DESIGN PROFESSIONAL LIABILITY ON COMPLETED WORK
What is a Construction Defect?
According to the
Insurance and Risk Management Institute, a construction defect is generally
speaking, a deficiency in the design or construction of a building or structure
resulting from a failure to design or construct in a reasonably workmanlike
manner, and/or in accordance with a buyer's reasonable expectation. The most dangerous defects have the capacity
to fail, resulting in physical injury or damage to people or property. However, many defects present no increased
risk of injury or damage to other property but nevertheless cause harm to the
property owner in the form of loss of use, diminution in value, and extra
expenses incurred while defects are corrected.
This latter type of defect is often referred to as a passive
defect.
Many states have more
specifically defined the term "construction defect" for purposes of
applying statutes that dictate processes for remedying and litigating
construction defect claims. These
statutory definitions vary by state.
Nevada, for example, uses the term constructional defects and defines it
as follows:
“Constructional defect” means a defect in the design,
construction, manufacture, repair or landscaping of a new residence, of an
alteration of or addition to an existing residence, or of an appurtenance and
includes, without limitation, the design, construction, manufacture, repair or
landscaping of a new residence, of an alteration of or addition to an existing
residence, or of an appurtenance:
Which is done in violation of law, including, without
limitation, in violation of local codes or ordinances;
Which proximately causes physical damage to the residence,
an appurtenance or the real property to which the residence or appurtenance is
affixed;
Which is not completed in a good and workmanlike manner in
accordance with the generally accepted standard of care in the industry for
that type of design, construction, manufacture, repair or landscaping; or
Which presents an unreasonable risk of injury to a person or
property.
For architects
and other design professionals, one of the most devastating professional and
business risks is from litigation alleging negligence in performing
professional services. These alleged
negligent acts, errors, or omissions may cause damage to owners, contractors,
or other third parties, and the architect’s firm may be found liable for these
damages.
WHAT ARE THE TOP CLAIMS THAT CAN BE FILED AGAINST AN
ARCHITECT OR ENGINEER?
The Common Law Standard of Care
The standard of care for architects and engineers is set forth in numerous
court decisions as follows:
the architects and other
design professionals are under a duty
to exercise ordinary, reasonable care, technical skill, and ability and
diligence, as are ordinarily required of architects, in the course of their
plans, inspections, and supervision during construction.
The duty owed by architects and engineers was further defined in other
court decisions as follows:
An
architect’s efficiency in preparing plans and specifications is tested by the
rule of ordinary and reasonable skill usually exercised by one in that
profession. (See, Annot., 25 A.L.R.2d 1088.) The duty of an architect depends
upon the particular agreement he has entered with the person who employs him
and in the absence of a special agreement he does not imply or guarantee a
perfect plan or satisfactory result; rather, he is only liable if he fails to
exercise reasonable care and skill. 5 Am.Jur.2d, Architects, Sec. 8.
The standard of care owed by an architect/engineer may be altered
by agreement with the owner. A provision
in an owner-A/E agreement by which the A/E represents that he or she will
follow the highest professional standards in performing all professional
services under the agreement would appear to override the standard of ordinary
and reasonable skill established by the typical court decisions, at
least with regard to a claim by the other party to the design professional’s
contract.
Among the reasons architects have been found answerable in malpractice
actions is because they hold themselves out and offer services to the public as
experts in their line of endeavor. Those who employ them perceive their skills
and abilities to rise above the levels possessed by ordinary laymen. Such persons have the right to expect that
architects, as other professionals, possess a standard minimum of special
knowledge and ability, will exercise that degree of care and skill as may be
reasonable under the circumstances and, when they fail to do so, that they will
be subject to damage actions for professional negligence, as are other
professionals.
In performing services, an architect
must possess and apply the knowledge and use the skill and care that is
ordinarily used by reasonably well-qualified architects. A failure to do so is a form of negligence
that is called malpractice.
The only way in which a judge or a jury
may decide whether the defendant architects possessed and applied the
knowledge, and used the skill and care which the law required of them, is from
evidence presented in the trial by architects called as expert witnesses. The judge or jury must not attempt to
determine this question from any personal knowledge he/she may have.
THEORIES
OF LIABILITY
Below
are the top five avenues of architect liability in New York and most other
states:
1. Contract Claims. Typical contract based claims against an
architect include: failure to properly design the building, failure to meet the
applicable federal, state or local codes, failure to complete projects on time,
work performed improperly under the architect’s direction, leaking roofs and
shrinking woodwork. In the absence of
any express language specifying the standard for the architect's performance in
a breach of contract claim, the courts apply a negligence standard.
In
a negligence standard claim, it must be shown that the architect failed to
perform in accordance with the standard of professional care usually exercised
by such professionals in the community.
Caution. Avoid
express warranties, if possible. Express
warranties regarding the quality of architectural and engineering services to
be performed may appear in an owner-architect or owner-engineer agreement. These warranties usually concern compliance
with local codes, rules, and regulations, and state and federal laws. However,
more often than not, qualifying language will have been inserted limiting the
architect’s or engineer’s liability to compliance “to the best of his or her
knowledge, information, and belief.” In the absence of any contract language or
given the qualifier noted above, the architect/engineer would presumably be
held to the standard of ordinary and reasonable care discussed in above under
the common law standard of care.
2. Warranty Claims. New York does not provide a cause of action
against architects for breach of an implied warranty. Nor does the work of an architect constitute
a product for which strict liability claims could exist. The architect may, however, enter into a
contract with terms that provide for the architect's liability if the architect
fails to produce specific results as guaranteed in the contract, even if the
architect otherwise conforms to the community standard of performance.
1.
Other
states do incorporate in their statutes and in their case law the doctrine of
implied warranty in connection with the delivery of professional design
services.
Architects and engineers represent themselves to be
competent in the preparation of plans and specifications necessary to the
construction of suitable structures, including but not limited to the knowledge
of and compliance with applicable building codes, and where they fail to use
reasonable care to produce a satisfactory structure in compliance therewith,
they may be sued for breach of an implied contract term. Himmel
Corp. v. Stade, 52
Ill.App.3d 294, 367 N.E.2d 411, 414 – 415, 10 Ill.Dec. 23 (1st Dist. 1977).
To
recover for breach of express warranty, a plaintiff must prove that a warranty
existed, the defendant breached the warranty, the breach proximately caused the
losses claimed as damages, and timely notice of the breach was given to
defendant. An express warranty is not
required to be in any specific form and may be either written or oral. Whether a statement is an express warranty is
a question of fact to be determined by the judge or the jury.
