December 27, 2016
The doctrine of privity in the common law of contract protects architects and engineers from lawsuits by contractors by requiring that for one party to sue another, there must be a contract between them. However, recent developments in tort law have weakened this defense by providing a path for contractors to sue architects and engineers for financial losses resulting from negligent misinformation in the construction documents.
In the case of Ultramares Corporation v. Touche (1932), Justice Benjamin Cardozo stated privity “provides that suits against parties to a contract for negligence in performance of the duties and obligations of the contract could only be brought by signatories to the contract, not by third party strangers.”
In the construction context, lack of privity prevented contractors from pursuing claims against architects and engineers (A/E) for economic losses resulting from bidding or performing the work in accordance with the plans and specifications. (Losses from personal injury or property damage are separate issues.)
While privity of contract has historically been a reliable defense for architects and engineers against third-party suits for negligence, the legal landscape is changing. Today, many state courts allow building contractors to sue the A/E for economic losses using tort law, principally the tort of negligent misinformation.
Courts have granted contractors this right through interpretation of the Second Restatement of Torts (1979) Section 552, which reads:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary [economic] interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
Courts have imposed this new tort liability on architects and engineers not out of any pending catastrophe, but simply because in this era jurists seek to increase, rather than restrict, liability. (For more, see Michael T. Terwilliger’s 1996 article, “Economic Loss in the Construction Context: Should Architects Be Liable for the Commercial Expectations of Contractors?”) However, in the process of increasing the architect/engineer’s liability, courts have undermined the certainty on which liability insurers have traditionally priced the risk of the architect’s business. This will inevitably lead to higher design fees for the owner and more defensive tactics by architects and engineers.
Many litigators have lauded this development. They prefer tort law to contract law because tort law offers expansive avenues for developing claims in negligence suits not afforded in contract law. Tort law also extends the statute of limitations for filing a claim. Further, any clauses in the owner-architect agreement limiting damages in litigation or requiring arbitration are not applicable to separate claims brought by contractors in tort law.
It must be emphasized the demise of privity defense is not universal in the United States. Some states, including Michigan and Texas, still require a contract with defined terms in order to sue another party in the construction context and then based only on the terms of the agreement.
Negligence case law
In a Delaware case, Guardian Construction Co. v. Tetra Tech Richardson, Inc. (1990), a contractor sued an engineer, and was awarded financial damages based on a claim of negligent misinformation. The engineer had provided incorrect benchmarks for the construction of a breakwater structure.
In a Pennsylvania case, Bilt-Rite Contractors, Inc. v. The Architectural Studio (2005), the contractor pursued a claim against The Architectural Studio for financial losses based on a statement in the plans and specifications saying standard construction methods could be used for an aluminum curtain wall and metal supports. The structure could not be built using standard means and methods, and Bilt-Rite lost considerable money on the project. Architectural Studio was required to make up the loss, which was calculated at more than $200,000.
In a Massachusetts case, Nota Construction Corporation v. Keyes Associates, Inc. (1998), the contractor claimed a loss for an understated amount of soils removal in a septic field and parking lot. The courts at first rejected the claim because of the law of privity, but the appeals court reinstated it, concluding there was “no reason why a design professional such as an architect should be exempt from liability for negligent misrepresentation to one where there is no privity of contract.”
Who benefits when the contractor loses money on a project?
Architects and engineers derive little benefit when a contractor’s bid underprices the whole cost of completing the work, but in states where tort suits for negligent misinformation are allowed, the A/E faces a risk of being sued by the contractor for its losses. Certainly, the owner would benefit, if the architect paid part of the cost of the building.
The post-bid interview
The traditional purpose of the post-bid interview was not to examine the contractor’s bid to see it was all-inclusive. In fact, many projects would never have been built if every contractor’s bid included everything needed to complete the work. However, today, under the expanded reach of the tort of negligent misinformation, the contractor can sue the architect/engineer to recover their losses. Therefore, architect/engineers are no longer disinterested in the matter. The post-bid interview is the last time they have any control over this risk.
