Fed. Ins. Co. v. Fredericks, Inc., 2015-Ohio-694, 29 N.E.3d 313, 2015 Ohio App. LEXIS 684 (Ohio Ct. App. Feb. 27, 2015)

This case arises from a construction project in Vandalia, Ohio that was damaged during a windstorm before construction was completed.  The project was for the construction of a “cross-dock facility” warehouse (the “Project”) on certain real property owned by Pasco Enterprises (“Pasco”), a company in the business of owning and leasing real estate holdings.  Pasco’s 100% parent, J.P. Holding Co., Inc. (“JP Holding”) also owned Carter Express, Inc. (“Express”) and Carter Logistics, LLC (“Logistics”).  Logistics was in the business of providing freight transportation services to its customers; it also contracted with freight carriers, including Express, to transport its customers’ freight.  Approximately 85% of Logistics’ freight shipments were transported by Express.

Logistics and Express each operated out of locations leased from Pasco.  Consequently, after Logistics signed a contract with Toyota for the transportation of materials to several Toyota assembly plants, Pasco made plans to purchase real property in Vandalia near the intersection of Interstate 70 and Interstate 75 on which to construct the Project.  In furtherance of the Project, JP Holding’s owner, Jon Paugh, made a “handshake” arrangement with William Fredericks, the president of Fredericks, Inc. (“Fredericks”), a construction company with whom Paugh had a longstanding relationship. Fredericks then entered into a subcontract with Skiles Construction, Inc. (“Skiles”) to construct pre-engineered metal buildings for use in the Project.  The subcontract named Pasco as the Project’s owner.  But, Skiles had performed previous contracts for Fredericks and was aware that Express would inhabit the Project for its business operations.

In August of 2011, Skiles began to erect the framework for the steel buildings.  But, after Skiles’ workers left the site on September 3, 2011, a windstorm passed through the region and a substantial portion of the steel framework collapsed.  Thereafter, JP Holding, Pasco, Express and Logistics filed an action to recover damages related to Skiles’ negligent construction.  The trial court held that damages for economic losses were available solely to Pasco on the basis that Pasco was the only third party beneficiary of the subcontract between Fredericks and Skiles.  The court therefore entered judgment against Skiles and in favor of Pasco.  JP Holding, Express and Logistics (the “Appellants”) appealed, arguing that the economic loss rule should not bar their  claims against Skiles.

On appeal, the Court of Appeals of Ohio affirmed the judgment of the trial court.  The Court discussed the policies underlying the economic loss rule, noting that the rule serves to preserve the balance between tort law and the law of contracts by precluding recovery in tort for the breach of obligations and duties “assumed only by agreement.”  Generally, there is no tort cause of action between an owner and subcontractor, the Court held, because absent a contractual relationship, a subcontractor does not owe a duty of care to the owner.  In this respect, the Court cited precedent from the Supreme Court of Ohio for the proposition that “mere knowledge by the subcontractor of the identity of the project owner, without more, does not create a nexus sufficient to establish privity or its substitute.”  Thus, Skiles could not be liable to the Appellants on the mere basis that it was aware of their relationship to the Project.

The Court then turned to the question of whether the owner may sue the subcontractor directly in contract to recover for economic losses.  The Court held that liability in contract may be available where the facts establish privity or a substitute for privity.  In the case before it, the Court held that there was no “substitute for privity” because there was no indication that Skiles exercised “excessive control” over the Project.  For instance, there was nothing to indicate that Skiles had the power to “stop the work and give orders about the project.”  Therefore, because Skiles did not exercise such control, there was no “substitute for privity” that would allow the Appellants to sue Skiles directly in contract.

The Court similarly rejected the Appellants’ argument that they were entitled to recover damages as third party beneficiaries of Skiles’ subcontract with Fredericks.  In affirming the ruling of the trial court, the Court held that the subcontract did not evidence an intent to benefit any of the Appellants. Notably, while the subcontract stated that it incorporated the “prime contract” by reference, there was, in reality, no such agreement because Paugh and Fredericks had simply entered into a “handshake agreement.”  Thus, there was some confusion on the part of Skiles with respect to the identity of the owner, and Skiles testified at trial that it initially believed that Express was the owner.  Nonetheless, the Court held that the subcontract was clearly intended only to benefit “the owner” and that Skiles’ confusion could not deem Express a third party beneficiary.  In particular, the subcontract was clear that Pasco was “the owner” and made a number of references to obligations that Skiles assumed “to the owner.”  Consequently, because Pasco was the only “owner”, only Pasco could be deemed a third party beneficiary of the subcontract.

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