Teaching An Old Dog New Tricks: The Spearin Doctrine and Design-Build Projects

John Castro | Gordon Rees Scully Mansukhani | October 5, 2018

The United States District Court for the Southern District of California has now held that the Spearin doctrine applies to design-build subcontractors where the subcontractor is expected to design a portion of their work. The case is United States for the use and benefit of Bonita Pipeline, Inc., et al. v. Balfour Beatty Construction, LLC, et al. (“Bonita Pipeline”) (Case No. 3:16-cv-00983-H-AGS).

In Bonita Pipeline, a subcontractor sued the general contractor and its sureties alleging breach of contract, breach of implied warranty, declaratory relief, and recovery under the Miller Act. The subcontractor then filed a motion for partial summary judgment against the general contractor on its declaratory relief cause of action, seeking a finding that the general contractor could not shift legal responsibility for its defective plans and specifications to the subcontractor.

The evidence presented in support and opposition of the motion showed that the general contractor provided incomplete design documents to the subcontractor at the bid stage, and expressly stated they were incomplete. The subcontractor was ultimately awarded the bid, which included design-build structural steel, metal decking, and other amenities. The parties admitted that the plans and specifications could be refined with further design, whereby the subcontract contained language stating that the subcontractor would assume risk of further change (“refinement”) of the plans and specifications. Further, the subcontract stated that the subcontractor was not entitled to additive change orders or an increase in its bid price for “refinements” resulting from the design-build process. Instead, the subcontractor would only be entitled to additional compensation for enhancements requested by the owner.

During the project the subcontractor sought additional compensation for design errors and changes, with the court noting 93 requests for information and 37 change order requests. The subcontractor also finished its work 290 days late.

The Spearin doctrine (named after United States v. Spearin (1918) 248 U.S. 132) generally holds that an owner (or here, general contractor) impliedly warrants the information, plans, and specifications it provides to the general contractor (or here, subcontractor). Citing case law that state law controls the interpretation of Miller Act subcontracts to which the United States is not a party, the Bonita Pipeline court noted that the California Supreme Court approved and applied of the Spearin doctrine, citing Souza & McCue Constr. Co. v. Superior Court of San Benito County (1962) 57 Cal.2d 508, 510 and E.H. Morrill Co. v. State (1967) 65 Cal.2d 787, 792-793. Citing Coleman Eng’g Co. v. N. Am. Aviation, Inc. (1966) 65 Cal.2d 396, 404, the Bonita Pipeline court also noted that the California Supreme Court has extended application of the Spearin doctrine to construction contracts even where there is no government entity involved.

The general contractor argued that the Spearin doctrine did not apply because the project was one of design-build, and the parties expressly acknowledged that the plans and specifications were incomplete at the time of bidding. The subcontractor, in turn, argued that it acknowledged it assumed the risk that the plans and specifications would be “refined,” but the general contractor nonetheless still impliedly warranted that the plans and specifications provided would be correct, even if incomplete.

Ultimately, the Bonita Pipeline court found the subcontractor’s position persuasive, finding that the Spearin doctrine applies to design-build projects. Regardless, the Bonita Pipeline court denied the plaintiff subcontractor’s partial motion for summary judgment, finding that there were insufficient facts in the record to determine whether the contractor’s extra work was due to errors in the plans and specifications, or whether the extra work was due to the design work expected of the subcontractor.

In support of its ruling, the Bonita Pipeline court relied on a United States Court of Federal Claims case, AAB Joint Venture v. United States, 75 Fed.Cl. 414 (Fed.Cl. 2007). In AAB Joint Venture, the plaintiff contractor won a bid to construct a military storage base in Israel, whereby the project was in a design-build format. The plaintiff was provided specifications from the government, and after construction commenced the plaintiff contractor submitted a request for information questioning the accuracy of the specifications. After further requests for information and responses thereto, the plaintiff contractor (and its subcontractors) performed earthwork using 3-inch stone fill, as opposed to a 6-inch maximum stone fill as specified in the contract. The use of the smaller fill, however, precluded use of the contract-specified density test, as the test could not be used on the smaller fill. Thereafter, plaintiff contractor sought an equitable adjustment as a result of the defective specifications and increased costs, which was denied.

