DESIGN PROFESSIONAL LIABILITY ON COMPLETED WORK

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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.

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.

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.

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.

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.

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 timeframe.

How long a design professional can be liable for claims, including claims from third-parties, has been goverened 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 goverened 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.4^th 390, and relying on the Weseloh Family LTD. Partnership v. K. L. Weseloh Construction Company, Inc. (2004) 125 Cal.App.4^th 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 distinguishedWeseloh, 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 extendedWeseloh 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. Biankanjaanalyzed 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.

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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