Builders
often provide homebuyers with express warranties protecting various elements of
the physical construction. Additionally,
express warranties are often included to disclaim or limit implied warranties
of habitability, fitness, and workmanship. However, while several cases support the
validity of such disclaimers, the courts have refused to answer whether they
are enforceable, and it remains an open question under Colorado law. Privity of contract or standing as a
third-party beneficiary of the contract is required in order to be protected by
the warranty.
Breach
of Implied Warranty
There are various implied warranties available in most
states. Two important warranties are the
implied warranty of habitability and the implied warranty of workmanlike
construction.
Implied
Warranty of Habitability
A
buyer is "entitled to relief based on the theory of implied warranty of
habitability if he proves the house was not built in a workmanlike manner or
that it was not suitable for habitation." The warranty of habitability has been likened
to strict liability for construction defects, and proof of a defect due to
improper construction, design, or preparations is sufficient to establish
liability in the builder-vendor. Courts
have extended the implied warranty of habitability to situations in which a
home becomes uninhabitable for reasons other than the workmanship, such as soil
expansion. Id. Generally, in these cases, the breach of the implied
warranty of habitability occurs in the builder's selection of the building
location.
Implied
Warranty of Workmanlike Construction
The
warranty of workmanlike construction is another implied warranty. It does not,
however, guarantee perfect construction by the builder. For construction to be
done in a good and workmanlike manner, there is no requirement of perfection;
the test is reasonableness in terms of what the workmen of average skill and
intelligence (the conscientious worker) would ordinarily do.
Statute
of Limitations for Breach of Warranty
In general, a breach of warranty is governed by the
statute of limitations for contract actions and must be filed within a
three-year period. Depending on the
state, there are statutes that either lengthen or shorten the statute of
limitations in a breach of warranty case against a design or construction
professional to two years.
3. Design Liability. New York State law has established that an
architect's work will be judged by the standard of ordinary and reasonable skill usually exercised by a licensed
professional, unless the parties state otherwise in their contracts.
This
claim is essentially one for professional malpractice or negligence in the
field of architecture.
To succeed on a
negligence claim, the plaintiff must show (1) the existence of a duty on the
part of a defendant, (2) a breach of that duty, (3) a causal connection between
the defendant's breach and plaintiff's injury, (4) and injury. Generally, a duty is owed to anybody that
could foreseeably suffer damages as a result of a defendant's negligent
conduct.
The
more complex and unusual the architect’s design, the more latitude an architect
is allowed. This latitude however can be
quite narrow. For example, an architect
was found liable for damages to the owner for roof repairs, not because the
roof was installed incorrectly, but because the design of the roof caused owner
significantly increased maintenance and repair costs.
Design
liability may also rest with the architect for items that are actually beyond
the design of the architect. New York
courts have held that an architect will be liable to the owner for any damages
incurred as a result of the architect's approval of engineering drawings and a
defect therein causes damage to the owner.
A negligence claim stemming from a construction contract may be barred by the Economic Loss Rule. This rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract. However, when a contract neither encompasses a duty nor requires that specific work be done, any work undertaken by a professional must be done in a reasonable manner. Failure to do so could result in an award of actual damages on a negligence claim
Some
states require that an Affidavit of Merit is submitted along with the
suit. New York does not have such
statute. The Affidavit of Merit for New
Jersey is listed below:
2A:53A-27
Affidavit of lack of care in action for professional, medical malpractice or
negligence; requirements. 2.In any action for
damages for personal injuries, wrongful death or property damage resulting from
an alleged act of malpractice or negligence by a licensed person in his
profession or occupation, the plaintiff shall, within 60 days following the
date of filing of the answer to the complaint by the defendant, provide each
defendant with an affidavit of an appropriate licensed person that there exists
a reasonable probability that the care, skill or knowledge exercised or
exhibited in the treatment, practice or work that is the subject of the
complaint, fell outside acceptable professional or occupational standards or
treatment practices. The court may grant no more than one additional period,
not to exceed 60 days, to file the affidavit pursuant to this section, upon a
finding of good cause.
In the case of an
action for medical malpractice, the person executing the affidavit shall meet
the requirements of a person who provides expert testimony or executes an
affidavit as set forth in section 7 of P.L.2004, c.17 (C.2A:53A-41). In all
other cases, the person executing the affidavit shall be licensed in this or
any other state; have particular expertise in the general area or specialty
involved in the action, as evidenced by board certification or by devotion of
the person's practice substantially to the general area or specialty involved
in the action for a period of at least five years. The person shall have no
financial interest in the outcome of the case under review, but this
prohibition shall not exclude the person from being an expert witness in the
case. L.1995,c.139,s.2; amended 2004, c.17, s.8.
A negligence claim stemming from a construction contract may be barred by the Economic Loss Rule. This rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract. However, when a contract neither encompasses a duty nor requires that specific work be done, any work undertaken by a professional must be done in a reasonable manner. Failure to do so could result in an award of actual damages on a negligence claim
4. Supervision and Inspection. If an architect assumes responsibility for
performing site supervision and inspection, he/she is bound to use due care in
the performance of such duties. The
primary purpose of the inspection requirement is to make it a contract
obligation for the architect to provide the owner with assurances that the work
is being completed in conformance with plans and specifications.
However,
as elaborated in case law from 1866, “the architect must be diligent in
inspecting and supervising the work, but is not obligated to discover every
defect in a contractor's or subcontractor's work and will not be liable for
defects so long as they are not attributable to carelessness, negligence, or
inattention on the architect's part.”
Regardless
of limitations over means and methods as stated above, failure of the architect
to abide by the contract terms of inspection can result in the architect
ultimately being liable to the owner. If
it can be established that the architect breached this obligation, and this
breach was the “proximate cause” of a failure to discover a defect, the
architect may be liable to the owner for the cost incurred in correcting the
defect.
5. Certification of Progress
Payments.
Courts in New York recognize the
numerous responsibilities owners look to architects to perform. Just as courts recognize that owners may rely
on architects for inspections of work, they also recognize that owners look to
architects for certification of progress payments.
Should
an architect improperly approve a progress payment, or prematurely release
retainage, the architect may be liable to the owner for any damages suffered,
as this may decrease the contractor's incentive to complete the work.
By issuing payment
certificates, the design professional makes a potential claimant out of
everyone involved in the construction process. Those people from whom the
design professional can expect claims include prime contractors, owners,
subcontractors, sureties and construction workers who have suffered personal
injuries.
Claims by Prime
Contractors.
The most common complaint
voiced by prime contractors against design professionals is that of under
certification. When a design professional under certifies a payment request,
they are recommending that too little money be paid out by the owner to the
prime contractor. The prime contractor might claim that the design professional
was negligent and under certified the work because the design professional
failed to accurately measure the progress of the work. If the design
professional does under certify payment, the prime contractor may be harmed and
denied needed resources to complete its work, possibly resulting in a default.
