On October 26, 2005, the Ohio Supreme Court ruled in Corporex Dev. & Constr. Mgt., Inc. v. Shook, Inc. (2005) 106 Ohio St. 3d 412 that a building project owner cannot sue a subcontractor directly for monetary losses if there is no contract between the owner and the subcontractor.
This case arose from the construction of an Embassy Suites Hotel in Dublin, Ohio. The owner, Dublin Suites, Inc. (DSI), contracted with its “sister company,” Corporex Development and Construction Management, Inc. (Corporex), for the construction of the hotel. Corporex subcontracted all of the concrete work to Shook, Inc. DSI was not a party to the Corporex/Shook subcontract. When the hotel opened 4 ½ months late, DSI and Corporex sued Shook, asserting claims based on breach of contract and on tort claims of negligence and breach of implied warranty.
In a 5-2 decision last week, the Ohio Supreme Court ruled that DSI could not sue Shook directly for economic losses. The Court stressed that Shook owed no independent duty to DSI (in tort or otherwise). In a case such as this, the owner’s only remedy is to sue the contractor. The contractor can then sue the subcontractor for any breaches of its subcontract duties.
DSI had argued that it was a foreseeable beneficiary of the Corporex/Shook contract because Corporex and DSI were owned by the same individual, and Shook knew it. The Court rejected that position, however, out of concern that such an argument would allow any subcontractor to be held liable to a project owner simply because the subcontractor knew the owner’s identity. The Court emphasized that even though Shook knew of the relationship between Corporex and DSI, that knowledge did not impose any independent duties on Shook towards DSI. In addition, the Court noted that although it may be possible to have a relationship that can create liability even where there is no contract, it takes more than merely knowing the name of the project owner to create that relationship. Since Shook owed no duty towards DSI, and Shook was not in contractual privity with DSI (meaning that Shook and DSI did not have a contract with each other), DSI could not assert any claims for monetary damages against Shook.
The decision is generally consistent with prior Ohio Supreme Court rulings addressing what is known as the Economic Loss Rule. That “Rule” provides that in the absence of a contractual relationship one party in a construction project cannot be liable to another for economic damages such as delay related expenses or corrective work costs. The Court has acknowledged that there can be an exception to the Rule where there is sufficient nexus (as in a relationship or interaction between the parties). While the Court in its Corporex v. Shook decision indicated that knowledge about another party’s identity did not create sufficient nexus to overcome the lack of privity to allow a cause of action, the Court did not provide any further guidance on what would create that sufficient nexus.
Janice Casanova is an associate in the Columbus, Ohio office of Buckingham, Doolittle & Burroughs, LLP and a member of the Real Estate and Construction Practice Group. Before joining Buckingham, Ms. Casanova was an associate at Maguire & Schneider, LLP, counsel for DSI, and was involved in preparing the Supreme Court argument for DSI.