Can It Be? Privity Of Contract Is Back!

Dust off those old law school books and turn of the century cases: privity of contract is making a comeback in Michigan!

Privity of contract, historically was a bar to certain tort law suits, such as product liability and professional liability cases filed by injured persons against other parties with whom they had no direct contractual relationship.

In 1916, the Seminal New York case of McPherson v Buick Motor Co. (1), triggered a major retreat in the country from privity of contract in product liability and professional liability cases, among others. In Michigan, privity disappeared as a viable defense for product liability and professional liability suits between the late 1950’s and mid-1970’s (2). While privity of contract still lived on in certain situations such as for claims of innocent misrepresentation (3), or malicious prosecution against an attorney (4), modern litigators by and large considered it an out dated and rarely viable way to contest claims.

This began to change in 2004 when the Michigan Supreme Court issued a surprisingly broad ruling in a simple slip and fall on ice case, resurrecting the privity of contract defense in ordinary tort cases. Fultz v Union-Commercial Associates (5). The Court held that a snow removal contractor hired by the parking lot owner could not be sued by the injured plaintiff who had no contractual relationship with the contractor in the absence of proof that the contractor assumed a duty separate and distinct from the duties it assumed under its contract with the owner.

Finding that there was no separate and distinct duty, the court held that the snow removal contractor owed no duty of care to the injured plaintiff.

Several cases since Fultz have followed its holding in ordinary negligence and injury cases. However, some panels of the Michigan Court of Appeals have also applied Fultz to professionals and construction managers in unpublished opinions (6).

In 2006, in Matrix Construction, LLC v Barton Malow, et al (7), the Court of Appeals, applying the Fultz ruling limited the prior rulings of Bacco and National Sand (2), which had allowed suits against professionals without privity of contract. The Matrix court held that privity of contract was not required only if a design deficiency was at issue and privity did apply to claims involving construction management services.

Later that year the Court of Appeals again applied the Fultz case rationale and held that a consulting engineer could not be sued by a third party without proof of privity of contract or the assumption of a duty independent from the contractual duties owed by the engineer to the owner. See Wallington v City of Mason, et al(8).

In 2005 another Court of Appeals panel had held in favor of the professional hired by the township against a claim by a contractor for failure to discover defects in a sewer system during inspections. The court, in New Dimension Development Inc v Orchard Hiltz & McClinet Inc (9), found no duty owed by the professional in claims sounding in negligence, fraud, or negligent and innocent misrepresentation.

In December, 2007, another panel of the Michigan Court of Appeals in Burton v Suretitle, et. al.(10), followed Fultz again in holding that a Title Company acting as a real estate closing agent could not be sued by the purchaser in tort, because there was no privity of contract.

Will privity of contract regain its lofty stature in Michigan from over a half century ago to become a dominant defense and barrier to product liability, construction defect and professional liability claims? The trend suggests it will. Until published Court of Appeals or Michigan Supreme Court decisions confirm the application of the Fultz doctrine in those areas we will not be sure, but privity seems to have been resuscitated and is alive, breathing and kicking.

1. MacPherson v Buick Motor Co, 217 N.Y. 382, 111 N.E. 1050 (1916).

2. Bacco Construction Co v American Colloid Co, 148 Mich App 397; 384 NW2d 427 (1986) revsd on other grounds, 204 Mich App 445 (1994); National Sand Inc v Nagel Construction Co, 182 Mich App 327; 451 NW2d 618 (1990);Piercefield v Remington Arms Co, 375 Mich 85; 133 NW2d 129 (1965); Spence v Three Rivers Builders & Masonry Supply Inc, 353 Mich 120, 90 NW2d 873 (Mich, 1958).

3. Forge v Smith, 458 Mich 198, 580 NW2d 876 (1998) privity required for innocent misrepresentation claim; U S F&G Co v Black, 412 Mich 99, 118-119, 313 NW2d 77 (1981); Chimko v Shermeta, 2006 WL 2060417 (Mich App, 2006).

4. Mich AFSCME Council 25 v Livingston County Road Commission, 2007 WL 3357398 (Mich App, 2007) privity required to sue attorney except for fraud or malicious prosecution.

5. Fultz v Union Commerce Associates, 470 Mich 460 (2004).

6. Unpublished opinions of the Court of Appeals do not have precedential authority in Michigan, but their reasoning may be adopted and applied by other courts.