In the case of defective work, the prime contractor will undoubtedly point to
the payment certificates which are issued by the design professional as evidence
that the owner and the design professional accepted the work.
Claims by
Subcontractors.
Subcontractors often
expect the design professional to act as watchdog to make sure that the prime
contractors are paying them with the proceeds received from the owner. If the
design professional fails to monitor the payments made by the prime contractor
to the subcontractor, the subcontractor may argue that the design professional
was negligent and caused a diversion of funds. By failing to monitor such
payments, the design professional could be said to have denied the
subcontractor of needed resources to complete its work, which could possibly
lead to a default.
Claims by Sureties.
Sureties may have
claims against design professionals for both over certification and under
certification. If the design professional under certifies payment and causes a
contractor default, the surety may be forced to complete the contractor's work.
Similarly, if the design professional over certifies payment, thereby reducing
the amount of retainage needed to adequately complete the job, the surety may
be forced to complete the contractor's work, upon default, with insufficient
funds.
Arguments
for Architect Liability to the Surety
Surety
actions against architects share these common arguments:
Improper
Certification of Progress Payments—the approval of
draw requests that result in overpayments to the contractor may result in loss
to the surety if the surety has to step in and is deprived of funds that could
be used to complete the project.
Contractor
“Front-Loads” Pay Requests—to cut down on the expense of
borrowing funds for a project, some contractors may submit pay requests beyond
what the work-in-place would allow. Front-loading a contract prevents the
surety from obtaining the fair value for its continuation of the contract.
Contractor
Shorting Subcontractors and Suppliers—That a surety
may have to make bond payments where an architect fails in its duty to discover
that a contractor is not paying its subs is foreseeable to some courts.
Premature
Release of Retainage—the surety may successfully sue the
architect to recover the improperly authorized release of retained funds when
it is discovered that the architect failed to adequately investigate whether
the contractor had paid for all labor and supplies.
Errors
in Contract Supervision or Inspection—Some courts
recognize the surety’s right to sue an architect where it is alleged that the
architect failed to adequately inspect the work, make an adequate number of
inspections, and improperly authorized payment for defective work.
Failure
to Report Construction Defects and Require Corrections to Defective Work—some
courts hold that the architect is bound to report defective work and see that
it is corrected even when there is no contractual obligation.
Deficient
Design Documents—if a contractor defaults and the
surety’s cost to complete the project increases because of deficient design,
the surety may assert a claim. The foreseeability of harm to the surety is less
certain because the surety is not the intended end-user of the design or the
finished project.
Claims by the Owner.
Claims brought by
owners against design professionals represent the greatest variety of potential
claims. The owner may allege that the design professional negligently over
certified payments or may allege that the design professional was negligent for
failure to adequately supervise the work. Most owners rely upon the issuance of
a payment certificate by the design professional to determine whether the
contractor is entitled to payment. If the design professional over certifies
payment, thereby recommending that payment be made for work that is not yet
done or for patently defective work, the owner may be injured. When the design
professional over certifies payment, the amount of retainage held by the owner
as security for default or defective work is reduced. This, of course, could
leave the owner with insufficient funds to complete the project.
In the case of
defective work, the payment certificates issued by the design professional are
typically used by the owner to attempt to hold the design professional
responsible for the contractor's work. The owner may allege that the design
professional was responsible for inspecting the work prior to issuing payment
certificates to make sure that the work conformed with the Contract Documents.
Owners may also view payment certificates as a guarantee by the design professional
that the work was properly done.
Claims by
Construction Workers.
Claims brought by
construction workers against design professionals, whether for negligence, may
be brought based upon the design professional's duty to issue payment
certificates. A construction worker who is injured on the job site may allege,
by inference, that the duty of the design professional to issue payment
certificates necessarily requires that the design professional visit the site
to check on the progress of the work, and that while checking on the progress
of the work, the design professional has a duty to protect people on the job
from any unsafe construction practices or defective conditions.
LEGAL ANALYSIS
The few cases which
have addressed the duty of the design professional to issue payment
certificates have analyzed that duty based upon responsibilities similar to
those set forth in the standard form AIA Agreements. Despite the use of the
typical disclaimer clauses used by the AIA, which protect the design
professional from liability for issuing payment certificates, the design
professional is often the subject of litigation.
Negligent Over
certification Cases.
There have been few
reported decisions in Illinois regarding the potential liability exposure of a
design professional for under certifying or over certifying payment requests.
Beginning with the case of City of Chicago v. Agnew, 106 N.E.2d 252, 264
Ill. 288, Illinois courts have held that contractors and sureties have standing
to assert claims of "negligent over certification" against owners and
others with whom they are in direct contractual privity. The law is much less
clear, however, whether those same contractors and sureties would have standing
to assert claims of "negligent over certification" against design professionals
with whom they do not have contractual privity.
The court in Southern
American Insurance Co. v. E.W. Corrigan Construction Co. et al. al., 1991
U.S. Dist. Lexis 10368 (N.D. Ill. 1991) held that the surety of a
subcontractor, who defaulted on the job, could not bring an action against the
architect who allegedly over certified the work of the subcontractor, thereby
depriving the surety of its primary source of security to mitigate the costs of
completing the subcontractor's work. The court reasoned that neither the
subcontractor nor the surety had a contract with the architect and therefore
the architect owed no legally cognizable duty to the subcontractor or the
surety. As support for its decision, the court cited the well-known decision of
Moorman Mfg. Co. v. Nat'l. Tank Co., 91 Ill. 2d 69, 61 Ill. Dec. 746,
435 N.E.2d 443 (1982), which prohibits the recovery of economic loss in tort
actions.
More recently, Judge
Jack Hoogasian of the Circuit Court of Lake County in Montessori School of
Lake Forest v. Aetna Casualty and Surety Company of Illinois, et. al., 92 L
1027 (1994), held that a surety could bring a claim for "negligent over
certification" against an architect with whom the surety had no
contractual privity. In that case, the Montessori School of Lake Forest, as
owner, filed a lawsuit against the General Contractor who worked on the job and
its surety for defective work. The surety filed a third-party complaint against
the architect alleging that the architect negligently over certified payments due
the General Contractor, thereby reducing the amount of funds needed to complete
the work. The architect moved to dismiss the third-party complaint on the
grounds that the surety was not a third-party beneficiary to the
Owner/Architect Agreement and that the surety could not recover economic losses
against the architect for its alleged negligent certification of payments.