The AAB Joint Venture court found that the Spearin doctrine applied to the design-build project. It held that “[t]he purpose of the specifications is to serve as a guide to the contractor … The contractor should be able to rely on a reasonable interpretation of the contract.” “The standard that must be met under the implied warranty is that the specifications will result in a satisfactory, acceptable, or adequate result; short of that, the specifications are defective and the contractor is entitled to an equitable adjustment.” There, the specifications provided a range of sizes for fill that could be used by the subcontractor, though some sizes in turn precluded use of the contract-specified density test. The AAB Joint Venture court held that the fact that the specifications allowed for some satisfactory results did not preclude a finding that they were defective. In other words, “[d]efective specifications may be found when the full scope of the dimension tolerances set forth in the specifications do not produce satisfactory results.”

The Bonita Pipeline court also relied on a Civilian Board of Contract Appeals case, Drennon Constr. & Consulting, Inc. (“Drennon”), 13 B.C.A. (CCH) ¶ 35,213 (2013). In Drennon, the plaintiff contracted with the Bureau of Land Management (“BLM”) to widen a road at a campground in central Alaska. Widening the road required excavating a hillside, and building a gabion wall along the cut. The hillside ultimately collapsed, and the contractor’s work was placed on suspension. Ultimately, the road was widened without the use of a gabion wall, and the contractor sought recovery for its costs during the suspension period, as well as the cost of purchasing gabions for which it no longer had use. The contractor contended that the geotechnical information provided in the BLM’s solicitation was defective. In contrast, the BLM argued that the contract was one of design-build, and that the contractor was not entitled to any recovery because of the contractor’s own faulty design.

The Drennon panel sided with the contractor, finding that the hillside would have collapsed regardless of the approach undertaken by the contractor. The court pointed out that the solicitation included a road design and specifications from the civil and geotechnical engineer. The engineer testified that the digital terrain model it utilized for its design contained inaccurate control points, and that the BLM denied the engineer’s request to perform a survey to address the inaccuracies. On that basis, the engineer testified that they intentionally added language to the solicitation that would have warned potential bidders of the inaccuracies of the model. The Drennon panel found this directly contributed to the increased costs suffered by the contractor. The Drennon panel also found that the engineer’s geotechnical report was defective, noting that the site conditions experienced by the contractor were materially different than what was described in the report.

Bonita Pipeline shows that the Spearin doctrine is still alive and well, and even permeating into modern construction projects. The doctrine’s application to a design-build project at the United States District Court level shows that it is moving of specialized venues such as the Federal Court of Claims and Board of Contract Appeals. The Spearin doctrine reaches its centennial anniversary this year on December 9, 2018.

Design Professional Best Practices for Successful Project Delivery and Loss Prevention

Jason Ebe | Snell & Wilmer | September 25, 2018

I frequently speak to architects and engineers on best practices for successful project delivery and loss prevention. The following is a brief refresher on some of those best practices.

Site Investigations

The design professional may want to consider recommending to the owner/client an appropriate scope for site investigation. If scope is limited due to budget, that should be documented. The design professional may want to consider providing all backup data along with a summary characterization report, to allow the contractor to draw its own conclusions from the data. The design professional may want to consider allowing the contractor reasonable access and opportunity to conduct its own pre-bid site investigation, but should not rely upon the contractor to do so.

When peer review is available, you may want to consider using it. You may want to exercise caution with absolutes (“always”, “never”) and vague terms, for example, what does “generally consistent” mean to you? 51%? 90+%? Perspectives will differ. The design professional may expect the contractor to rely on the language used. The design professional may want to exercise caution when assuming contract disclaimers will necessarily provide protection from claims.

Design Specifications

The design professional may want to exercise caution when allocating unresolved design issues to the contractor’s “means and methods.” If there are components of the design that are intended to be delegated or deferred, the design professional may expressly call those out to the owner and contractor to avoid surprise and confusion as to the shared design responsibility.

The design professional does not intend or achieve perfection in its services, so it should recognize the contractor is not perfect either, and there may be a need and justification for variances and construction tolerances.

The design professional may want to consider seeking construction industry feedback on constructability, pricing and other facets of the design. But, the design professional should be careful not to run afoul of procurement restrictions on communications with bidders. And, if feedback is obtained, the design professional may be served well by documenting in the design file what consideration the design professional gave to the feedback in refining and finalizing its design.

