Negligence and the loss of privity defense for architects and engineers (part two)

June 24, 2016

Paul Potts portraitLAW
Paul Potts
This is the second article in a two-part series on privity. The first[1] provides a history of the decline of the 18th century ‘Law of Privity’ which was a bulletproof defense for architects and engineers against claims of negligence brought by third parties along with efforts in the 20th century to replace it with the Economic Loss Doctrine.

Courts using modern tort theory provided by the American Law Institute (ALI) have created a pathway for contractors to pursue tort claims against architects and engineers. There may be as many as a hundred contractors on a major construction project, any of which could bring a suit for negligence. This unpredictable threat has compromised the architect’s authority to carry out oversight obligations during construction.

Architects and engineers have special insights into the work of contractors that make their active participation at the constructions site essential to assuring compliance of the contractor’s work with the plans and specifications, design intent, and building codes. Allowing contractors to pursue economic losses from architects/engineers (A/Es) even when negligence is involved is bad public policy, leading to higher insurance costs and reduced oversight of construction[2].

Shifting risk from contractor to architect
Bolstered by the ALI publication of the “Restatement of Torts, Second” (1981), state’s courts have provided a pathway for contractors to bring negligence claims against A/Es. Today, these claims have become the second most common category of professional liability claims behind owner claims.

While contractors have acquired a reduction in risk in this changing scenario, architects and engineers have clearly taken on more risk of an unpredictable nature. Dozens of contractors could sue the architect as a result of a single error in the plans. While owners have acquired a small benefit in this rearrangement of risk, they have lost significantly in assurances that the project will be built in accordance with the design intent, plans and specifications, and building codes.

Architects and engineers have responded to this uncertainty by raising prices to cover increased insurance costs and rewriting agreements to minimize their exposure to risk by:

While owners have acquired a small benefit in this rearrangement of risk, they have lost assurances the project will be built in accordance with the plans, specifications, and building codes. Clearly, a return to certainty of risk is needed so A/Es can perform their oversight duties without fear of retaliatory claims[4].

Is the construction industry different?
No other undertaking is as well organized by contract than a commercial construction project. Every business entity engaged— except for government agencies—is present as a result of a written contract or purchase order. These are seasoned business parties with attorneys, accountants and insurance companies to make them aware of the risks they are undertaking[5]. Design and construction contracts are freely undertaken and a carefully crafted distribution of risks and responsibilities.

Empowering contractor’s to sue architects and engineers in tort does not result in better performance of the A/E’s duties and obligations. They do not produce better plans and specifications or provide better onsite administration as a result; instead they increase their prices to cover the cost of additional insurance and rewrite their agreements to divorce themselves from the responsibility of the contractor’s workmanship quality and plan, specification and building code compliance.

Unpredictable risk
Risks for A/Es go up considerably if the low bidder is litigious or unfit to perform the work; but they have little control over the selection of the contractors. They may know the class of the businesses that will bid the project, whether they are plumbers, carpenters, or electricians, but the identity and reputation of the low bidders is unknown at the time they contract signing with the owner.

Additionally, architects and engineers are reluctant to recommend against hiring the low bidder even if the bidder’s reputation is not admirable to avoid being accused of black balling. A/Es are not immune[6] to lawsuits for libel or slander. Maybe they should be? Those decisions are made by the owner and the construction manager for reasons that are favorable to them and rarely take into account the interests of the architect-engineer.

Something omitted from the bid
When contractors underbid a project, either by accident or as a result of something misleading in the plans and specifications, the owner gets a bargain. They are getting the project for less than its real cost. If the contractor then advances a claim against the A/E and recovers the loss, the architect-engineer is subsidizing the cost of the project for the owner. The contractor should be suing the owner where they have a contract, but litigious contractors want to sue and live to bid again. The architect is an easier target.