The surety filed a
brief in response to the architect's motion to dismiss and argued that the
surety was a third-party beneficiary to Owner/Architect Agreement because the
surety was explicitly given the right to use any retainage to complete the job
and was to benefit by the use of this retainage. The surety also argued that
regardless of whether it was a third-party beneficiary to the Owner/Architect
Agreement, the architect owed the surety an independent duty to correctly
estimate the progress of the work and to only certify and approve conforming
work for payment. The surety stated that the architect's representations
concerning certification of payments were negligent and because the architect
was allegedly in the business of supplying information, the Moorman
doctrine did not apply and the surety could bring a claim for negligent over
certification. The court, in an unpublished opinion, held in favor of the
surety.(1)
Negligence.
The liability
exposure of design professionals for negligence, based upon issuing payment
certificates, can be greatly reduced provided that design professionals take
particular care when negotiating their contracts with owners. The potential
liability exposure of a design professional for negligence, whether brought by
owners or personal injury claimants, typically depends upon whether the design
professional has any responsibility for site inspection or review of the
contractor's work for compliance with the Contract Documents.
In Corbetta
Construction v. Lake County Bldg. Commission, 64 Ill. App.3d 313, 21 Ill. Dec. 431,
381 N.E.2d 758 (2nd Dist 1978), the Court held that the architect was negligent
and liable to the owner for the contractor's defective work because the
architect, who had agreed to supervise the construction, should have discovered
the contractor's defective work. In Busick v. Streator Township High School,
234 Ill. App. 3d 647, 175 Ill. Dec. 423, 600 N.E.2d 46 (3rd Dist. 1992), the
Court held that the architect was not liable to an injured construction worker
for job related injuries because the architect had no duty to supervise the
work, nor was he responsible for worker safety. In reaching its decision, the
Court noted that the legal duty of a design professional to third persons, such
as construction workers and other personal injury claimants, is based upon the
scope of the design professional's agreement with the owner (whether the design
professional has agreed to inspect and supervise the work).
HOW THE DESIGN
PROFESSIONAL CAN MINIMIZE LIABILITY EXPOSURE WHILE PARTICIPATING IN THE PAYMENT
PROCESS
Unquestionably, the
best way for design professionals to protect themselves from liability arising
out of the payment process is to avoid issuing payment certificates. Some
owners may be willing to relieve the design professional of the duty to issue
payment certificates and perform this task themselves, or delegate it to a
construction manager, in order to retain greater control over the payment
process. If an owner is willing to absolve the design professional from the
headaches which typically accompany issuing payment certificates, the design
professional should accept the offer. More commonly, the owner will request
that the design professional issue payment certificates. The following
suggestions are ones that the design professional should consider when an owner
has requested that the design professional issue payment certificates.
The Design
Professional Should Only Be Held To A "Negligence" Standard.
Both the B141 and
A201 Agreements seek to limit the liability exposure of the design
professional, for issuing payment certificates, by creating a negligence
standard. These standard forms of agreement carefully provide that such
certificates are based upon the "knowledge, information and belief"
of the design professional, making it clear that the design professional shall
be held only to the professional standard of care -- not a guarantee -- in the
exercise of its certification function. Paragraph 2.6.10 of the B141 Agreement
sets forth the primary duties of the design professional to issue payment
certificates:(2)
"The Architect's
certification for payment shall constitute a representation to the Owner, based
on the Architect's observations at the site as provided in Subparagraph 2.6.5
and on the data comprising the Contractor's Application for Payment, that the
Work has progressed to the point indicated and that, to the best of the Architect's
knowledge, information and belief, quality of the Work is in accordance with
the Contract Documents. The foregoing representations are subject to an
evaluation of the Work for conformance with the Contract Documents upon
Substantial Completion, to results of subsequent tests and inspections, to
minor deviations from the Contract Documents correctable prior to completion
and to specific qualifications expressed by the Architect. The issuance of a
Certificate for Payment shall further constitute a representation that the
Contractor is entitled to payment in the amount certified. However, the
issuance of a Certificate for Payment shall not be a representation that the
Architect has (1) made exhaustive or continuous on-site inspections to check
the quality or quantity of the Work, (2) reviewed construction means, methods,
techniques, sequences or procedures, (3) reviewed copies of requisitions
received from Subcontractors and material suppliers and other data requested by
the Owner to substantiate the Contractor's right to payment or 4
ascertained how or for what purpose the Contractor has used money previously
paid on account of the Contract Sum."
In addition to
limiting the design professional's certification by a "knowledge,
information and belief" standard, Paragraph 2.6.10 sets forth other
protections for the design professional. As discussed in Section III (C) of
this Article, Paragraph 2.6.10 attempts to absolve the design professional from
having any control over the work and from making continuous or comprehensive
on-site inspections. This language is important to the design professional
because it specifies that any on-site visits made by the design professional
are for checking the progress of the work, rather than an
"inspection" of the work for compliance with the contract documents,
which can give rise to a negligence or Structural Work Act claim.
Paragraph 2.6.10 also
gives the design professional the right to retract his previous representations
that the Work is in accordance with the Contract Documents, "subject to an
evaluation of the Work for conformance with the Contract Documents upon
Substantial Completion." This language, once again, illustrates the narrow
purpose of the payment certificates and makes it very difficult for an owner or
surety to argue that a design professional should be held liable for contractor
deviations at the progress payment stage.
The significance of
including exculpatory language, like that used in the AIA standard form
agreements, is underscored by the fact that some owners believe that by issuing
payment certificates, the design professional is giving his
"guarantee" or "certifying" that the contractor has
complied with the plans and specifications. Of course, if the design
professional actually "certifies" that something is perfect, he is
assuming a level of liability well beyond the standard of care required by the
law. This is significant for insurance reasons, as well as potential liability
reasons, because certificates for payment can be construed to be warranties or
guarantees, especially when the certificate contains representations of fact
upon which the Owner will rely, and the design professional's insurance does
not typically cover claims for breach of warranty:
"This insurance
does not apply to liability assumed by you under any contract; but that this
exclusion does not apply if you would have been liable, in the absence of such
contract, due to your own error, omission or negligent act."
When negotiating an
Owner/Architect Agreement, the design professional should explain to the owner
that the provisions in the B141 and A201 Agreements, which provide that payment
certificates are issued based upon the design professional's "knowledge,
information and belief," benefit both the design professional and the
owner by triggering the design professional's insurance coverage. If the owner
wants the design professional to be exposed to liability which is not covered
by insurance, the design professional should request to be paid for those
services and more money should be allocated for comprehensive site inspections
by the design professional.
Demand a Schedule of
Values.
Prior to issuing any
payment certificates, the design professional should insist on receiving a
detailed Schedule of Values from the contractor. The A201 General Conditions
(Paragraph 9.2.1) requires that the contractor provide the architect with a
detailed Schedule of Values, but does not specifically state whether the design
professional's payment certificate is a representation that a certain
percentage of the work is completed, or that the amount which the contractor
seeks coincides with the actual amount of labor and materials put in place.