Construction Administration and Management

The design professional may want to consider clearly defining in its contracts the scope of its construction administration and management, then follow that scope, and document changes to avoid scope creep. If, during on-site observations, the design professional observes an issue of concern, even if that issue was not part of what the design professional was there to observe, the design professional may want to consider making an appropriate reporting. Follow the maxim “if you see something, say something.” But, the design professional may want to exercise caution and not cross the line of directing the contractor’s means and methods.

Daily progress reports are usually the key to proving what happened during construction. Memories fade, and testimony varies, but the documents last forever and are typically the most credible. Accompanying photos and video are golden. The design professional may want to consider following contract reporting requirements and provide “just the facts, ma’am” without editorialization. Objective reporting is the most credible. Meeting minutes are nearly as valuable as daily reports. Audio records can and should be made, with knowledge of all participants, and retained in the event there are disputes or follow up needed regarding the minutes.

With respect to emails and other project communications and documentation, you may want to exercise caution when using inside jokes, emotional or angry venting, and really anything that you would not want your mother or a judge to see. And think twice before hitting “send”, both as to content and recipients.

When evaluating changes and claims, the design professional may want to consider being objective and act in good faith. The design professional may want to exercise caution when taking a position it can’t maintain on the witness stand. The design professional may want to consider documenting the support for its position, for later third-party scrutiny. Some claims will be legitimate and will cost the owner money. Some claims will be the result of errors and omissions. In such instances, the design professional may want to consider discussing with its legal / risk management team before memorializing its position. The design professional should also recognize when reconsideration of a prior position is warranted.

Partnering is open, frank and respective dialogue, focusing on the issue, not the person, and seeking to resolve issues with a win-win, not a win-lose outcome. However, partnering is not acquiescence to an unreasonable participant’s demands. The design professional should understand the difference.

Many public owners have administrative claims procedures which are required to be exhausted before litigation. The design professional may want to consider making a checklist at the start of the contract, and follow it precisely to avoid loss of a claim, or to defend against a claim.

Claims Avoidance and Mitigation

Causes of action against the design professional may include, but are not limited to, professional negligence, negligent misrepresentation, fraud, fraudulent concealment, breach of contract, breach of the covenant of good faith and fair dealing, breach of warranty, interference with contract, and indemnity. Professional liability errors and omissions insurance may provide a defense to some but not all of these claims. Relief against the design professional may include compensatory damages, disgorgement of fees, punitive damages, attorneys’ fees, experts’ fees, litigation costs, and interest. Damages may include increased direct costs of construction, cumulative impact or disruption of premium costs, time driven delay costs, liquidated damages, and increased administrative / management / inspector / owner costs. Again, professional liability errors and omissions insurance may provide indemnity for some but not all of this relief.

Defenses to the foregoing claims may include, but not be limited to, claims that the services performed met the standard of care; the services not performed were not within the scope of contract or duty; the errors and omissions did not rise to negligence standard; the interference to contractor resulting from construction administration was proper in light of the design professional’s duty to the owner; a lack of causal connection between breach and damages; insufficiency of proof of damages; betterment; contractual limitations on liability and waivers of consequential damages and other relief; joint versus several liability; and non-parties at fault. Experienced counsel can help evaluate the claims and defenses and recommend options and the best path forward for a given dispute scenario. Counsel may also recommend engagement of experts, including as to standard of care, scheduling and delays, and damages.

When to Seek Input from Legal / Risk Management (Before the Lawsuit)

Best opportunities to engage with legal counsel and risk management before the lawsuit include review of the prime contract and subconsultant contracts; periodically during project performance; in the event of escalated tension among other project participants (for example, if the design professional’s client’s lawyer drafts letters for the design professional’s signature, if the design professional is invited to participate in a mediation without being a party to the mediation, and if the design professional is involved in documenting a settlement between the owner and contractor); and finally, and most certainly, in the event of a claim by the owner or contractor of negligence, errors, omissions or other fault or wrongdoing, even if no relief is being sought at that time.

By following the foregoing best practices, the design professional can better position itself for a successful project delivery and prevent loss to the project and itself.

