Ossining Union Free School Dist. v. Thune Assoc., 73 N.Y.2d 417 (1989)

In cases of negligent misrepresentation causing only economic injury, a plaintiff must demonstrate either contractual privity with the defendant or a relationship so close as to be the functional equivalent of privity to maintain a cause of action.

Summary

Ossining Union Free School District sued engineering consultants Thune & Geiger for negligent misrepresentation after relying on their reports about structural weaknesses in a school annex, which led to its unnecessary closure. The school district had a contract with an architectural firm, Anderson LaRocca Anderson, who then retained Thune and Geiger as consultants. The New York Court of Appeals held that while contractual privity is not strictly required, the relationship between the school district and the engineers had to be so close as to approach privity. The Court found that the allegations satisfied this near-privity requirement because the engineers knew their reports would be relied upon by the school district for a specific purpose.

Facts

The Ossining Union Free School District hired Anderson LaRocca Anderson (Anderson), an architectural firm, to evaluate its buildings. Anderson retained Thune Associates and Geiger Associates as engineering consultants to assess the structural soundness of the high school annex. Thune and Geiger tested the concrete and reported serious weaknesses. The school district, relying on these reports, closed the annex. A subsequent expert found that the concrete was a lightweight type known as “Gritcrete,” a fact allegedly available to Thune and Geiger in the original building plans. The school district claimed that Thune and Geiger’s negligence caused them substantial expenses related to the unnecessary closure of the annex.

Procedural History

The school district sued Anderson, Thune, and Geiger, asserting claims of negligence and malpractice. Thune and Geiger moved to dismiss the complaint, arguing a lack of contractual privity. The Supreme Court granted the motion, and the Appellate Division affirmed. The New York Court of Appeals reversed the Appellate Division’s order and denied the motion to dismiss the complaint against Thune and Geiger.

Issue(s)

Whether, in a negligent misrepresentation case producing only economic injury, a plaintiff must demonstrate contractual privity with the defendant or a relationship so close as to be the functional equivalent of contractual privity to state a cause of action.

Holding

Yes, because while strict contractual privity is not required, the relationship between the plaintiff and defendant must be so close as to approach that of privity for a negligent misrepresentation claim to proceed when only economic damages are sought.

Court’s Reasoning

The Court of Appeals relied on the principle established in Glanzer v. Shepard (233 N.Y. 236 (1922)) and Ultramares Corp. v. Touche (255 N.Y. 170 (1931)), which addressed the limits of liability for negligent misrepresentation causing economic loss. The Court distinguished between foreseeable reliance and a relationship approaching privity. “If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.” (Ultramares Corp. v Touche, 255 N.Y. 170, 179-180 (1931)). The Court articulated a three-part test derived from Credit Alliance Corp. v. Andersen & Co. (65 N.Y.2d 536 (1985)): (1) awareness that the reports were to be used for a particular purpose; (2) reliance by a known party or parties in furtherance of that purpose; and (3) conduct by the defendants linking them to the party or parties and evincing defendant’s understanding of their reliance. The Court found that the school district’s allegations satisfied these criteria, as the engineers knew their reports would be transmitted to and relied upon by the school district for the evaluation of the school buildings’ structural soundness, and that there was direct contact between the school and the engineers, thus linking the two parties in a manner that met the “near privity” standard. The court emphasized that this narrower rule, requiring near-privity, was a matter of policy to avoid imposing overly broad liability, rather than a limitation applying only to accountants.