Typically, the design
professional compares the percentage of work completed against the schedule of
values, rather than attempting to analyze the actual value of the work.
Nonetheless, some owners are now requiring the design professional to certify
that the original schedule of values submitted by the contractor accurately
allocates the contract sum among the various trades in order to avoid
contractor front loading. An example of this type of responsibility is as
follows:
Design Professional shall review and approve the Contractor's schedule of values and certify that the schedule accurately represents the amounts to which the Contractor should be entitled for the Work described in each line item and that the Contractor's schedule of values is of sufficient detail to allow the Design Professional to certify that the Contractor's Applications of Payment are accurate representations of the value of the Work put in place.
If possible, the design professional should avoid taking on this type of responsibility. The design professional's duty to issue payment certificates should only be an indication that the work "has progressed to the point indicated" (see A201, 9.4.2), and not a summary of how the money was spent. It should be left up to the owner/lender to make sure that the money paid to the contractor is used properly.
Design Professional shall review and approve the Contractor's schedule of values and certify that the schedule accurately represents the amounts to which the Contractor should be entitled for the Work described in each line item and that the Contractor's schedule of values is of sufficient detail to allow the Design Professional to certify that the Contractor's Applications of Payment are accurate representations of the value of the Work put in place.
If possible, the design professional should avoid taking on this type of responsibility. The design professional's duty to issue payment certificates should only be an indication that the work "has progressed to the point indicated" (see A201, 9.4.2), and not a summary of how the money was spent. It should be left up to the owner/lender to make sure that the money paid to the contractor is used properly.
Protect Yourself From
Negative Inferences.
Most lawsuits against
design professionals, based upon their role in the payment process, are founded
upon negative inferences typically drawn from payment certificates. It is
common for contractors and owners to equate the duty of the design professional
to issue payment certificates with that of inspecting the work for compliance
with the Contract Documents. To avoid this negative inference, design
professionals should include language in all of their contracts to make clear
that they are not in charge of the work, nor required to make exhaustive or
continuous on-site inspections. Both the B141 and A201 Contracts contain
appropriate language like this which should be incorporated into any contract
entered into by the design professional. Specifically, Paragraph 2.6.10 of the
B141 and Paragraphs 4.2.2 and 4.2.3 of the A201 absolve the design professional
from having any control over the work and from making continuous or
comprehensive on-site inspections.
CONCLUSION
The duty of the
design professional to issue payment certificates exposes the design
professional to a variety of potential claims. The design professional may face
claims for negligence and for alleged Structural Work Act violations, as well
as claims for negligent over certification and under certification of payments.
In order to minimize the design professional's exposure to such claims, the
design professional should, whenever possible, attempt to utilize standard form
AIA documents or incorporate the concepts discussed in this Article into any
contract entered into by the design professional.
Endnotes
1.
Courts
in other jurisdictions have also held that design professionals may be liable
for over certifying payment requests. For example, in State ex rel. National Surety Corp. v. Malavaney, 221 Miss. 190,
72 So. 2d 424 (1954), the court held that an architect was liable to a surety
for negligent certification of payments. See also U.R.S. Company Inc. v. Gulport-Biloxi
Regional Airport Authority, 544 So. 2d. 824 (Miss. 1989); Aetna Insurance Company v. Hellmuth, Obata
& Kassabaum Inc., 392 F.2d 472 (8th Cir. 1968).
2.
Paragraph
2.6.9 of the B141 and Paragraph 4.2.5 of the A201 Agreements similarly provide
that "[b]ased upon the Architect's observations and evaluations of the
Contractor's Application for Payment, the Architect shall review and certify
the amounts due the Contractor."
Design
Professional Liability on Completed Work
Perpetual Liability for Injuries to Third Parties?
For New York Architects, Landscape Architects,
Engineers, and Land Surveyors, exposure to liability on their completed
projects may extend long beyond the completion of the project itself. Exactly
how long design professionals can be 'on the hook' for claims has been a bit of
a moving target in New York, with changes and proposed additional changes to
this time frame.
How long a design professional can be liable for
claims, including claims from third-parties, has been governed by the Statute
of Limitations. Generally this has provided three years for a design
professional malpractice action, and six years for a breach of contract claim.
The New York State Court of Appeals in 1995
clarified this in holding that claims against design professionals is time
barred three years after completion of construction. Newburgh v. Hugh Stubbins
& Associates, 85 NY2d 535.
Subsequently the New York State Legislature passed CPLR
214-d, which allows a third party (any injured person who was not the client of
the design professional) to bring forth claims against the design professional
within three years of their loss or injury, even if such loss or injury occurs
40 or more years from completion. In fact, this regulation only looked at the
length of time from the date of injury and made no reference to when the
construction actually was completed.
"...
a design professional ... is governed by a three year statute of limitations
and the cause of action does not accrue until the injury takes place - even if
the plaintiff is injured 20, 30, 50, or 100 years after the design professional
has completed work on the building or structure."
The effect of this is to cause New York design
professionals to be potentially liable for any injuries suffered to third
persons on the completed work, even where the architect is not responsible for
long term maintenance. Further, often times the design professional may
not have been additionally retained to supervise the actual
construction itself, or even where the architect is not responsible for long
term maintenance, and in defending such a claim so many years beyond completion
witness memories may fade, or witnesses may no longer be available and can have
the effect of forcing New York design professionals to maintain their
malpractice insurance coverage indefinitely.
In seeking to
address these unintended consequences, in 2011 the New York Senate introduced S4782-2011
seeking to amend the effects of section 214(d) by among other things establish
a new ten year statute of repose for professional injury or wrongful death
actions brought against professional engineers, architects, landscape
architects, land surveyors or construction contractors. This would eliminate
the current legal landscape where the design professional has no effective time
limit on how long it could remain liable to third parties beyond project
completion. The legislation recognizes that
the design professional has no control over the structure long after
construction is complete.
S4782-2011 is still
a pending bill in senate subcommittee, and has not yet been enacted
into law. Design professionals in New York are encouraged to maintain their
records forever, as you could need them in defending against such claims.
Architects and Design Professionals Can Be Held Liable
For Defects Based On Third Party Claims
A
homeowners association, on behalf of its members, sued a condominium developer
and various other parties for construction design defects that allegedly made
their homes unsafe and uninhabitable for a significant portion of the year. Two
defendants were architectural firms that allegedly designed the homes in a
negligent manner but did not make final decisions regarding how the homes would
be built. Applying the Supreme Court’s decision in Bily v. Arthur Young & Company (1992) 3
Cal.4th 390, and relying on the Weseloh
Family LTD. Partnership v. K. L. Weseloh Construction Company, Inc.
