The problem of tort liability continues to be one of the major challenges facing businesses and governments today. This concern is driven by the seemingly open-ended potential liability that can extend to people and businesses with whom we do not even have direct relationships. Often, the scope of these potentially devastating liabilities seems limited only by the creativity of lawyers. They drive the cost of public contracts — as they do with all contracts — higher than necessary due to the uncertainty surrounding the amount of contingent liability. In effect, the price of constructing public works increases due more to the fear of the risk than to the actual loss itself.
The trend toward expansion of tort liability has reached into business relationships between owners, contractors, and design professionals in a variety of ways. One serious implication of this phenomenon has been the steady erosion of the barriers to direct liability of design professionals to contractors, and others who are not their clients, for economic losses such as delay damages and extra work. Courts have even applied this thinking to the relationships in public projects. Design-build contracting offers design professionals a vehicle for managing those risks by recognizing that the liability exists and by expressly limiting and allocating the risks in a direct legal relationship with the contractor, that is defined by a contract. This arrangement also benefits the owner and contractor by limiting the uncertainty associated with tort liability and allowing the risks to be accurately allocated and, therefore, priced. Owners can also benefit by stepping out of any dispute between the contractor and designer. The design-build method of project delivery will create a much needed sense of camaraderie among the players by setting forth expectations of responsibilities and liabilities in writing at the outset of the project. In most cases, particularly in publicly-bid projects, this should tend to reduce the cost of construction and create more price and time certainty.
These improvements in project delivery should be enough to encourage the use of design-build project delivery wherever possible. The trend toward increasing tort liability creates another incentive. The reality is that courts in a growing number of states have found various ways to hold design professionals liable to contractors for such economic losses in the absence of contracts. The result of this growing body of law is that design professionals are increasingly exposed to tort liability, which often allows damages greater than amounts that would have been available under contractual remedies.
The following discussion will provide an overview of the various rationales employed by courts to hold architects and engineers liable to contractors for damages. Specific cases involving public projects will be examined to illustrate how the parties could have benefited from a design-build relationship.
The Traditional Model of Looking to the Owner for Relief
Traditional design-bid-build contracting creates an environment in which the owner maintains independent contractual relationships with its designer and contractor. Because there is no contract between the design professional and the contractor, the contractor is unable to pursue any contractual remedies against the designer, even if the designer’s actions or inactions caused him harm. This leaves contractors with only one type of avenue for redress against the design professional: a cause of action in tort.
Historically, the problem for contractors in pursuing tort claims against architects and engineers was that they needed to overcome established legal doctrines which would prevent economic recovery against design professionals. Specifically, the “economic loss doctrine,” which bars recovery for purely economic damages in tort, has been employed by courts to prevent contractors from recovering monetary damages from design professionals. The rationale behind maintaining this barrier is that, while the contractor may not have a contractual relationship with the designer, he could have negotiated terms for recovery due to the negligence of the designer in his contract with the owner. See Rissler & McMurray Co. v. Sheridan Area Water Supply, 929 P.2d 1228 (Wyo. 1996). Parties were allowed to pursue economic damages only from parties with whom they were in privity of contract.
Consequently, this line of cases posed a real problem for owners by putting them in the middle of the dispute between the design professional and the contractor. When contractors experienced delays or cost overruns due to defective designs or inadequate supervision, they were left with no recourse but to assert claims against the owners with whom they had a contract. This not only put the owners between the warring contactors and designers, but also placed liability for losses that fell in the gap between the owner’s warranty of complete plans and specification to the contractor and the professional negligence standard between the owner and the designer.
Eventually, the rigid application of the economic loss doctrine and privity of contract rules led to contractors pursuing an inefficient, and sometimes ineffective, avenue of relief and owners having to pay for the negligence of their designer, for which they were not really responsible. Meanwhile, design professionals remained largely insulated from claims by contractors who relied on their designs and plans and specifications. Courts found ways to avoid these frustrating results and incorporate the realities of contracting into their decisions.
Courts Allowing Actions Directly Against Design Professionals
Liability Based on Foreseeability
The majority of courts have now turned their backs on a strict adherence to the economic loss doctrine and rules of privity in favor of a more flexible approach towards tort claims by contractors. A frequent approach taken by courts is one in which a contractor is allowed to pursue a tort claim for economic damages, includ-ing delays, because the designer should have been able to foresee that his actions could result in economic harm to the contractor.
