Construction Contracts, Third Party Claims and Tort Law Liability

Carl R. Pebworth | Faegre Baker Daniels | October 5, 2017

What tort obligations does a design professional on a construction project owe to non-parties — like, for example, the persons who will use what has been designed after it is built? Tort law involves the idea of a duty of care that the design professional owes to others arising out of the designer’s professional expertise and certification. Matters involving a design professional’s tort obligations typically raise the following issues:

  • The nature and extent of the professional’s duty of care to others
  • What kinds of damages can be recovered if this duty of care is breached
  • What is necessary to prove that a third party has been damaged by the breach

Contracts and Establishing the Standard of Care

In one Illinois case, a court addressed whether an engineer who had contracted to design a “replacement” for a bridge deck had a professional obligation to “improve” the bridge deck after it failed and third-party motorists were killed. In other words, did the design professional have an independent obligation to go beyond replacing the bridge deck, as the contract stipulated? The Supreme Court of Illinois said no, granting summary judgment as a matter of law in favor of the engineer as to the deceased motorists’ claims.

In this case, there was a contract that prescribed the duty of care that the design professional agreed to meet: “the degree of skill and diligence normally employed by professional engineers or consultants performing the same or similar services.” These contract obligations trumped the standard of care that would exist absent a contract: “the use of the same degree of knowledge, skill and ability as an ordinarily careful professional would exercise under similar circumstances.” While these standards look similar, they differ because one recognizes the limitations that the parties agreed to in their contract limit the engineer’s duty to others. Because the contract specifically required replacement — and not redesign — of the bridge deck, the engineer could not be held liable for failing to go beyond the contractual scope of duty.

The engineer could have been found liable to third parties if he had been negligent in performing services relating to the replacement of the bridge deck — that was in the scope of what the engineer had agreed to do. Moreover, the engineer could have assumed additional liability by voluntarily attempting to improve the bridge deck and delivering a poor or defective product.

Contracts and the Economic Loss Doctrine

A design professional’s obligations to third parties are further limited by the “economic loss doctrine,” which applies to claims that do not involve physical harm. This doctrine prevents a party from pursuing a claim for economic or commercial losses arising from an alleged breach of a duty of care if the design professional’s contract precludes recovery of consequential or tort-based damages. Put simply, the contract’s limitation of damages can preempt economic loss liability even in cases where a professional failed to meet the duty of care.

Another question that arises if a duty of care is present and a third party has suffered damages is whether the breach of the duty has “proximately caused” these damages. Here, many courts — including the Illinois court — look at what the professional has contractually agreed to do. If injury results from something reasonably within that contractually defined responsibility, a design professional can be seen to proximately cause damages that flow from the designer’s failure to competently perform those duties.

In Conclusion: Know (and Perform) Your Contractual Duties

In summary, a design professional’s contract serves to confine and to define the designer’s obligations — not just to the design professional’s client, but also to third parties with whom the designer does not have a contractual relationship. As long as the design professional sticks to what the designer has contracted to do and does that work professionally, the designer cannot be obligated to go beyond those duties.

California Limits Indemnification Obligations of Design Professionals

William L. Doerler | The Subrogation Stategist | August 18, 2017

The California legislature recently enacted legislation – SB 496 – limiting a design professional’s indemnification obligations in private contracts related to design services. The term “design professional” refers to licensed architects, landscape architects and professional land surveyors, and registered professional engineers. As revised, Cal. Civ. Code § 2782.8 states that, for all contracts entered into on or after January 1, 2018 for design professional services, all provisions that purport to have the design professional indemnify the indemnitee for claims against the indemnitee – or require the design professional to provide a defense to the indemnitee – are unenforceable except to the extent that the claims against the indemnitee arise out of, or relate to, the negligence, recklessness or willful misconduct of the design professional. In addition, as revised, § 2782.8 limits a design professional’s liability for the cost of defense to the design professional’s percentage of fault.

The revised statute provides two exceptions. Pursuant to these exceptions, the limitations related to the duty and cost to defend do not apply to: 1) design service contracts where a project-specific general liability policy insures all project participants, including the design professional, and 2) a design professional who is a party to a written design-build, joint venture agreement.

Although this change in the law does not go into effect until January 1, 2018, the change serves as a reminder to subrogation professionals that, when faced with indemnification provisions in design or construction-related contracts, they should check local laws to determine the extent to which subrogating insurers can enforce such provisions.

