This month we consider two cases, starting with a decision from the U.S. District Court for the Southern District of Ohio on the issue of whether the Spearin doctrine applies to plans and specifications on private projects in Ohio. Our second case, from the Court of Appeals of Michigan, looks at whether an owner may maintain a third-party beneficiary claim against a subcontractor under Michigan law.
Federal Court Refuses to Extend Spearin Doctrine to Private Projects
When you put a puzzle together you usually use the picture on the box as a guide to see where all the pieces go. Contractors use the plans and specifications for the same purpose. While those plans and specifications are supplemented with the contractor’s shop drawings and submittals, the plans generally show the contractor where the pieces go, and they help the contractor prepare an estimate of the construction cost before bids are submitted. But does an owner warrant that the plans and specifications are perfect and without any errors?
The Spearin doctrine holds that an owner impliedly warrants the accuracy of the plans and specifications prepared by the owner. The doctrine was recognized by the U.S. Supreme Court in 1918 in the case from which the doctrine takes its name. In United States v. Spearin, 248 U.S. 132, the Supreme Court recognized that when a contractor is “bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”
Through the years, various courts at both the federal and state level have interpreted the meaning and application of the doctrine. The Ohio Supreme Court addressed it in 2007 in the case of Dugan & Meyers v. Ohio Dept. of Admin. Servs., 113 Ohio St. 3d 226.
One of the most recent cases interpreting this doctrine comes out of the U.S. District Court for the Southern District of Ohio. The case of Thomas & Marker v. Wal-Mart, 2008 U.S. Dist. LEXIS 79072, involved the construction of a Wal-Mart in Springfield, Ohio.
Prior to awarding the construction contract, Wal- Mart engaged a civil engineer to perform geological testing and prepare a report to be used for bidding. The report was ultimately prepared based on data from 62 separate test borings conducted by multiple rigs over a period of several weeks.
Thomas & Marker submitted a lump sum bid and was awarded the construction contract. In addition to the construction agreement, the Contract Documents included the bid package, the General Conditions, the Supplementary Conditions, the Special Conditions, plans, specifications, and site and grading plans. The Special Conditions specifically referenced the geotechnical report.
The geotechnical report indicated that the site contained rock which would be required to be removed for the building foundation and site utilities. Thomas & Marker subcontracted this work. The subcontract included a unit cost for rock removal.
Almost immediately, Thomas & Marker’s subcontractor encountered rock at elevations higher than indicated in the report. The subcontractor could not remove the rock using the excavators they had planned to use, so it had to bring in additional specialized equipment. When the additional specialized equipment proved inadequate, the subcontractor brought in a trencher that was specifically designed to remove rock.
This highly specialized equipment proved up to the task. During the course of rock excavation, Thomas & Marker, at Wal-Mart’s request, tracked the quantities and cost to remove the rock. Thomas & Marker, through its subcontractor, had excavated approximately 5,500 cubic yards of rock which was not indicated in the geotechnical report at a cost of $1,296,400. Thomas & Marker submitted a proposed change order for the costs. Wal-Mart rejected the change order noting that “documents clearly show rock on site per Geo Report.”
Thomas & Marker filed suit. One of the counts contained in the action was a claim for breach of the implied warranty of suitability of plans, specifications, and geotechnical reports: the Spearin Doctrine. In response, Wal-Mart argued that there was no cause of action in Ohio against an owner for breach of an implied warranty of the accuracy of plans. Further, the Contract Documents specifically disclaimed the accuracy of the geotechnical report.
The court found that the success of Thomas & Marker’s claim that the implied warranty prevails over the express terms of the contract turns on Ohio’s application of the Spearin doctrine. The court turned to the Dugan & Meyers case for its answer. In Dugan & Meyers, the Ohio Supreme Court recognized the Spearin doctrine finding that “the doctrine holds that, in cases involving government contracts, the government impliedly warrants the accuracy of its affirmative indications regarding job site conditions.”
However, the court found that no Ohio court had ever found that the Spearin doctrine applied to a private project. In fact, the court found one Ohio appellate court that had determined that, at least in a non-breach of contract context, there is no implied warranty of the accuracy of the plans. In Lattea v. City of Akron, (Ohio Ct App. 1982), 9 Ohio App.3d 118, the Tenth District Court of Appeals determined that no Ohio decision found such a warranty and that there was no basis for such an implied warranty.
