Virginia’s Privity of Contract Defense Continues to Protect Defendants in Economic Loss Cases

By: Will Watkins. This was posted Wednesday, June 18th, 2014

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I am often told by clients that they are protected from a lawsuit because they have a corporation.  The advice I usually give them is that while the corporate shield is strong it does not protect them if they are negligent and cause injury or damage, even if it is during working hours.  While that advice is still correct, the answer to that question is not so simple in Virginia.

Virginia has long held that a party must be in privity of contract to recover for contractual claims.  Privity requires that the party making the claim actually have a contract, whether written or oral, with the person they are suing.  Virginia courts have maintained that damages for breach of contract, and negligence claims for economic loss, still require privity of contract.   On the other hand, Va. Code § 8.01-223 abolished the requirement of privity of contract in cases seeking redress for damages for injury to person or property caused by another’s negligence.  The challenge for most lawyers and parties is to determine the difference between economic waste (which requires privity) and damage to property (which does not require privity).  The Honorable James Jones of the US District Court of the Western District of Virginia recently issued an excellent opinion outlining the history of the rule and how it is applied.

In McConnell v. Servinsky Eng’g PLLC, Case No. 2:13CV000148 (May 20, 2014), the plaintiff had hired Servinsky Engineering PLLC to design a post foundation for a pole barn.  The foundation system failed and, as a result, the barn became unusable.  After Mr. McConnell filed suit, Sevinsky Engineering filed for Chapter 11 Bankruptcy.  Not to be undone, Mr. McConnell amended his complaint and alleged that Mark S. Servinsky, a professional engineer employed by Servinsky Eng’g, was negligent in the work he performed on the project and breached his implied warranty to design the foundation system in a reasonable fashion.

Judge Jones recognized that the contract in this case was with the engineering company, not Mr. Servinsky.  Therefore, the Court had to determine if the damage claimed was for property damage or economic loss.  Beginning with Sensebrenner v Rust, Orling & Neale, Architects, Inc. 236 Va. 419, 374 S.E.2d 55, 57 (Va. 1988), Judge Jones analyzed the difference between claims for property damage and claims for economic loss.  While the defective foundation system clearly caused damage to property, this damage was actually economic loss because the “loss” was the bargained for level of quality that was contracted for by the parties.  Essentially, the building (or a component part thereof) caused damage to itself.  The object of the contract, the pole barn, failed because the building’s foundation system failed.  Therefore, the object of failure was the same object for which Mr. McConnell contracted.  Because Mr. McConnell did not contract with Mr. Servinsky in his individual capacity, but only with Mr. Servinsky’s company, Mr. McConnell had no valid cause of action for negligent design against Mr. Servinsky.

Therefore, the next time I receive a call from a client saying they cannot be sued because they are a corporation, I will have to fall back on the perfect answer, “well that depends on the facts”.  If you are in luck, the damage will be economic loss and therefore you cannot be found liable for the damage.

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