California Design Professionals’ Indemnity Obligations Limited Under 2018 Contracts

Ryan W. Young | Lewis Brisbois Bisgaard & Smith LLP | June 22, 2018

The California Legislature has narrowed the scope of enforceable indemnity agreements applicable to licensed architects, engineers, and land surveyors through its amendment of Civil Code § 2782.8. This represents an important development in the allocation of risk in the construction community, since Section 2782.8 previously limited indemnity clauses only as to design professional service contracts with local public agencies entered into on or after January 1, 2007.

Under amended Section 2782.8, all contracts with non-state agencies for design professional services entered into on or after January 1, 2018, that require licensed architects, engineers, and land surveyors to indemnify their client are now unenforceable, except to the extent the claims against the client arise out of the design professional’s negligence, recklessness or willful misconduct.

Section 2782.8, as amended, also caps a design professional’s liability for the cost to defend their client to the design professional’s proportionate percentage of fault. The design professional, however, is required to meet and confer with other parties to an action regarding unpaid defense costs, where one or more of the defendants has dissolved or become bankrupt.

This limitation of the duty and cost to defend, however, does not apply to (1) any contract for design professional services where a project-specific general liability policy insures all project participants for general liability on a primary basis and also covers all design professionals for their liability arising out of their services on a primary basis; and (2) a design professional who is a party to a written design-build joint venture agreement.

All design professional service contracts with non-state agencies entered into on or after January 1, 2018, are now deemed to incorporate by reference the provisions of this section and the provisions cannot be waived.

Civil Code § 2782.8 is silent, however, as to the trigger date for the above-referenced duty to defend. Consequently, parties to this kind of contract should address the timing of the defense obligation in the contract, because California law requires an immediate defense upon a proper request, unless the parties state otherwise.

Recent California Legislation May Have an Impact Contractors and Design Professionals

Kimberly A. Blake | Gordon Rees Scully Mansukhani | June 1, 2018

Several bills that have recently been introduced in California will likely have an impact on the construction industry and, in particular, contractors and design professionals. Below is an overview of recent and pending legislation in California that includes the Labor Code, the Business and Professions Code, and the Government Code.

Contractor Liability Under the Labor Code

AB 1701, which was introduced February 2017, and became effective on January 1, 2018, adds Section 218.7 to the Labor Code.1

The Labor Code governs the basic rights and obligations of workers and employers in the employment context. Under current law, an employee may generally sue her employer for wage claims, such as nonpayment of wages, fringe benefits, and contributions to a health and welfare or pension fund. Until January 2018, however, there had been no requirement that a direct contractor must assume liability for any successful wage claims brought against a subcontractor working for the direct contractor.

In an effort to create a new avenue for collecting remedies in wage claims, AB 1701 requires that a direct contractor making or taking a contract for the construction or repair of any structure must assume liability for “any debt owed to a wage claimant incurred by a subcontractor at any tier” acting under or by the direction of the direct contractor, where the wage claimant’s performance of labor is related to the construction project.2 Because AB 1701 covers “building(s)” and “structure(s)” as well as “other work”, it applies to all construction projects involving a direct contractor.3

Consequently, direct contractors are obligated to assume such liability at the time the contractor enters into the construction contract. However, AB 1701 provides that the direct contractor’s liability does not extend to penalties or liquidated damages unless otherwise provided.4 Therefore, a direct contractor must assume liability for wage claims against subcontractors, but should specify in the written contract that liability does not include penalties or liquidated damages.

Architect Liability

AB 1489, which was introduced February 2017, would add Section 5536.25 to the Business and Professions Code.

The Business and Professions Code provides rights and obligations to members of specific professions. Under current law, Section 5536.25 absolves a licensed architect of liability for damages that may arise when the architect’s signed and stamped plans or specifications are changed or used without the architect’s prior written approval.5 If enacted, AB 1489 would add the provision that an architect will not be liable for damages that may arise when the construction deviates from the permitted plans or specifications, regardless of written authorization.6

AB 1489 would create a broad liability shield for architects regarding construction projects that do not conform to the architect’s signed and stamped plans. Besides the direct benefit to architects, AB 1489 should reduce legal costs in the construction industry by providing greater certainty as to architect liability as well as reducing the usefulness of seeking a written authorization from the architect to deviate from the original plan.

Accessory Structures on Single-Family Lots

AB 2939, which was introduced in February 2018, would add Section 65852.2 to the Government Code.