New Indemnity Law for Design Professionals

William Coggshall | Archer Norris | August 10, 2017

On April 28, 2017, Governor Brown signed into law Senate Bill 496 (Cannella). The Bill, which is now codified in California Civil Code §2782.8, amended the statute to provide greater protection for design professionals. Under the prior law, design professionals1 that entered into contracts with public agencies where there was an indemnity provision would only be required to indemnify the public agency for claims arising out of the negligence, recklessness, or willful misconduct of the design professional. For private works projects, the state of the law was as interpreted by the court in the onerous case UDC v. CH2M Hill decision.2  In that case, a jury determined that CH2M Hill was not negligent in performance of its services. Notwithstanding the successful verdict, the courts determined that CH2M Hill was required to pay for the defense of UDC in the underlying complaint that gave rise to the dispute.

As amended, Section §2782.8 shall apply to all contracts entered into on or after January 1, 2018, wherein a contract that purports to indemnify the indemnitee is unenforceable, except to the extent that the claims arise out of the “negligence, recklessness, or willful misconduct of the design professional.”

In addition to providing this new protection for design professionals in private works projects, the new law also provides additional protection for those design professionals performing services for public agencies. That new pertinent language is as follows:

“In no event shall the cost to defend charged to the design professional exceed to the design professional’s proportionate percentage of fault.”

The law provides that the duty to defend as well as the duty to indemnify are limited as provided in this section and it may not be waived or modified by the parties.

Please click here to read the law in its entirety.

1Design Professionals include licensed architects, landscape architects, professional engineers, and professional land surveyors.

2181 Cal. App. 4th 10 (2010).

A Primer on Design Professionals’ Liability in Virginia

Stephen G. Test | Williams Mullen | July 27, 2017

When building a construction project in Virginia, it is essential that you understand the obligations and supporting legal principles for each of the parties involved in the Project.  You cannot make an informed judgment of the risk involved unless you know the scope of liability for each party.  The Owner must provide timely information and payment.  The general and the subcontractors must provide sufficient manpower and skilled workmanship.  The supplier must deliver equipment that meets the design criteria.

What about the architect or engineer?  The design professionals must provide design information and administration that allow the project to be constructed on time and on budget, and that meet the owner’s criteria for beneficial use when finished.  The legal principles underlying the liability of a design professional in Virginia, whether architect or engineer, are unique and differ markedly from those of an owner or contractor.  That is because of the principle of “professional liability.”

Architects and engineers in Virginia are deemed to be “professionals,” licensed and regulated by the Virginia Board for Architects, Professional Engineers, Land Surveyors, Certified Interior Designers and Landscape Architects.  Because they are professionals, their performance is judged by a “standard of care” not applicable to others involved in the project.  In Virginia, that standard has been determined by the Supreme Court of Virginia to be a duty to “exercise the care of those ordinarily skilled in the business.”  The designer must meet this professional standard in both the design and the administration of the project’s construction.  Nelson v. Commonwealth, 238 Va. 228 (1988).  This standard is determined by the expert opinion of a licensed design professional accounting for the type, size and complexity of project and its location, describing any deviation from that standard.  The design professional is not held to a standard of perfection, nor does she act as a guarantor of the design.

Contractual Liability

When an issue of design professional liability arises on a project, you must know the legal theory to use to establish that there has been a breach of the professional standard of care.  This begins with a determination of contract liability or tort liability.  Assuming there is an enforceable contract, either written or oral, the professional standard of care is implied in the contract for design services. See Nelson.  Should the contract provide for a higher standard of care, keep in mind that professional liability policies will exclude coverage for such additional contractual liability.  The contract may also provide that the design professional has agreed to provide a warranty or guarantee of its design services.  A warranty is an enforceable statement regarding the design professional’s own work, such as a certification that the design meets local building codes.  A guarantee is made with respect to the services of another, such as a designer’s sub-consultant.

Tort Liability

A tort is a civil wrong.  The most common tort is negligence.  If a person or business does not exercise a reasonable degree of care, it is negligent.  Applied here, the design professional must adhere to that professional standard of care, working as carefully as other design professionals under the same or similar circumstances.  In Virginia, a failure to adhere to the professional standard of care constitutes negligence.  There are essential elements that must be proved to prevail on a negligence theory: (i) existence of a duty; (ii) a breach of that duty; (iii) the breach was the proximate cause of the injury; and (iv) the breach resulted in damages.  The law provides that the design professional owes the duty to its contractual partner that it will adhere to the professional standard of care.  To establish a negligence claim, you will need expert testimony as to the professional standard of care and its breach, just as in a contract claim.

