How Close Do You Have To Be To Be “Near Privity”?

(A Representative Survey of the Evolving Jurisprudence of the Court of Appeals)[1]

 (Victor M. Metsch is a Senior Litigation/ADR partner at Hartman & Craven LLP.  He can be reached at vmetsch@hartmancraven.com.  He maintains a website at www.LegalVictor.net and can be found on Twitter at @LegalVictor1).

This article was originally published on Law.com.

                         To attorneys “of a certain age” (including me), the concept of “privity”, in respect of claims sounding in either contract and tort, was taught in law school at an almost talismanic level – that is to say, “privity” was a threshold and fundamental element of any such claims.

Over the years, what Judge Cardozo characterized (in 1931) as “[t]he assault upon the citadel of privity” has not only “proceeded apace”, but in certain respects arguably may have all but emasculated the iconic principle.

Part 1:  The “Citadel of Privity”

At the outset, I will “refresh your recollection” as to our point of departure –  four decisions by Judge Benjamin Cardozo: [2]

In Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922):

Plaintiffs bought of Bech, Van Siclen & Co., a corporation, 905 bags of beans.  The beans were to be paid for in accordance with weight sheets certified by public weighers.  Bech, Van Siclen & Co., the seller, requested the defendants, who are engaged in business as public weighers, to make return of the weight and furnish the buyers with a copy.  A letter to the weighers, dated July 20, 1918, informed them that the bags were on the dock, that the beans had been sold to Glanzer Bros., the plaintiffs, who would accept delivery Tuesday, July 23, and that the defendants were to communicate with the plaintiffs, and ascertain whether it would “be in order” to be on the pier Tuesday morning to weight the beans before delivery.  The defendants did as bidden.  They certified the weight of the 905 bags to be 228,380 pounds, and were paid for the service by the seller.  Their return recites that it has been made “by order of” Bech, Van Siclen & Co., “for G. Bros.”  One copy of the return they sent to the seller, and a duplicate to the buyers.  Later, 17 bags, containing 4,136 pounds, were withdrawn from the shipment.  The others were accepted and paid for on the faith of the certificates.  The plaintiffs, upon attempting a resale, found that the actual weight was less by 11,854 pounds than the weight as certified in the return.  Upon learning this, they brought suit against the defendants in the City Court of New York for $1,261.26, the amount overpaid.  The trial judge, upon motions made by each side for the direction of a verdict, ordered judgment for the plaintiffs.  The Appellate Term reversed upon the ground that the plaintiffs had no contract with the defendants, and must seek their remedy against the seller.  The Appellate Division reversed the Appellate Term, and reinstated the verdict  The defendants are the appellants here.

Judge Cardozo held:

We think the law imposes a duty toward buyer as well as seller in the situation here disclosed.  The plaintiffs’ use of the certificates was not an indirect or collateral consequence of the action of the weighers.  If was a consequence which, to the weighers’ knowledge, was the end and aim of the transaction.  Bech, Van Siclen & Co. ordered, but Glanzer Brothers were to use.  The defendants held themselves out to the public as skilled and careful in their calling.  They knew that the beans had been sold, and that on the faith of their certificate payment would be made.  They sent a copy to the plaintiffs for the very purpose of inducing action.  All this they admit.  In such circumstances, assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed.  We do not need to state the duty in terms of contract or of privity.  Growing out of a contract, it has none the less an origin not exclusively contractual.  Given the contract and the relation, the duty is imposed by law.

In MacPherson v. Buick Motor Company, 217 N.Y. 382, 111 N.E. 1050 (1916):

The defendant is a manufacturer of automobiles.  It sold an automobile to a retail dealer.  The retail dealer resold to the plaintiff.  While the plaintiff was in the car, it suddenly collapsed.  He was thrown out and injured  One of the wheels was made of defective wood, and its spokes crumbled into fragments.  The wheel was not made by the defendant; it was bought from another manufacturer.  There is evidence, however, that its defects could have been discovered by reasonable inspection, and that inspection was omitted  There is no claim that the defendant knew of the defect and willfully concealed it.  The case in other words, is not brought within the rule of Kuelling v Lean Mfg. Co.  The charge is one, not of fraud, but of negligence.  The question to be determined is whether the defendant owed a duty of care and vigilance to any one but the immediate purchaser.