In the case of Stone/Congress, Inc. v. Town of Andover, 6 Mass. L. Rep. 330 (Mass. Super. 1996), the general contractor on a high school construction/renovation project filed suit against the Town of Andover, MA, as the owner, as well against the owner’s architect. The contractor claimed that the architect’s plans were defective and therefore the architect should be held liable for negligent misrepresentation. The Massachusetts state court refused to apply the economic loss doctrine as bar to the contractor’s claim against the architect when “the architect knew that a contractor would be relying on its representations, as contained in the plans, to calculate its bid.” The court noted that “[a]lthough [the architect] did not know the specific identity of the party to be so affected, in the usual chronology of drafting, bidding, and contracting, an architect does reasonably foresee that a general contractor will base its bid upon the architect’s plans and upon any deficiencies in those plans.”
In reaching this decision, the Court made it clear that the architect would be held liable under a negligence standard, regardless of whether it maintained a relationship with the contractor, or even knew who the contractor was. This foreseeablity standard has been applied to allow not only claims of defective designs to proceed against design professionals, but a whole host of claims including negligent supervision and control of the contractor and failure to award an architect’s certificate upon completion of the project. See A.R. Moyer, Inc. v. Graham, 285 So.2d 397, 402 (Fla. 1973). At least one other court has characterized this foreseeability standard by referring to the “scope of risk” accepted by the designer by his involvement in the project. See E.C. Ernst, Inc. v. Manhattan Construction Co., 551 F.2d 1026, 1032 (5th Cir. 1977). Within this “scope of risk” is the contractor who relies on the work done by the design professional.
The court’s approach in this case is a boon to public owners. While the opinion does not tell us the outcome of the case, it creates risk for the designer and, therefore, leads to the likelihood that designer contributed to the ultimate settlement. Contrary to traditional thought, this is not bad for the designer. If the designer were to blame, he or she would have paid eventually after a protracted series of lawsuits. Thus, in effect, the court sped up the process by which the loss would be absorbed by the responsible party.
If the parties had used design-build project delivery, the process would have accelerated even further — it would have been achieved at the outset of the project. Because defective plans are a foreseeable cause of losses to a contractor, the parties could have entered into a contract at the beginning of the project defining the standards to which the drawings should be made, the method of computing the losses that the contractor could recover, limitations of liability, and other relevant items. This is far preferable to allowing the relationship to be governed by tort law, which leaves much of this to what the arbitrator, judge, or jury finds to be “reasonable” under the circumstances.
Liability Based on Professional Standards
Courts have also breached the barrier of the economic loss doctrine by holding designers to their duties as professionals. This reasoning is illustrated by the case of Tommy L. Griffin Plumbing and Heating Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85 (S.C. 1995). In this case, the County of Charleston, SC, contracted with an engineer to design and supervise the construction of a water trunk project. The general contractor asserted a number of claims against the engineer, including: the engineer wrongfully closed the project due to false OSHA violations; the engineer made demands of the contractor beyond the terms of the contract; and the engineer erroneously interpreted the construction contract with the County. The Court held that, just as lawyers and doctors owe a duty to individuals with whom they might not be in privity of contract, a design professional owes a professional duty, separate from its contractual duties, to the contractor. In light of this finding, the Court allowed the contractor to pursue claims against the engineer for malpractice and breach of warranty.
Had this been a design-build project with the engineer and contractor in a contractual relationship, many of these disputes could have been avoided. This result would be achieved through two means: (1) the creation of a common interest between the designer and contractor and (2) the definition of liabilities between the contractor and designer through an agreement that created that common interest. By having a common interest in receiving payment from the owner and adhering to the schedule, the contractor and engineer would have had an incentive to resolve any potential regulatory issues together to avoid shutting down work on the project. Also, the engineer would have negotiated the terms of the design-build contract with the owner, so his expectations of the contractor’s scope of work would have been settled at the outset. Any subsequent interpretation of the design-build contract would have been done by the engineer and the contractor acting in concert and with one voice in presenting their views to the owner. Involvement with one another from the beginning of the project, along with mutual incentives, would have prevented the type of finger-pointing that took place in the Tommy L. Griffin Plumbing and Heating case.
Finally, if all else failed, the designer and contactor would be certain of the allocation of responsibility to one another for the problems. Their agreement would identify the risks and allocate them in relation to the economics of the project, rather than leaving that allocation to arbitrators, judges, or juries with little or no experience with construction or the project.