Defenses for Design Professionals

There are recognized defenses that design professionals will commonly rely on to defend a claim that their design work or administration breached the professional standard of care.  These include:

  • Statutes of limitations and statutes of repose:  Prohibit filing a claim after a defined period.  In Virginia, a claim for breach of written contract is five (5) years; for an oral contract, it is three (3) years. These time limits begin to run from the date the plans are delivered to the owner or the design-builder.  If administrative obligations are in the scope of the design professionals work, the time limit begins to run from the date of the breach of the administrative duty. The statute of repose in Virginia bars ANY filing for injury to property, real or personal, or for personal injury or wrongful death arising out of THE defective or unsafe condition of an improvement to real property more than five (5) years after completion of the performance of the services and construction.  This has been interpreted to apply only to claims in tort, not under contract.
  • Privity and Economic Loss:  A design professional cannot be sued for a claim of purely economic loss unless there is contractual privity.
  • Contributory Negligence:  If sued in tort, the design professional may allege that the party bringing the claim was also negligent, which negligence contributed to the damages.  If proved, the defense will bar the claim.
  • Betterment:  The party injured by the breach of the professional standard of care cannot recover damages that would make it better off than it would have been had the breach not occurred.  A design error discovered prior to construction that would not require corrective work will not obligate the designer to pay for the new work, only for the possible delay or increase in the costs of materials.
  • Limitation on Liability:  the written contract with the design professional may contain a provision that limits the liability of the professional to an amount certain.  It can be limited to the fee earned or some other defined amount.

All parties enter contracts with the prayer that it will go smoothly and be successful.  The more you know about the obligations, risks and legalities at the start, the more likely that prayer will be answered.

2016: A Busy Year for the Supreme Court of Virginia, Including 2 Significant Decisions for the Construction Industry

Joseph R. Pope and Robert K. Cox | Williams Mullen | July 5, 2017

If you are a design professional providing services in Virginia, or a general contractor on a public works project for the Commonwealth of Virginia, you need to know of two Virginia Supreme Court decisions in 2016. You ask why? The answer is because your current practices and protocols may expose you to the same risks and liabilities that the design professional and general contractor experienced respectively on the projects the Virginia Supreme Court addressed in its two decisions. Now is the time to learn of these decisions and to review and, if appropriate, modify your practices to avoid the same risks and liabilities.

The first decision is William H. Gordon Associates, Inc. v. Heritage Fellowship Church, 291 Va. 122, 784 SE2d 265 (2016), which involved an array of construction issues, including the duty of care that design professionals owe when preparing construction plans and specifications. The second decision is Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc., 791 SE2d 734 ( Va. 2016), in which the Court limited the effect of the general contractor’s flow-down clause in its subcontracts and rejected the general contractor’s indemnity claim against its subcontractor.

William H. Gordon Associates, Inc. v. Heritage Fellowship Church, and A Design Professional’s Duty of Care

In this case, Heritage, a church located in Reston, Virginia, contracted with the Gordon firm to provide engineering services for the site on which the Church’s new sanctuary would be built. The services included designing a storm water management system for the site. The Gordon engineer assigned to the project selected a rain tank system that was relatively new to the industry. Unfortunately, the engineer had no experience with the system and “cut and pasted” the plans and specifications for the rain tank system that the rain tank vendor had provided into the design documents for the project. The engineer admitted at trial that he did not fully understand many aspects of the rain tank specifications and plans he “cut and pasted” into the design documents.

While installing the rain tank system, the building contractor became concerned that the system was ill-suited for the site and requested additional information. Relying on information that the rain tank vendor provided, the Gordon engineer dismissed the contractor’s concerns. The contractor proceeded to install the rain tank system and then paved over the installation as part of the construction of a new parking lot. Shortly after that installation and paving, the rain tank and parking lot above it collapsed. The Church sued the general contractor and engineer for the damages caused by the collapse, including the cost to install a new storm water management system.

Following an eight-day bench trial with over 20 witnesses, the trial court ruled that the engineer Gordon breached the duty of care because its engineer merely “cut and pasted” the rain tank’s product specifications into the design without “understand[ing] the specifications.” Despite evidence showing that the contractor did not strictly or fully comply with Gordon’s plans, the trial court concluded that Gordon’s breach of the standard of care was the proximate cause of
the collapse.

Gordon appealed the ruling on the narrow ground that the evidence was insufficient to establish that any breach of the professional standard of care proximately caused the rain tank to collapse.

The Supreme Court affirmed the trial court’s ruling on the issue, concluding that there was sufficient evidence to establish that the engineer violated the standard of care and the breach was the proximate cause of the rain tank collapse and the resulting damage. The Court noted that Heritage offered expert testimony that Gordon breached the standard of care by (1) incorporating the manufacturer’s unverified literature into the design, (2) failing to fully understand the design, (3) failing to consider the unusually high water table, (4) failing to provide quality oversight during construction to ensure that the elements of the plan were being verified and executed, and (5) failing to reexamine the original plan when the contractor requested information from the engineer. The Court also found the evidence sufficient to support the trial court’s finding that the breach of the standard of care was the proximate cause of the rain tank collapse.