Judge Cardozo wrote:

From this survey of the decisions, there thus emerges a definition of the duty of a manufacturer which enables us to measure this defendant’s liability.  Beyond all question, the nature of an automobile gives warning of probable danger if its construction is defective.  This automobile was designed to go fifty miles an hour.  Unless its wheels were sound and strong, injury was almost certain.  It was as much a thing of danger as a defective engine for a railroad.  The defendant knew the danger.  It knew also that the car would be used by persons other than the buyer.  This was apparent from its size; there were seats for three persons.  It was apparent also from the fact that the buyer was a dealer in cars who bought to resell.  The maker of this car supplied it for the use of purchasers from the dealer just as plainly as the contractor in Devlin v. Smith, supplied the scaffold for use by the servants of the owner.  The dealer was indeed the one person of whom it might be said with some approach to certainty that by him the car would not be used.  Yet the defendant would have us say that he was the one person whom it was under a legal duty to protect.  The law does not lead us to so inconsequent a conclusion.  Precedents drawn from the days of travel by stage coach do not fit the conditions of travel to-day.  The principle that the danger must be imminent does not change, but the things subject to the principle do change.  They are whatever the needs of life in a developing civilization require them to be.

In H.R. Moch Company, Inc. v. Rensselaer Water Company, 247 N.Y. 160, 159 N.E. 896 (1922):

The defendant, a water works company under the laws of this State, made a contract with the city of Rensselaer for the supply of water during a term of years.  Water was to be furnished to the city for sewer flushing and street sprinkling; for service to schools and public buildings; and for service at fire hydrants, the latter service as the rate of $42.50 a year for each hydrant.  Water was to be furnished to private takers within the city at their homes and factories and other industries at reasonable rates, not exceeding a stated schedule.  While this contract was in force, a building caught fire  The flames, spreading to the plaintiff’s warehouse near by, destroyed it and its contents.  The defendant according to the complaint was promptly notified of the fire, “but omitted and neglected after such notice, to supply or furnish sufficient or adequate quantity of water, with adequate pressure to stay, suppress or extinguish the fire before it reached the warehouse of the plaintiff, although the pressure and supply which the defendant was equipped to supply and furnish, and had agreed by said contact to supply and furnish, was adequate and sufficient to prevent the spread of the fire to and the destruction of the plaintiff’s warehouse and its contents.”  By reason of the failure of the defendant to “fulfill the provisions of the contract between it and the city of Rensselaer,” the plaintiff is said to have suffered damage, for which judgment is demanded.  A motion, in the nature of a demurrer, to dismiss the complaint, was denied at Special Term.  The Appellate Division reversed by a divided court.

Judge Cardozo held that the action was not maintainable as one for breach of contact:

No legal duty rests upon a city to supply its inhabitants with protection against fire…That being so, a member of the public may not maintain an action under Lawrence v. Fox against one contracting with the city to furnish water at the hydrants, unless an intention appears that the promisor is to be answerable to individual members of the public as well as to the city for any loss ensuing from the failure to fulfill the promise.  No such intention is discernible here.  One the contrary, the contract is significantly divided into two branches:  one a promise to the city for the benefit of the city in its corporate capacity, in which branch is included the service at the hydrants; and the other a promise to the city for the benefit of private takers, in which branch is included the service at their homes and factories.  In a broad sense it is true that every city contract, not improvident or wasteful, is for the benefit of the public.  More than this, however, must be shown to give a right of action to a member of the public not formally a party.  The benefit, as it is sometimes said, must be one that is not merely incidental and secondary…It must be primary and immediate in such a sense and to such a degree as to bespeak the assumption of a duty to make reparation directly to the individual members of the public if the benefit is lost.  The field of obligation would be expanded beyond reasonable limits if less than this were to be demanded as a condition of liability.  A promisor undertakes to supply fuel for heating a public building.  He is not liable for breach of contract to a visitor who finds the building without fuel, and thus contracts a cold.  The list of illustrations can be indefinitely extended.  The carrier of the mails under contract with the government is not answerable to the merchant who has lost the benefit of a bargain through negligent delay.  The householder is without a remedy against manufacturers of hose and engines, though prompt performance of their contracts would have stayed the ravages of fire.  “The law does not spread its protection so far”…