Adversarial relationship
Even with reduced construction obligations, the architect and the contractor are in an adversarial relationship and the owner is the principal beneficiary. According to provisions of the current owner-architect agreement the A/Es are responsible for:

Contractors should be barred from bringing claims against architects, because it diminishes the architect’s authority to carry out their oversight obligations[7] during construction.

Self-policing an unreliable policy
Some architects are reacting to this new uncertainty by scaling back their construction services detracting from the traditional checks and balances. Many aspects of substandard construction result from hidden workmanship issues that will not come to light for years (e.g. poor roof construction, insufficient subgrade preparation, laying masonry in freezing conditions, watering concrete etc.). It takes a practiced eye to spot these defects in the making and the A/E is especially suited to perform this function.

Traditionally, architects and engineers participated in the construction activity with the conviction that they needed to be present to prevent substandard workmanship and deterioration of the design intent. However, this lofty optimism has given way to the more cynical practice of defensive architecture—avoiding the role of supervisor and leaving it to contractors to self-police.

Do architects have unlimited power over contractors?
Nothing seems farther from the truth. Some justices have reasoned in claims cases that contractors should have recourse to tort law to protect themselves from architects who have power of economic life[8] and death over them. However, that kind of a power relationship has not existed for at least 30 years. Instead, architects have structured their contracts with the owner to reduce their control over the contractor even declaring they are not the guarantors of the contractor’s work and disavowing any authority to halt the work.

Today, contractors have recourse to many authorities if they are dissatisfied with the reasoning of the A/E. They can challenge the architect’s pronouncements to the construction manager who will often give them a one sided hearing. If the contractor is dissatisfied with the outcome of that discussion, they have recourse to Article 15 of the General Conditions to the contract and can demand a formal, written decision from a principal of the A/E’s firm, thereby going over the head of the construction administrator. If not satisfied with that decision they can demand mediation and arbitration to resolve the dispute.

Conclusion
Contractors should be pursuing additional compensation for hidden conditions and errors in the plans and specifications under Article 15 of the General Conditions instead of suing architects and engineers for negligence. If the owner is unfairly burdened by the change order costs they will settle their differences  with the A/E based on their mutual agreement.

The demise of Privity of Contract and exceptions to the economic loss rule has made the risk-benefit of contract look precarious to design professionals. As a result, many architects and engineers have considered joining contractors in design-build relationships that will provide the security they lost in the demise of privity. Unfortunately, this leaves no one except the design-builder to oversee the standards of the plans and specifications. It would be better if there were a third party to do the watching.

(Author’s note: The reader should not conclude from this article that I do not respect the overwhelming majority of contractors who are every bit as professional as their architect and engineer counterparts. I have enjoyed working with hundreds of professional contractors who have spent years acquiring the skills and knowledge needed to pursue their professions. Further, research and conclusions in this two-part article are for informational and educational purposes only and are not intended as legal recommendations.)

Paul Potts is a technical writer and construction administrator. He has worked in the construction industry as an independent contractor and administrator for architects, engineers, and owners in Michigan. Potts can be contacted via e-mail at paulpotts1@comcast.net[9].

Endnotes:
  1. first: http://www.constructionspecifier.com/Negligence-and-the-loss-of-privity-defense-for-architects-and-engineers:-Part-one/
  2. reduced oversight of construction: http://scholar.valpo.edu/cgi/viewcontent.cgi?article=1912&context=vulr
  3. ammunition for a claim: http://www.theaiatrust.com/whitepapers/contractor-termination/
  4. retaliatory claims: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027670
  5. undertaking: http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=5051&context=flr
  6. not immune: http://www.theaiatrust.com/whitepapers/contractor-termination/
  7. oversight obligations: http://scholar.valpo.edu/cgi/viewcontent.cgi?article=1912&context=vulr
  8. power of economic life: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027670
  9. paulpotts1@comcast.net: mailto:paulpotts1@comcast.net

Source URL: https://www.constructionspecifier.com/negligence-and-the-loss-of-privity-defense-for-architects-and-engineers-part-two/