(2004) 125 Cal.App.4th 152, the trial court sustained a demurrer in
favor of the defendant architectural firms, reasoning that an architect who
makes recommendations but not final decisions on construction has no duty of
care to future homeowners with whom he has no contractual relationship. The
Court of Appeal reversed, concluding that the architect owes a duty to
homeowners in these circumstances, both under common law and under the Right to
Repair Act (Civil Code Section 895 et
seq.) The Supreme Court agreed and held that the homeowner may
state a cause of action against a design professional for negligence.
Skidmore,
Owings & Merrill LLP (SOM) and HKS, Inc., (HKS) were architectural firms
(“defendants”) who provided architectural and engineering services to the
Beacon Residential Condominiums (“the Project”), a residential community in San
Francisco.
The
Beacon Residential Community Association (BRCA) sued SOM and HKS. BRCA alleged
numerous construction defects as a result of negligent architectural and
engineering design and observation. BRCA also complained of “solar heat gain,”
excessively high temperatures resulting from the defendants’ approval of
inexpensive and nonfunctional windows, and a design lacking adequate
ventilation within the residential units. The defendants were named in three
causes of action: Civil Code Title 7 – Violation of Statutory Building
Standards for Original Construction; Negligence Per Se in Violation of Statute;
and Negligence of Design Professionals and Contractors.
The
defendants demurred to the complaint, arguing that under Bily v. Arthur
Young & Co.(1992) 3 Cal.4th 370 and Weseloh Family Ltd. Partnership
v. K.L. Wessell Construction Co., Inc. (2004) 125 Cal.App.4th 152, they
owed no duty of care to BRCA or its members. The trial court sustained the
demurrers and dismissed the case. The trial court reasoned that liability could
not be premised on negligent design because without privity of contract, BRCA
was required to show that the design professionals had “control” in the
construction process and assumed a role beyond that of providing design
recommendations to the owner. The court believed that BRCA failed to meet its
burden.
The
Court of Appeal reversed, holding that BRCA could state a claim based on design
liability that was recognized both under common law and statutory law. The
Court distinguished Weseloh, in which judgment was affirmed in favor of
design engineers who were sued after a retaining wall failed. There, the
outcome was premised on the evidentiary record before the court and was of
limited guidance. The Court said that no California court has yet extended Weseloh
to categorically eliminate negligence liability of design professionals to
foreseeable purchasers of residential construction. The Court also observed
that in Cooper v. Jevne (1976) 56 Cal.App.3d 860, an architect’s duty of
reasonable care is logically owed to those who purchase an allegedly
defectively designed and built condominium.
The
Supreme Court granted review. It began its discussion by pointing out that
although liability for the supply of goods and services historically requires
privity of contract between the supplier and the injured party, the
significance of privity has been greatly eroded over the past century. The
declining significance of privity had found its way into construction law. The
Court noted that it had previously found that manufacturers of defective
ladders, elevators, and tires could be liable to persons who were not in
contractual privity with them but foreseeably injured by their products. Courts
usually apply the same rule to someone responsible for part of a house; e.g., a
defective railing.
In
addition, the Court said that these third party liability principles had always
been applied to architects where the architect plans and supervises the
construction work and provides protection to any person who is foreseeably
harmed. Generally, liability for deficient goods and services hinges on whether
there is a relationship between the buyer and seller. However, the Supreme
Court recognized that in certain circumstances a contractual relationship is
not necessarily required. In this ruling, it relied on 50-year old precedents
in Biankanja v. Irving(1958) 49 Cal.2nd 647. In Biankanja, the
California Supreme Court outlined several factors which determine whether a
duty of care is owed to non-contracted third parties. Biankanja analyzed
many factors, including whether the declared harm was foreseeable from a
defendant’s conduct and how close of a connection there was between the conduct
and the injuries.
The
Court recognized that even though the design firms did not actually build the
project, they conducted weekly inspections, monitored contract compliance,
monitored design elements when issues arose, and advised the owners of any
non-conforming work. In applying theBiankanja factors to these
circumstances, the Supreme Court determined the homeowners were intended
beneficiaries of the design work, and the design in the project bore a close
connection to the alleged injuries. As a result, the Supreme Court held that
the allegations in the complaint were sufficient, and if proven, established
that the defendants owed a duty of care to the homeowners association.
This
case will affect how design professionals allocate risk of future residential
projects, perhaps requiring their principals to insure them. However, design
professionals are now larger targets in construction defect lawsuits,
especially where there is a large design issue and a developer withdraws
insurance coverage.
Undoubtedly,
plaintiffs will attempt to expand architect/design liability in situations
involving general contractors, subcontractors, and materials suppliers. This
would have the greatest affect in situations involving a single family home
where the architect is in privity of contract with the owner.
We
expect that architects will now require that they be listed on the developer’s
insurance policy(ies) and be contractually indemnified by the developers. As
construction cases are getting increasingly more difficult to settle due to the
lack of or exhaustion of insurance, expanding the liability of design professionals
will give an added source of funding to settle cases. We expect a great deal of
activity in this matter both in terms of litigation and in terms of insurance
products being available to developers, contractors, design professionals and
owners.
The
Spearin Doctrine protections can be lost by contractors if they assume design
responsibility
A recent decision by a federal judge in the
Eastern District of Kentucky should remind contractors that the Spearin
Doctrine protections can be lost by contractors trying to be helpful. In
American Towers, LLC v. BPI, Inc., (U.S. D.C. E.D. Ky. Aug. 4, 2014), American Towers, an operator of wireless
communications towers, accepted a bid from BPI to construct a new tower. After
breaking ground on the project, BPI discovered a problem with American Towers’
plans for the access road to the tower. BPI proposed a solution that American
Towers approved. Less than one (1) year later, the access road collapsed.
American Towers sued BPI for breach of contract, and BPI moved
for summary judgment. BPI argued that its contract with American Towers
required American Towers to issue written instructions regarding how to proceed
after BPI discovered the flaw in American Towers’ original plans. BPI argued in
the classic tradition of Spearin that American Towers was obliged to consult an
engineer before telling BPI what to do and that American Towers must therefore
bear the consequences of its own design failure.
The court recognized that BPI’s contract provided that when BPI
encountered a problem, it need only inform American Towers and wait for
instructions. However, BPI “apparently did more than the contract required” and
“proposed a new plan to American Towers.” Because BPI’s contract required it to
complete its work with the “highest degree of skill and care,” and an expert
witness for American Towers opined that such a degree of skill required BPI to
consult an engineer, then BPI could be liable for the design flaw. The court
therefore denied BPI’s motion for summary judgment and has sent the case to a
jury trial to determine BPI’s level of responsibility for the road collapse.