This author recommends employing the architect’s and engineer’s staff at the post-bid interview to examine the contractor’s bid for completeness, and to learn of any errors in the documents causing the contractor to underprice the cost of the work.
It is hard to generalize about whether the architect/engineer or contractor has a better understanding of the construction documents at the post-bid interview. It is a case of different people knowing different aspects about the same thing. This is what makes the post-bid interview such an information rich transaction. The A/E must take this opportunity to exchange information with the contractor and determine whether their bid covers all costs.
Investigating the contractor’s bid in a public forum can be a delicate process. A certain caution must be exercised, especially if the result is discovering the contractor has overlooked something that will significantly increase the bid, perhaps nudging its price above the second-lowest bidder. This author has attended many post-bid meetings where it was obvious the contractor’s bid was unrealistically low, based solely on comparison with other bidders, but they could not be shaken from their intent to sign the contract. The meeting minutes should carefully detail any such assertiveness or mistaken confidence.
The construction management format, which is structured around one-on-one post-bid meetings with each trade contractor, is the ideal format for this purpose, but a general contract that brings the major subcontractors to the meeting also works. The architect/engineer’s representative for the post-bid must plan staff participation based on professional disciplines. If it is an interview with a concrete contractor, then the architect or structural engineer responsible for that phase of the documents must attend the meeting. If the next meeting is with the mechanical contractor, the mechanical engineer should attend. Regardless, the architect’s representative should be at every meeting to provide continuity and record the minutes. The trade contractor should be expected to bring the estimator who made the take-off and assembled the bid, along with the project manager and/or superintendent.
The architect/engineer’s representative should approach the interview as research into whether the contractor fully comprehends the scope of work, design intent, and engineer’s calculations. The discipline representative must remain alert to discussions on scope of work—particularly when it comes to the contractor’s understanding of specific calculations involving large-scale pieces of the work. The architect’s representative and the discipline representative should ask open-ended questions about the contractor’s bid without reserve.
The interview should not become adversarial. Any sense of rivalry will make it harder to get the contractor to speak openly about their bid. The architect/engineer should share knowledge of the contract documents to get the contractor to do the same. The minutes should clearly record the content of the meeting.
In the hands of a skillful litigator before a jury of laypeople, a contractor’s misinterpretation of the documents could become the basis for a successful claim of negligent misinformation. The minutes of the post-bid interview may become the most potent evidence in court to prove the contractor was given more than adequate assistance in clarifying the details and requirements of the documents, as well as an opportunity to correct or withdraw the bid.
Disqualifying a contractor
Documented information from a credible source showing a contractor is unqualified should not be kept from the owner. Some states have laws giving the architect/engineer qualified immunity from suits related to revealing negative information about a contractor, but most have not. It is important to consult with an attorney about the laws in the specific state.
The A/E could run into the complication the construction manager or general contractor does not want to disqualify a subcontractor with whom they have worked with in the past. However, going directly to the owner to disqualify a contractor without the construction team in agreement is not a formula for success. At the same time, architects or engineers concealing well-documented negative information about a contractor are doing a disservice to the client.
The decline of the privity defense has raised the risk design professionals will be sued by contractors for financial losses based on tort claims of negligent misinformation or even misinterpretation of the plans and specifications. The best protection from this risk is a complete and accurate set of drawings. However, there is a risk that misinformation or misinterpretation will result in contractors bidding the project for less than the whole cost of completing the work, and suing the architect-engineer for the difference.
While architect/engineers have an implied responsibility to aid the owner in controlling construction costs, they are not obligated to ignore the fact the contractor has made a mistake in its bid. The prospect A/Es may have to make up the contractor’s losses after tort litigation should be motivation to scrutinize the contractor’s bid carefully. The post-bid interview is the last opportunity to do this before contracts are signed.
|This article represents the research and opinions of the author. It is intended for general information purposes only, and does not constitute legal advice. The reader should consult with legal counsel to determine the complex interaction of laws, suggestions, and illustrations of specific situations.
For more on privity of contract and the emergence of tort law in the construction context, read this author’s previous article on the subjects.
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 email@example.com.
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