So with the case at hand.  By the vast preponderance of authority, a contract between a city and a water company to furnish water at the city hydrants has in view a benefit to the public that is incidental rather than immediate, an assumption of duty to the city and not to its inhabitants.  Such is the ruling of the Supreme Court of the United States…Such has been the ruling in this State…though the question is still open in this court.  Such with few exceptions had been the ruling in other jurisdictions…The diligence of counsel has brought together decisions to that effect from twenty-six States.  Typical examples are Alabama… California… Georgia… Connecticut… Kansas… Maine… New Jersey… and Ohio.  Only a few States have held otherwise (Page, Contracts, § 2401).  An intention to assume an obligation of indefinite extension to every member of the public is seen to be the more improbable when we recall the crushing burden that the obligation would impose…The consequences invited would bear no reasonable proportion to those attached by law to defaults not greatly different.  A wrongdoer who by negligence sets fire to a building is liable in damages to the owner where the fire has its origin, but not to other owners who are injured when it spreads.  The rule in our State is settled to that effect, whether wisely or unwisely…If the plaintiff is to prevail, one who negligently omits to supply sufficient pressure to extinguish a fire started by another, assumes an obligation to pay the ensuing damage, though the whole city is laid low.  A promisor will not be deemed to have had in mind the assumption of a risk so overwhelming for any trivial reward.

Judge Cardozo also held that the action was not maintainable as one for common law tort:

It is ancient learning that one who assumes to act, even though gratuitously, may thereby become subject to the duty of acting carefully, if he acts at all…The plaintiff would bring its case within the orbit of that principle.  The hand once set to a task may not always be withdrawn with impunity though liability would fail if it had never been applied at all.  A time-honored formula often phrases the distinction as one between misfeasance and non-feasance.  Incomplete the formula is, and so at times misleading.  Given a relation involving in its existence a duty of care irrespective of a contract, a tort may result as well from acts of omission as of commission in the fulfillment of the duty thus recognized by law…What we need to know is not so much the conduct to be avoided when the relation and its attendant duty are established as existing.  What we need to know is the conduct that engenders the relation.  It is here that the formula, however incomplete, has its value and significance.  If conduct has gone forward to such a stage that inaction would commonly result, not negatively merely in withholding a benefit, but positively or actively in working an injury, there exists a relation out of which arises a duty to go forward.  So the surgeon who operates without pay, is liable though his negligence is in the omission to sterilize his instruments… the engineer, though his fault is in the failure to shut off steam…the maker of automobiles, at the suit of some one other than the buyer, though his negligence is merely in inadequate inspection…The query always is whether the putative wrongdoer has advanced to such a point as to have launched a force or instrument of harm, or has stopped where inaction is at most a refusal to become an instrument for good…

The plaintiff would have us hold that the defendant, when once it entered upon the performance of its contract with the city, was brought into such a relation with everyone who might potentially be benefited through the supply of water at the hydrants as to give to negligent performance, without reasonable notice of a refusal to continue, the quality of a tort.  There is a suggestion of this thought…, but the dictum was rejected in a later case decided by the same court…when an opportunity was at hand to turn it into law.  We are satisfied that liability would be unduly and indeed indefinitely extended by this enlargement of the zone of duty.  The dealer in coal who is to supply fuel for a shop must then answer to the customers if fuel is lacking.  The manufacturer of goods, who enters upon the performance of his contract, must answer, in that view, not only to the buyer, but to those who to his knowledge are looking to the buyer for their own sources of supply.  Every one making a promise having the quality of a contract will be under a duty to the promisee by virtue of the promise, but under another duty, apart from contract, to an indefinite number of potential beneficiaries when performance has begun.  The assumption of one relation will mean the involuntary assumption of a series of new relations, inescapably hooked together.  Again may we say in the words of the Supreme Court of the United States, “the law does not spread its protection so far”…We do not need to determine now what remedy, if any, three might be if the defendant had withheld the water or reduced the pressure with a malicious intent to do injury to the plaintiff or another.  We put aside also the problem that would arise if there had been reckless and wanton indifference to consequences measured and foreseen.  Difficulties would be present even then, but they need not now perplex us.  What we are dealing with at this time is a mere negligent omission, unaccompanied by malice or other aggravating elements.  The failure in such circumstances to furnish an adequate supply of water is at most the denial of a benefit.  It is not the commission of a wrong.