Design professionals and project owners should note that the Supreme Court’s ruling was closely tied to the particular facts of the case, and, because the appeal was from a bench trial, the trial court’s ruling could not be disturbed so long as there was some evidence in the record to support the judgment. Based on these circumstances, the Court had no difficulty concluding that there was an evidentiary basis for the trial court’s ruling, especially given that the engineer admitted that he did not understand the specifications for the rain tank system, yet he nonetheless “cut and pasted” those specifications into the design documents.

While this case was pending the appeal process, design professionals had expressed concern that the Court might accept the argument of the project owner, Heritage, that Virginia licensed design professionals breach the standard of care if they adopt into their sealed design documents the general plans and specifications for a product prepared by a non-engineer manufacturer. The Virginia Supreme Court neither accepted nor rejected that contention.

Hensel Phelps Construction Company v. Thompson Masonry Contractors, Inc.; No Limitations Protection Against Lawsuits By The Commonwealth

The second decision, issued in November 2016, arose from a project the general contractor, Hensel Phelps, had completed some 16 years earlier at Virginia Tech. Virginia Tech is a public, state owned university, and, as such, the University, like other agencies of the Commonwealth, is not subject to any statutory limitations period on claims by the Commonwealth.

The construction at issue in the case, a student health and fitness center, began in 1997 and was substantially complete in 1998, and all work was complete by June 2000. Years after completion, defects were discovered, and Virginia Tech repaired or replaced the defective work at a cost that Virginia Tech claimed to be in excess of $7.0 million. In April 2012, Virginia Tech claimed recovery of its repair and replacement costs against Hensel Phelps. Virginia Tech and Hensel Phelps eventually settled, with Hensel Phelps paying Virginia Tech some $3.0 million. Hensel Phelps then filed a lawsuit against its subcontractors who had performed the defective work, asserting breach of contract and indemnification.

The subcontractors defended on the basis that Hensel Phelps’ lawsuit was long outside Virginia’s five year statute of limitations on contract actions. The trial court agreed with the subcontractors and dismissed Hensel Phelps’ lawsuit.

On appeal to the Supreme Court, Hensel Phelps argued that the “flow-down” clause in its subcontracts flowed-down to the subcontractors the obligations that Hensel Phelps owed to Virginia Tech under the prime contract, including the obligation to respond to a Virginia Tech claim at any time. The particular subcontract clauses that Hensel Phelps relied upon were (1) the subcontractor’s incorporation by reference clause, found in most subcontracts, incorporating the prime contract into the subcontract, and (2) the subcontract language: “The subcontractor is bound to the contractor by the same terms and conditions by which contractor is bound to Virginia Tech.”

The Supreme Court rejected Hensel Phelps’ flow-down argument. The Court reasoned that, under Virginia law (like many other states), a waiver of rights must be shown by proving the party giving up its rights (here the subcontractor) has knowledge of the rights to be waived and intends to give up those rights. Hensel Phelps’ incorporation by reference subcontract clause and generally worded flow-down clause were not sufficient; there being no express statement by the subcontractor waiving its right to rely on the statute of limitations.

As a fall back argument, Hensel Phelps argued that it was entitled to indemnification by the subcontractors. The Court found Hensel Phelps’ express indemnification clause in its subcontracts, however, to be void under Virginia law. The clause included indemnification of Hensel Phelps for any act, error, omission or negligence of Hensel Phelps resulting in damages or losses to Hensel Phelps; thus calling for indemnification for Hensel Phelps’ own negligence, a fatal flaw under Virginia law. When Hensel Phelps turned to other subcontract clauses requiring the subcontractor to indemnify Hensel Phelps, the Court determined those clauses to be ineffective, particularly when it was clear that the parties had expressly otherwise agreed to an indemnification clause, although a clause void under Virginia law.

The take away for general contractors from this second decision is the wisdom of reviewing their “standard” subcontracts before using those “forms” on their next project. Are the terms drafted to obligate the subcontractor(s) to the same extent and for the same time that the general contractor obligated itself to the project owner, is the indemnification clause enforceable under the law applicable to the subcontract, and does the indemnification clause survive termination or close-out of the prime contract?

3. Conclusion

General contractors’ practices and procedures may have been sufficient in the past; but that should not dissuade them from periodically reviewing those practices and procedures and modifying them, if appropriate, to better protect their interests now and in the future.