The American Towers case provides a clear cautionary tale for
contractors. Where a contractor has agreed to construct according to an owner’s
design plans, and a contractor finds a design flaw in those plans, in order to
protect itself, the contractor should hold owner to its required contractual
duty to provide the plans. Where a contractor has the expertise to provide
suggestions to the plans which could keep the project on track and save the
owner significant costs in delays, the contractor should still require the
owner to seek the necessary review and approval by qualified experts. In this
case, had BPI demanded that American Towers consult with an engineer to certify
the sufficiency of the plans, BPI probably would not have been liable to
American Towers.
In
every construction project the particular facts of the problem should be reviewed
in conjunction with each party’s contractual requirements to determine the best
course of action. Usually, such problems can be resolved or mitigated with a
quick phone call and a short review of each party’s obligations. Taking such
action during the project can significantly reduce the likelihood of litigation
costs and potential liability as exemplified by the American Towers case.
A
CONSULTING ENGINEER / ARCHITECT’S PROTECTION FROM A NEGLIGENCE CLAIM BY A
CONTRACTOR
The case of Recreational
Design & Construction, Inc. v. Wiss, Janney Elstner & Associates, Inc.,
2011 WL 5117163 (S.D.Fla. 2011), is a recent case discussing whether an
independent engineering firm hired as a consultant by an owner can be liable to the general contractor for
professional negligence
under Florida law. In this case, the City of North Miami Beach (“City”)
hired a contractor to perform all design and construction services for a water
slide project (“Contractor”). The City also hired a separate engineering
firm to evaluate and perform inspections of the contractor’s work
(“Engineer”). The engineering firm hired another engineering firm as a
subconsultant to perform the engineering inspections (“Subconsultant”).
The Subconsultant
issued a report to the Engineer that was provided to the City explaining that
the water slide the Contractor designed and started to construct was
structurally unsafe. The report recommended repairs to be implemented on
the slide. The City rejected the Contractor’s work based on the Subconsultant’s
recommendation and required the Contractor to implement the repairs before
completing the work.
The Contractor,
instead of suing the City, sued the Engineer and Subconsultant for professional
negligence (also known as professional malpractice) to recover its costs in
reconstructing the slide and implementing the repairs recommended to the
City. Both the Engineer and Subconsultant moved to dismiss the
Contractor’s complaint arguing that they did not owe a duty of care to the Contractor;
therefore, they could not be liable in negligence to the Contractor under the
law. The Southern District of Florida agreed with the Engineer and
Subconsultant and dismissed the Contractor’s complaint with prejudice.
In order to be liable for professional negligence, a plaintiff must prove
the following elements against the defendant-professional: 1) the defendant
owed a duty of care to the plaintiff; 2) the defendant breached its duty of
care; and 3) the breach of the duty of care proximately caused damages to the
plaintiff.
See Recreational Design & Construction, 2011 WL at *2 citing
Moransis v. Heathman, 744 So.2d 973, 975 n.3 (Fla. 1999). The element of duty, however, is a question
of law in Florida and must be determined by the court before a negligence case
proceeds to the jury or trier of fact. See Wallace v. Dean,
3 So.3d 1035, 1046 (Fla. 2009).
The Contractor relied
on the Florida Supreme Court’s ruling in A.R. Moyer, Inc. v. Graham, 285
So.2d 397 (Fla. 1973), in arguing that the Engineer and Subconsultant owed the
Contractor a duty to perform its work and issue recommendations to the City
with reasonable care and due diligence. In A.R. Moyer, the Florida
Supreme Court held that a general contractor can maintain a cause of action
against a supervising architect for the architect’s negligent performance of a
contractual duty (even though the contractor has no contractual privity with
the architect). Particularly, the Florida Supreme Court found that the
following circumstances would present a professional negligence cause of action
by the contractor against a supervising architect or engineer:
“(a) supervising architect or engineer is
negligent in preparation of plans and specifications; (b) the supervising
architect or engineer negligently causes delays in preparation of corrected
plans and specifications; (c) the supervising architect or engineer negligently
prepared and negligently supervised corrected plans and specifications; (d) the
supervising architect or engineer negligently failed to award an architect’s
certificate upon completion of the project; (e) the architect or engineer was
negligent in exercise of supervision and control of contractor.” A.R.
Moyer, 285 So.2d at 402.
Of importance, the
“professional defendant [in A.R. Moyer] was an architect whose
responsibilities on the relevant project were to prepare the designs and plans
for the project, approve the overall structural components or framework for the
project, and supervise the general contractor’s execution of those plans, including
having the authority to halt the contractor’s work.” Recreational
Design & Construction, 2011 WL at *4. In other words, A.R. Moyer dealt with more of a traditional
architect or engineer that, among other things, served as the architect /
engineer-of-record for the project and had detailed contract administration
services that enabled them to make decisions that could effect the contractor,
which is why the Court described the professional as a supervisory architect or
engineer.
But, in Recreational
Design & Construction, the Engineer and Subconsultant, were really
nothing more than a consultant providing expert-related services issuing
recommendations, advice, or suggestions to the City in which the City could
accept or reject. The Engineer and Subconsultant did not serve as the
engineer-of-record. They did not design the plans for the City’s project.
They did not issue specifications for the project. They were not
performing supervision to ensure that the Contractor’s construction complied with
their design (since they were not the designer). And, they did not have
authority to halt the construction of the project or issue corrective details
directly to the Contractor. Instead, as previously mentioned, their
services were truly within the realm of consulting services in which it was up
to the City to determine how it wanted to utilize any suggestions, advice, or
recommendations. For these reasons, and because the role of the Engineer
and Subconsultant in this case was substantially different than the role of the
architect in A.R. Moyer, the Southern District held they did not
owe a duty of care to the Contractor. See also McElvy, Jennewein,
Stefany, Howard, Inc. v. Arlington, Elec., Inc., 582 So.2d 47 (Fla. 2d DCA
1991) (finding that architect did not owe duty to subcontractor because
architect was required to issue advice to owner regarding interpretation of
architect’s design, but it was the owner responsible for making the ultimate
decision based on the advice of the architect).
An architect or
engineer that is serving as the architect / engineer-of-record for a
construction project may want to implement certain language in their contract
with the owner that while it will render certain advise, recommendations, or
suggestions to the owner regarding its design and specifications and
interpretations thereof, it is the owner that is required to render the
ultimate decision regarding the advice, suggestions, and recommendations.
This way, if the contractor does pursue a professional negligence claim against
them, they can argue they were not a supervisory architect or engineer and
should not be deemed to owe a duty to the contractor because it was the owner
that made the ultimate decision that affected the contractor.
