The Appellate Division of the Supreme Court of New York holds that seller of a building may seek indemnification from a mechanical engineer whose negligent design caused seller to have to pay the new owner for costs arising out of the design flaws. The Court also holds that the economic loss doctrine did not bar a claim for professional malpractice.

17 Vista Fee Assocs. v. Teachers Ins. and Annuity Assoc. of America,
1999 N.Y. App. Div. LEXIS 7981 (July 15, 1999)

The plaintiffs/third-party plaintiffs 17 Vista Fee Associates and 17 Vista Associates (“17 Vista”) entered into a sale agreement with defendant Teachers Insurance and Annuity Association of America (“TIAA”), pursuant to which 17 Vista was to construct an office building at 17 State Street in Manhattan, and to sell it to TIAA upon completion. To obtain a certificate of occupancy for the building, the sales agreement required 17 Vista to perform several tasks, including construction of the building’s smoke purge system. 17 Vista retained Third-Party Defendant Jaros Baum & Bolles (“JB&B”), a mechanical engineer, to perform design services for the building.

17 Vista sold the partially completed building to TIAA in 1990. By 1992, construction was complete, but TIAA was unable to receive a permanent certificate of occupancy because of problems associated with the smoke purge system. 17 Vista continued to work with JB&B in an attempt to repair the smoke purge system. Not until a second fan system was installed years later did the system pass inspection and the Fire Department issue a permanent certificate of occupancy.

After TIAA refused to pay the contract balance, 17 Vista sued TIAA and TIAA counterclaimed for breach of the agreement, part of which related to the smoke purge system. Subsequently, 17 Vista commenced a third-party action against JB&B for indemnification and negligence. 17 Vista and TIAA subsequently entered into a settlement for an undisclosed sum and 17 Vista proceeded with its third party claims against JB&B. Prior to trial, the trial court granted JB&B’s motion for summary judgment.

On appeal, the Court first addressed whether 17 Vista could pursue its implied indemnity claim. The Court initially recited the principle of common law or implied indemnity, which permits one who has been compelled to pay for the wrong of another to recover from the wrongdoer the damages it paid to the injured party. However, a party who has actually participated in the wrongdoing is not entitled to indemnity. Thus, under New York law, the owner or contractor seeking indemnity must have delegated exclusive responsibility for the duties giving rise to the loss to the potential indemnitor. Applying such law, the Court found that 17 Vista delegated full responsibility for the design of the smoke purge system to JB&B and thus was entitled to indemnity. Moreover, the Court also rejected JB&B’s argument that 17 Vista was an actual wrongdoer because it had allegedly breached the contract with respect to portions of the project other than the smoke suppression system. Rather, he Court found that as long as 17 Vista segregated its claims between the smoke purge system and the other issues, its indemnity claim survives and the trial court erred in dismissing the claim. The Court also held that the trial court erred when it held that the underlying claim to an indemnity claim must sound in tort not contract. Rather, the Court limited the application of such a rule to contribution claims as opposed to indemnity claims.

Of particular importance, the Court found that 17 Vista’s indemnity claim was improperly dismissed as New York’s economic loss doctrine does not bar actions for professional malpractice. The Court first acknowledged that to plead a tort claim, 17 Vista must establish a legal duty independent of the contract claim, but the Court then found that claims against professionals involve such an independent duty imposed by law. Thus, the Court held that 17 Vista’s allegations that JB&B failed to exercise the skill and judgment required of the engineering profession were sufficiently distinct from JB&B’s contractual duties, and thus stated a claim for professional malpractice.

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