Liability Based on Notions of Fairness
In addition to the rationales discussed above, courts also have not hesitated to rely on basic notions of fairness and justice in holding design professionals liable for damages to contractors. In Clevecon, Inc. v. Northeast Ohio Reg. Sewer Dist., 628 N.E.2d 143 (Ohio App. 1993), the Northeast Ohio Regional Sewer District entered into a contract with an architect to lead a design team for a tunnel construction project and a construction contract with its contractor. The contractor alleged that the design team negligently prepared the plans and specifications for the project, resulting in delays and cost overruns. In allowing the contractor’s claims to go forward, the Court found that the design team had such control over the project, including site supervision, that a nexus was established between the designer and contractor. More specifically, the Court noted that:
Since the supervising architect wielded excessive control over the contractor, a consequent duty arose on the part of the architect to perform without negligence his functions as they affect the contractor. The power of the architect to stop the work is tantamount to a power of economic life or death over the contractor. It is only just that such authority, exercised in such a relationship, carry commensurate legal responsibility.
Clevecon, Inc., 628 N.E.2d at 147 (quoting Floor Craft Floor Covering, Inc. v. Parma Comm. Gen. Hosp. Assn, 560 N.E.2d 206, 210 (Ohio 1990). A number of other courts have allowed contractors to pursue claims against architects and engineers as a means of ensuring that the design professionals are not able to act negligently with impunity. See Mid-Western Electric, Inc. v. DeWild Grant Reckert & Assoc., 500 N.W.2d 250, 255 (S.D. 1993) (allowing an electrical subcontractor to proceed with a claim against an engineer for its work on the installation of a fire detection and suppression system at an Air National Guard base so as not to condone a professional’s right to do his job negligently with impunity).
What is the standard for determining when a design professional’s conduct in relation to a contractor is unreasonable? Wouldn’t it be better for all concerned to define the scope of the designer’s authority explicitly at the outset? The best way to do this is through a design-build agreement, not only because it allocates liability, but more importantly because it creates incentives for the designer and contractor to work together.
Damages
While the cases discussed above do not describe the ultimate outcome of the disputes, they all lead to the possibility of liability for the A/E firm. With no contract between the contractor and design professional, judges and juries are left to their own devices in determining applicable damages. This can have “bet the company” kinds of results.
In the case of Carroll-Boone Water Dist. v. M.P. Equip. Co., 661 S.W.2d 345 (Ark. 1983), the contractor, after having constructed a public water intake system designed by an engineer, blasted with explosives the land mass surrounding the system. One of these blasts severely damaged the intake system. After it was sued by the owner, the contractor filed a complaint against the engineer. Despite the fact that the engineer was not even present at the blasting in question and did not design the blasting plan, an Arkansas jury found that the damage was due to the negligence of the engineer and awarded $219,279.71 in damages. The trial court, in accordance with principles of contractual privity, allocated damages to the contractor from the owner. On appeal, the Supreme Court of Arkansas ruled that the lower court should have awarded the contractor a judgment against the engineer and not the owner. Therefore, the engineer was forced to pay $219,279.71 to the contractor, which was an amount determined by the jury.
Entering into a design-build contact with a contractor allows design professionals to avoid this type of unpredictable tort liability. Contracts can be structured to limit the amount of damages an aggrieved party can receive. For example, an architect or engineer could limit its liability to the value of its services. Without such express contract provisions setting the limits of exposure, designers will be subject to the will of judges and juries who will use the wide latitude afforded to them in tort law to mete out their own notions of justice and fairness. A more precise allocation of risk and liability set forth in a design-build contract will give all the parties involved a more definitive expectation of what their liability to each other would be in the event claims arise.
Sills Cummis Epstein & Gross P.C., a full-service law firm, has developed an outstanding reputation for excellence and service to the construction industry. The construction group’s philosophy of approaching all issues from both a business and legal perspective enables their clients to control the risks associated with project construction and contain their exposure post-completion. The firm is known for developing innovative and efficient solutions to the challenges faced by their clients and for successfully handling high exposure problems. From power stations abroad to transportation projects and buildings around the corner, the firm’s construction lawyers draw on a wealth of experience and practical know-how to solve problems and win disputes.
Phil White is the Chair of Construction Law Practice Group at Sills Cummis Epstein & Gross P.C. , with offices in Newark, NJ, and New York, NY. He can be reached at pwhite@sillscummis .com and (973) 643-5275.
David Kiefer is a Senior Associate in the Construction Law Practice Group at Sills Cummis Epstein & Gross P.C., with offices in Newark, NJ, and New York, NY. He can be reached at dkiefer@sillscummis.com and (973) 643-5361.