Also, owners on construction
projects sometimes hire other consultants or experts to assist in the
construction of their project. For instance, sometimes owners hire a
building envelope consultant or a glazing consultant, etc. These
consultants sometimes worry about the contractor asserting a negligence claim
against them based on their advice, suggestions, and recommendations made to
the owner. These consultants, however, should be able to rely on the
arguments in Recreational Design & Construction to support they do
not owe a duty to the contractor. These consultants can also employ the
same contractual language suggestions above so that their contract specifically
expresses that it is the owner that is required to act on the advice,
suggestions, and recommendations of the consultant so that it remains
understood that the owner, and not the consultant, has ultimate control over
the contractor’s work.
Texas Supreme Court Shields Design Professionals From Tort Liability to General Contractors based on Economic Loss Theory. May Still Be Liable based on Other Legal Theories.
Occasionally
contractors have attempted to assert claims against design professionals in an
attempt to recover increased costs incurred on a construction project. These
claims have usually been couched as negligence or negligent misrepresentation
causes of action because the contractors typically have no contractual
relationship with the design professionals. Until a few weeks ago, it was
unsettled whether such claims were legally viable in Texas, but the Texas
Supreme Court answered the question recently in the negative: contractors
cannot recover economic losses from design professionals based on alleged
negligence or negligence misrepresentation. See
LAN/STV v. Martin K. Eby
Construction Co., No. 11-0810, 2014 WL 2789097 (Tex. June 20,
2014).
In LAN/STV,
the contractor, Martin K. Eby Construction Co., Inc. (“Eby”), constructed a
light rail transit line for DART and then sued the architect, LAN/STV, for
increased construction costs and delay damages allegedly caused by errors in
the architect’s plans and specifications that DART used to solicit construction
bids. At trial, the jury found that LAN/STV was liable for a portion of Eby’s
damages based on negligent misrepresentation. Both parties appealed, and the
Dallas Court of Appeals affirmed the judgment. On appeal to the Texas Supreme
Court, the dispositive issue was whether Eby’s recovery from LAN/STV for
negligent misrepresentation was barred by the “economic loss rule.”
What
is the economic loss rule?
Because
the rule has been applied to a diverse range of situations, the economic loss
rule actually encompasses several different formulations based on the
particular situation. The formulation relevant here is that a party who lacks
privity with another will be precluded from recovering purely economic losses
from that party based on a negligent performance of services. The rule is not
absolute. Despite the rule, Texas courts have nevertheless permitted, at least
in some circumstances, a contractual stranger to recover economic losses from
another based on a negligent failure to provide services. See, e.g., Grant Thornton LLP v.
Prospect High Income Fund, Ltd., 314 S.W.3d 913, 920 (Tex. 2010)
(holding that an accountant may be liable to a strictly limited group of
investors for negligent misrepresentations in a corporate audit report, despite
lacking contractual privity with the accountant). Thus, whether the rule
applies in a particular context depends on whether the underlying rationales
supporting the rule justify its application.
Two
principal rationales have been proffered to support the rule. First, because
the physical consequences of negligence are self-limiting but indirect economic
losses are not, allowing recovery of economic losses could result in liability
“in an indeterminate amount for an indeterminate time to an indeterminate
class.” Id. at
*3 (internal quotations omitted). In other words, precluding recovery of pure
economic losses is necessary to shield the tortfeasor from virtually unlimited
liability—and therefore liability that could greatly exceed the culpability of
the conduct. Second, risks of economic losses tend to be especially well suited
to allocation by contract. Id.
at *4 (quoting Restatement
(Third) of Torts: Liability for Economic Harm § 1 cmt. c (Tentative
Draft No. 1, 2012)). Therefore, application of the economic loss rule should be
applied where the parties are adequately able to determine by contract how
economic loss should be allocated.
The
question then in LAN/STV
was whether these rationales justified application of the economic loss rule in
the design-bid-build context.
The
rationales for the economic loss rule support insulating design professionals
from tort liability to general contractors
The
Texas Supreme Court concluded that the underlying rationales supported
application of the economic loss rule to preclude contractors from recovering
economic loss damages against design professionals based on negligence or
negligent misrepresentation. According to the court, if any party in the
construction chain could recover economic loss damages from any other party in
the chain due to negligence, “the risk of liability to everyone on the project
would be magnified and indeterminate.” Id.
at *7. Application of the rule would therefore serve to avoid indeterminate and
excessive liability.
The
ability to allocate the risk of any economic losses by contract also supported
application of the rule in this context—and was apparently the rationale that
carried the day. In the court’s view, the contractor was freely able to
protect itself from its economic losses through its contract with the owner,
and in fact it did, which it acknowledged was customary in the industry. See LAN/STV at
*8. The court opted for the clarity achieved by restricting the available
remedies to those provided by contract because such “clarity allows parties to
do business on a surer footing.” Id.
(internal quotations omitted).
What
does this ruling mean?
The
bottom line is that now, in a typical design-bid-build scenario, the owner
alone holds the right to seek economic damages such as additional costs of
completion from the design professional. While this is welcome news for the
Texas design professional community, it is not the end of the story.
As
you may know, Texas law has long provided that owners do not implicitly
guarantee the sufficiency of the project architect’s specifications used to
solicit construction bids from prospective contractors. See Lonergan v. San Antonio Trust Co.,
101 Tex. 63, 74-75 (1907). This means that in most cases if a contractor’s
price to complete increases because of a design defect, the contractor
typically cannot look to the owner to cover that increased cost unless it follows
a contract provision for additive change orders. LAN/STV now adds to this a bar precluding
the contractor from recovering the increased cost of construction due to
inadequate or defective design from the architect. With this additional avenue
of recovery squashed, sophisticated contractors may seek to recover increased
construction costs from the owner through larger price adjustment requests in
the change order process. As such, due to more aggressive change order demands
from contractors, design professionals will likely in turn see an increase in
demands from owners seeking to recover these increased costs from the design
professionals.
Further,
nothing in LAN/STV
expressly precludes contractors from attempting to recover property and
personal injury damages from architects—e.g.,
on-site materials destroyed or lost by an alleged design defect. Architects
should therefore continue to account for potential liability to contractors for
these types of damages.
Finally,
despite LAN/STV’s
holding, contractors may argue that design professionals can still be liable
under a fraudulent or negligent misrepresentation theory based on certain
direct representations from the architect to the contractor—i.e., a representation
the architect made to the contractor on the construction site rather than
simply the representations embodied in the architectural plans. In other words,
LAN/STV leaves
plenty of room for contractors to argue that its holding is limited to tort
claims arising out of plans and specifications. Therefore, at least until a
consensus emerges regarding the scope of the LAN/STV
holding, the best practice for design professionals is to limit their direct
communications with the contractors and sub-contractors to follow the
procedures negotiated in the governing contracts. In other words, design
professionals should still adhere to long-standing simple advice—don’t say
something that you may regret later.
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