Project Owner’s right to pursue claims directly against Engineer’s subconsultant. City of Whiting v. Whitney, Bailey, Cox & Magnani, LLC. United States District Court, Northern District of Indiana (2015), by Hugh Anderson

Summary: The City of Whiting, on Lake Michigan, retained Structurepoint as its consulting engineer on a lakeshore park, marina, and shoreline protection project. Structurepoint in turn retained WBCM as a subconsultant for portions of the professional services. WBCM designed a shoreline  revetment structure armored with stone. According to the city, during and after construction the revetment failed on three occasions, with much of the armor stone being washed away, and damage to the new pavilion, gazebo, and fishing pier. The city linked these failures at least in part to confusion in the design regarding actual water depth and the correct mud- line for design purposes.

Structurepoint and the city entered into an agreement in which Structurepoint assigned its claims against its subconsultant to the city (we can speculate that this was the result of a settlement or payment by Structurepoint, but the published decision does not discuss the reason) and the city agreed to not pursue Structurepoint for the design errors attributed to the subconsultant. The city then embarked on a lawsuit against WBCM based on the assigned claims, and on the city’s own direct claims.

Decision: The reported decision is made at a preliminary stage based on the pleadings (primarily the city’s complaint) in the case. WBCM seized on the point that the city referred to recovery of its own damages in connection with the assigned claims—whereas technically under an assigned claim the assignee (the city) is pursuing the damages of the assignor (Structurepoint), not the assignee’s own damages. The court rejected this point, holding that under federal pleading rules there was no basis for dismissing a complaint based on an “imperfect” statement of the legal theory of recovery.

WBCM also argued that because the assignment contained a commitment that the city would not pursue Structurepoint, there was no claim to assign. The court held that contract claims are legally assignable, and that the specific assignment was valid.

The court next examined the city’s direct (not assigned) claim under a third-party beneficiary of contract theory. The court concluded that the claim could proceed for the time being, because there was no “no third party beneficiary” clause in the contracts, but indicated that WBCM could pursue discovery as the parties’ intent regarding third-party beneficiaries.

As to the city’s direct negligence claim against WBCM, the parties and the court acknowledged the possible bar of the economic loss doctrine, but the court held that the pleadings suggested possible damage to other city property (other than the failure of the project itself), which would constitute a limited exception to the bar of the economic loss doctrine, and that his point could be explored as the case moved forward.

Comment: The EJCDC contracts contain express “no third party beneficiary” clauses. The standard subconsultant agreement, E-570, disclaims that it is creating a duty to Owner.

The EJCDC agreements also limit assignments of rights. A point for future policy discussion would be whether the documents should make it easier for an intermediate party such as the Engineer or Contractor to assign rights in the event of a claim.

The prime engineering contract was described as using the “Short Form of Agreement”—possibly EJCDC E-520.

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