it can not and should not rely on the professional’s services without prior express approval.

• In contrast, if you are in the role of the “third-party” and want the legal right to rely on the work product of a professional with whom you are not in contract, you can attempt to obtain a statement from the professional, sometimes in the form of a “reliance letter”, confirming that you are authorized to rely on the work product just as the original client was able to rely on it.

Although these measures do not assure immunity from claims by third-parties, they might provide some level of protection against them.

Please contact me if you or a colleague has a question on contracts, performance, or real estate issues.