All of the cases cited by Thomas & Marker involved government contracts. The Ohio cases that have interpreted the doctrine have also all involved government contracts. Therefore, the court found no basis for extending the Spearin doctrine to cases involving private entities. “The Spearin doctrine does not provide an implied warranty for defects in plans and specifications in this contract action between Wal-Mart and Thomas & Marker, both private entities.”
It is important to remember that this is a federal case. As the District Court pointed out in its decision, no Ohio state court has ever ruled on whether the Spearin doctrine applies to contracts between private entities. We will have to wait and see if any Ohio state court weighs in on this issue.
Michigan Owner Sues Subcontractor— Succeeds on Third-Party Beneficiary Claim
It is difficult to recover damages under a contract where you are not a party to the contract. However, if you are a third-party beneficiary to a contract in Michigan, you may be able to recover damages. In Marie Vanerian v. Charles L. Pugh Co., Inc., 2008 Mich. App. LEXIS 1333, the Court of Appeals for Michigan applied Michigan’s third-party beneficiary statute to a case involving a homeowner and a subcontractor who was in contract with a general contractor.
In Vanerian, a homeowner’s insurance company hired a general contractor to make necessary repairs to prevent further flooding and to replace wood flooring in the homeowner’s basement after a previous flood. The contractor suggested to the homeowner that she use a flooring contractor she had used in the past. The homeowner contacted the flooring contractor who installed the flooring in her kitchen and dining room and met with him to discuss the work. The general contractor later entered into a contract with the flooring contractor to install the basement floors.
The contract between the general contractor and flooring contractor titled the job as “Marie Vanerian Residence.” The contract provided, in detail, the duties and obligations of the flooring subcontractor. The work under the contract was solely for work in the homeowner’s house.
At some point, the basement flooded again causing extensive damage to the flooring. The flooring buckled and was no longer useful. The homeowner sued the general contractor and flooring subcontractor to recover for the damages.
To recover against the flooring contractor, the homeowner claimed that she was a third-party beneficiary of the contract between the general contractor and the flooring contractor. The trial court found that the homeowner was not a third party beneficiary of the contract.
The trial court relied on a Michigan case involving an oral contract between a general contractor and its subcontractor. In that case, the court found that “[a] bsent clear contractual language to the contrary, a property owner does not attain intended third-partybeneficiary status merely because the parties to the subcontract knew, or even intended, that the construction would ultimately benefit the property owner.”
The trial court determined that there was no thirdparty beneficiary because the oral contact did not include an express promise to perform the work for the homeowner, and the general contractor and subcontractor executed the contract primarily for their own benefit.
On review, the Court of Appeals turned immediately to Michigan’s third-party beneficiary statute, MCL 600.1405. The court indicated that the statute must be interpreted to provide that “only intended, not incidental, thirdparty beneficiaries may sue for breach of a contractual promise in their favor.” A person is only a third-party beneficiary of a contract where the “contract establishes that a promisor has undertaken a promise directly to or for that person.”
The contract expressly defined the work as repairs to the homeowner’s basement, the homeowner personally discussed the project with the subcontractor, the homeowner and the subcontractor agreed that the floors would be replaced with a specific material, the subcontractor’s work directly benefited the homeowner, and the contract referred to the homeowner by name – even titling the job as “Marie Vanerian Residence.” The court determined that the homeowner was a thirdparty beneficiary and, therefore, was entitled to sue the subcontractor for breach of contract.
We should distinguish this Michigan case from the key case in Ohio regarding an owner’s right to recover damages from a subcontractor where no contract exists. In Corporex Development & Construction Management, Inc. v. Shook, Inc., 2005 Ohio LEXIS 2386, the Ohio Supreme Court determined that an owner may not recover against a subcontractor for purely economic loss in tort based on breach of contract.
This decision was based on the principles that only where a duty in tort exists may a person recover in tort, and only where the duties are created by a contract may a party recover on breach of contract. The court also held that the “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” between the owner and a subcontractor. The question if a case such as Vanerian occurs in Ohio is whether the dealings between the owner and the subcontractor create a sufficient nexus to create a substitute for privity.