7. 2006 WL 399762 (Mich App, 2006). Also see the trial court ruling in Llangs Group v Barton Malow Co, 2006 WL 3950939 (Oak Ct Cir Ctm 1/12/06). However, a federal court continued to apply the Bacco and National Sand line of cases in RMF Nooter, Inc v Gleeson Constructors, LLC, 2006 WL 3290126 (W.D. Mi, 2006). It does not appear that the Fultz case was considered by the Court.

8. 2006 WL 3826784 (Mich App, 2006)

9. 2006 WL 2806134 (Mich App, 2005)

10. 2007 WL 4322269 (Mich App, 2007)

Randall Phillips is the Principal of Provizer&Phillips, P.C.,located in Bingham Farms, Michigan; http://www.provizer-phillips.com; Contact:(248) 642-0444;rphillips@p-ppc.com. He handles complex litigation such as professional liability, toxic tort,construction defect, and insurance coverage litigation.

Is an Oral Contract as Good as a Written Contract?

An Oral Contract is as legally binding as a Written Contract, the issue with an Oral Contract is in proving its existence. To begin, the existence of a Written Contract is fairly obvious, either there is a writing or there isn’t. An oral contract, by definition, does not have a writing to support its terms, conditions or even existence. So how can we prove that it exists? One way is to use witness testimony. If A and B enter into an oral agreement, and C and D are present at the time the oral contract is made, C and D can be used to prove the existence of the oral contract. Their testimony that they heard the terms of the agreement will be sufficient to prove the existence of an Oral Contract. Course of Conduct is another way to prove the existence of an oral contract. Let’s assume that X offers to buy a radio from Y for $50. Y accepts and hands the radio to X, who then gives Y $50. The parties’ course of conduct indicates that an oral contract existed. If the radio were defective, or if Y changed his mind, he could not say that a contract did not exist. Another example of Course of Conduct would be your typical neighborhood newspaper delivery. For the most part, the newspaper boy delivers a newspaper to you and you pay him on a weekly basis. There is rarely a written agreement with the newspaper boy to deliver newspapers. You simply tell him, “please deliver a paper to me, and I will pay you”. If the newspaper boy delivers newspapers to you for a few week, and you pay him, an oral contract exists based upon the parties course of conduct. After this time, if the papers are delivered and then you refuse to pay, you cannot allege that there is no contract. The Course of Conduct indicates that an Oral Contract exists. Credibility of the parties is another factor in proving the existence of an Oral Contract. Suppose that Patron walks into a local restaurant and orders a plate of spaghetti. When Patron orders the spaghetti, an offer is made by Patron to pay for a plate of spaghetti. When the server brings the spaghetti to Patron, an Acceptance occurs and a binding oral contract is made. Credibility comes into play where the Patron then refuses to pay for spaghetti, saying “I never agreed to pay for this, I thought it was free”. All of you can see that is an incredible statement. Should that type of matter go to court, a judge would look at the credibility of the parties in regard to the situation and likely find that an oral contract was formed. If you reconsider the spaghetti scenario, though, you can see where an oral contract would be just as legally binding as a written contract. If a lawsuit were to arise out of the patron’s failure to pay, any court in the land would find the existence of the oral contract based upon credibility. The existence of an oral contract can be more difficult to prove in a different type of scenario. Imagine a scenario with P and Q. P and Q are complete strangers. P approached Q and offers to buy a Corvette from Q for $1,000. Q laughs, and says “sure”, then drives away in the Corvette. If P attempts to enforce what he feels is a binding oral agreement, will he succeed? He will have a very difficult time proving that a contract exists. There is no writing to show the agreement. There is no prior course of dealing between the parties. There were no other witnesses to this alleged conversation. Credibility becomes an issue here, along with believe-ability. As you can see, the difficulty in enforcement of an oral contract lies in the parties’ ability to prove what the terms of the contract were. Absent proof of the terms of the contract, a party may be unable to enforce what it believes to be a firm contract. Evidence, such as witness testimony, prior dealing of the parties, course of conduct and credibility of the parties are some factors that may play into the enforcement of an oral contract. If sufficient evidence can be established that the parties orally entered into a contract, the terms of that contract will be enforced. If the proof is strong, then an oral contract is just as binding as a written one. The question at hand lies with the sufficiency of that oral evidence.

Greg Artim is an Attorney with offices located in Pittsburgh, PA. For more answers to your Contracts or other legal questions, please visit his website at www.gregartim.com

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