And in Ultramares Corporation v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931):

In January, 1924, the defendants, a firm of public accountants, were employed by Fred Stern & Co., Inc., to prepare and certify a balance sheet exhibiting the condition of its business as of December 31, 1923.  They had been employed at the end of each of the three years preceding to render a like service.  Fred stern & Co., Inc., which was in substance Stern himself, was engaged in the importation and sale of rubber.  To finance its operations, it required extensive credit and borrowed large sums of money from banks and other lenders.  All this was known to the defendants.  The defendants knew also that in the usual course of business the balance sheet when certified would be exhibited by the Stern company to banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion, as the basis of financial dealings.  Accordingly, when the balance sheet was made up, the defendants supplied the Stern company with thirty-two copies certified with serial numbers as counterpart originals.  Nothing was said as to the persons to whom these counterparts would be shown or the extent or number of the transactions in which they would be used  In particular there was no mention of the plaintiff, a corporation doing business chiefly as a factor, which till then had never made advances to the Stern company, though it had sold merchandise in small amounts.  The range of the transactions in which a certificate of audit might be expected to play a part was as indefinite and wide as the possibilities of the business that was mirrored in the summary.

Judge Cardozo stated that:

The defendants owed to their employer a duty imposed by law to make their certificate without fraud, and a duty growing out of contract to make it with the care and caution proper to their calling.  Fraud includes the pretense of knowledge when knowledge there is none.  To creditors and investors to whom the employer exhibited the certificate, the defendants owed a like duty to make it without fraud, since there was notice in the circumstances of its making that the employer did not intend to keep it to himself…A different question develops when we ask whether they owed a duty to these to make it without negligence.  If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.  the hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.

And, after noting that “[t]he assault upon the citadel of privity is proceeding in these days apace” and observing that “[h]ow far the inroads shall extend is now a favorite of juridical discussion”, Judge Cardozo wrote:

Liability for negligence if adjudged in this case will extend to many callings other than an auditor’s.  Lawyers who certify their opinion as to the validity of municipal or corporate bonds with knowledge that the opinion will be brought to the notice of the public, will become liable to the investors, if they have overlooked a statute or a decision, to the same extent as if the controversy were one between client and adviser.  Title companies insuring titles to a tract of land, with knowledge that at an approach auction the fact that they have insured will be stated to the bidders, will become liable to purchasers who may wish the benefit of a policy without payment of a premium.  These illustrations may seem to be extreme, but they go little, if any, farther than we are invited to go now.  Negligence, moreover, will have one standard when viewed in relation to the employer, and another and at times a stricter standard when viewed in relation to the public.  Explanations that might seem plausible, omissions that might be reasonable, if the duty is confined to the employer, conducting a business that presumably at least is not a fraud upon his creditors, might wear another aspect if an independent duty to be suspicious even of one’s principal is owing to investors.  “Every one making a promise having the quality of a contract will be under a duty to the promise by virtue of the promise, but under another duty, apart from contract, to an indefinite number of potential beneficiaries when performance has begun.  The assumption of one relation will mean the involuntary assumption of a series of new relations, inescapably hooked together”…

Our holding does not emancipate accountants from the consequences of fraud.  It does not relieve them if their audit has been so negligent as to justify a finding that they had no genuine belief in its adequacy, for this again is fraud.  It does no more than say that if less than this is proved, if there has been neither reckless misstatement nor insincere profession of an opinion, but only honest blunder, the ensuing liability for negligence is one that is bounded by the contract, and is to be enforced between the parties by whom the contract has been made.  We doubt whether the average business man receiving a certificate without paying for it and receiving it merely as one among a multitude of possible investors, would look for anything more.

                         The Cardozo “quartet” – Glanzer, MacPherson, H.R. Moch and Ultramares –  left the “citadel” of privity substantially in tact.

In Glanzer, defendants, who were engaged in business as public weighters, had every reason to know that the buyers intended to rely upon their certificates of weight.

In MacPherson, the automobile manufacturer knew that the retail dealer intended to re-sell the car to a third party.

In H.R. Moch, the record did not establish that the waterworks supplying water to the city undertook to be answerable to the public at large.

And, in Ultramares, the public accountants clearly owed a duty to both their client and their client’s counter-parties to prepare financial statements that were not fraudulent.  However, absent fraud or gross negligence, the auditor had no duty or obligation to an open-ended class of possible recipients of the statements.

The simple facts, and direct application of those facts to the law, by Judge Cardozo, formed the “privity template” upon which scores of subsequent decisions by the Court of Appeals are based, distinguished or expanded.

In Part 2 of this article, we will explore the evolution of the “privity” standards post-Cardozo.  And in Part 3 we will discuss the current state of the law in New York with respect to privity.

Victor M Metsch is a Senior Litigation/A.D.R Partner at Hartman & Craven LLP.

(www.legalvictor.net) [hartmancraven.com]