The Government Code organizes the government of California and sets forth rights and duties of various governmental entities. Under current law, a local agency must approve an application for a building permit to create within a single-family zone one “accessory dwelling unit” per lot, if the accessory dwelling unit is part of an existing residence or accessory structure, has independent exterior access from the existing structure, and has sufficient side and rear setbacks for fire safety. An “accessory dwelling unit” is a residential dwelling unit providing complete, independent living facilities for one or more persons.

If enacted, AB 2939 would add a substantially similar mechanism enabling the construction of multiple accessory dwelling units on multifamily zoned lots which already contain at least five residential units. AB 2939 would require a local agency to approve an application for a building permit to create one or more accessory dwelling units on lots zoned for multifamily use, where each accessory dwelling unit is located within the existing an existing multifamily structure or accessory structure, access to the accessory dwelling unit is independent of access to other residential units, and where the side and rear setbacks of every structure are sufficient for fire safety.7 Therefore, AB 2939 could spur the construction of new accessory dwelling units on multifamily lots with at least five residential units.

How Much Control Is Too Much Control? Federal Court in Florida Holds Designers’ Supervision of Project and Issuance of Design Documents Creates Control Over—And Potential Tort Liability To—Project Contractors

John J. Gazzola | Constructlaw | May 3, 2018

Suffolk Constr. Co. v. Rodriguez & Quiroga Architects Chtd., 2018 U.S. Dist. LEXIS 42652 (S.D. Fla. Mar. 15, 2018)

This case arises out of the design and construction of a science museum in Miami, Florida (the “Project”).  Museum of Science, Inc. (“MSI”), the Project owner, executed several agreements relating to the Project, including: (i) an agreement with Defendant Rodriguez and Quiroga Architects Chartered (“R&Q”) to serve as executive architect; (ii) an agreement with Defendant Grimshaw Architects P.C. (“Grimshaw”) to serve as the design architect; (iii) a construction services contract with Plaintiff Suffolk Construction Co. (“Suffolk”); and (iv) a direct contract with Suffolk’s subcontractor, Plaintiff Baker Concrete Construction, Inc. (“Baker”) for construction services after MSI terminated Suffolk for convenience.  After execution of these agreements, R&Q executed contracts with Defendant Fraga Engineers, LLC (“Fraga”) for mechanical, electrical, and plumbing design services, and with Defendant DDA Engineers, P.A. (“DDA”) for structural design and engineering services.

Suffolk and Baker (collectively, “Plaintiffs”) filed suit for negligence against R&Q, Grimshaw, Fraga, and DDA (collectively, “Defendants”), claiming that by issuing deficient design documents, Defendants breached their duties owed to Plaintiffs causing Plaintiffs to incur economic losses.  All Defendants but R&Q moved to dismiss the claims, arguing that they had no supervisory role or control over Plaintiffs, as demonstrated by the fact that their contracts with MSI did not designate them as “supervisory architects,” and thus, owed no duty to Plaintiffs.

Applying Florida law, the district court rejected this argument and held that Plaintiffs’ allegations were sufficient to survive a motion to dismiss.  The Court noted that Florida law provides that a duty may arise if the defendant’s conduct creates a foreseeable zone of risk and the defendant creates or controls that risk.  Over forty years ago, in A.R. Moyer, Inc. v. Graham, 285 So. 2d 397 (Fla. 1973) the Florida Supreme Court applied this law to hold that an architect owed a duty to a contractor despite their lack of privity.  There, the Supreme Court noted that as a matter of policy, supervising architects simply have too much control over a contractor not to owe the contractor a legal duty. While later Florida courts have limited Moyer “strictly to its facts,” an architect may still be liable to a contractor in tort in the absence of privity where the architect exerts control over the contractor.  Such control may be established where the architect maintains a supervisory role on a project, or where the architect acts with knowledge that the contractor will rely on its designs or plans.

In light of this law, the district court held that Plaintiffs’ allegations—specifically, Defendants’ preparation and issuance of design materials on which they knew Plaintiffs would rely and Defendants’ obligations to observe and supervise Plaintiffs’ work—were sufficient to show that Defendants maintained control over Plaintiffs such that a legal duty could be imposed.  Accordingly, the district court denied Defendants’ motions to dismiss and permitted the parties to proceed to discovery.