Words: Paul Potts
Photo: Kanizphoto
If the law of privity remains a valid defense for architects, most contractors, subcontractors, or other third parties could not bring a claim or lawsuit against an architect for negligence. While lack of privity is still a valid defense in some states, various interpretations of Tort law have expanded the likelihood that the privity defense can be breached by the tort of negligent misinformation. AIA Trust – Stranger No More.
The term “architect” as used in this presentation means architect-engineer and other design professionals working for the architect.
The Law of Privity
We will begin our discussion of contractor’s claims against architects with a discussion of the Law of Privity. Prior to 1960, the Common Law of Privity prevented contractors or any third party from suing the architect even if personal injury or financial loss resulted from the architect’s negligence. The law of privity meant simply—If There is No Contract, There is No Duty or Right to Sue. Privity was part of common law inherited from Great Britain at the time the 13 colonies declared independence in 1776.
Privity was a business-friendly piece of legislation originating in the British Parliament in the 18th Century and later incorporated into American common law after the American Revolution (1776). The business purpose of privity was to reinforce the benefits of contract for professionals—securing for them predictable duties and obligations, providing measured and insurable risks, and limiting liability to a known party in contract. Privity also protected providers of professional services from claims by an unlimited collection of potentially injured third parties resulting from one negligent event. 1 The privity defense was so reliable that before its decline fifty years ago most architects did not feel a need to carry professional liability insurance.2 A lengthier explanation of the benefits of privity can be found in the footnotes.
The Economic Loss Rule (ELR)
In a rare departure from privity in 1965, the California Supreme Court adjudicated a new doctrine “The Economic Loss Rule” (ELR). The economic loss rule split claims against architects by third parties (those not having a contract with the architect) into those that involved personal injury and those that involved purely economic losses. The economic loss rule preserved the privity defense for purely economic losses but allowed some tort-like actions to proceed for personal injuries and ancillary property damage that resulted from professional negligence. In its broadest sense, the “economic loss rule” prohibits recovery in tort for purely economic loss incurred under contract law but allows tort like suits for personal injury and ancillary property damage. 3 Owing to the perceived fairness of the Economic Loss Rule it was quickly adopted by several states.
In contract law duties and obligations are created by signatories to the contract. The contractor has no contract with the architect and according to privity there is no duty between the contractor and architect. Tort law on the other hand proceeds from duties imposed by lawmakers and is intended to protect unsuspecting individuals from the unlawful acts of others (e.g. fraud, defamation, or negligence). Tort law applies to everyone equally.
The Merriam Webster Dictionary defines a tort as “a wrongful act other than a breach of contract for which relief may be obtained in the form of damages or an injunction.” Negligence, the most common tort claim, is the failure to exercise the care that a reasonably prudent person would exercise in similar circumstances. Thus, where a contract exists governing the subject matter of the dispute, claims between the parties must be based on the contract terms, and a tort-based claim between the parties will typically be barred. 4
To this point, we have discussed contract law, where duties and obligations are created by signatories to the contract. The contractor has none with the architect and according to privity, there is no duty between the two. Tort law which emerges in the following paragraphs proceeds from duties imposed by lawmakers and is intended to protect unsuspecting individuals from the unlawful acts of others (e.g. fraud, defamation, or negligence). Privity traditionally precluded tort law, but that was about to change. The Economic Loss Rule was difficult to apply and, in many courts, it led to vague and unexpected adjudications, which brought it to the attention of the American Law Institute.
The American Law Institute
What is the American Law Institute? Common law in the United States inherited from British rule develops independently state by state, sometimes leaving large gaps in the law and irreconcilable differences from one state to another. The American Law Institute (ALI), a group of 3000 or more jurists established in 1923 “to promote the clarification and simplification of United States Common Law and its adaptation to changing social needs” does not dictate law, but its publications are widely read and often integrated into state common law.
In response to inconsistent interpretations of the economic loss rule, the ALI issued the “Restatement of Torts Second” in 1979 and the “Restatement of Contracts Second” in 1981. They became some of the most widely read and adopted provisions ever issued by the society. The restatements portend ominous interpretations of privity for architects and engineers by defining two exceptions to privity–(a) third-party beneficiaries and (b)negligent misinformation5. We will not present third party beneficiary because AIA agreements contain “no third-party beneficiary clauses”,6 which are generally recognized to be definitive by the courts, and successfully bar claims against architects by implied third parties.
The Tort of Negligent Misinformation
In “Restatement of Torts Second:” Section 552, “Information Negligently Supplied for The Guidance of Others,” the American Law Institute (ALI) described the tort of negligent misinformation as one who, in the course of his/her business, profession or employment, or in any other transaction in which he/she has a financial interest, supplies false information for the guidance of others in their business transactions, is subject to liability for monetary losses if he/she fails to exercise reasonable care or competence in obtaining or communicating the information (negligence).7 The tort of negligent misinformation is a common foundation for lawsuits brought by contractors against design professionals.
Negligent Misinformation example
In Guardian Construction Co. vs. Tetra Tech Richardson, Inc. (1990 Delaware) in response to the Defendant-architect’s request for summary judgment on the basis of lack of privity, the court concluded: For the foregoing reasons, the Court concludes that as to the Plaintiffs-contractor’s claims that the negligently prepared project plans and specifications and the information conveyed at the pre-bid meeting were prepared and presented by the Defendant-architect for the use of a specific and limited class of potential users of which Plaintiff-contractors were known members and because Plaintiff-contractors were intended to and did rely to their detriment on that information in preparing their project bids, Plaintiff-contractor’s negligent misrepresentation claims are cognizable despite the lack of contractual privity with Defendant-architect and the fact that Plaintiffs seek purely economic damages.8
The Owner/Contractor Agreement
When signing an AIA agreement (contract) the contractor must keep in mind they are signing more than what is in front of them.9 For example, the general conditions, incorporated by reference, apply equally to the owner, the architect, and the contractor. General Conditions AIA A201 is an integral part of the contract for construction for a large project. They set forth the rights, responsibilities, and relationships of the owner, contractor, and architect.10
There are also “flow down provisions” in the contractor-subcontractor agreement. Flow Down provisions in AIA subcontractor agreements incorporate the terms of the general contractor-owner agreement to bind the subcontractor to the general contractor with the same terms that the general contractor is bound to the owner.11
What is Design Intent
Design intent is a term used frequently by architects to describe what an owner expects in the completed project. The architect and engineer have discussions with the owner during programming and design development and a concept usually supported with sketches and minutes of their meetings. It is these ideas, concepts, and criteria that are expected by the owner and referred to as design intent. The architect-engineer is responsible for achieving the design intent in the plans and specifications. This is no simple feat because it combines art, engineering and construction knowledge to achieve a certain effect. When bidding the project and planning your daily work stick to a knowledgeable reading of the plans and specifications and any other contract documents for which you are responsible.
The contractor is responsible for what can be understood from a thorough experienced reading of the plans and specifications and other contract documents. The contractor also brings special skills and experience to the project e.g. masonry joints must be uniform width and exterior joints must be properly slushed full and tooled to prevent wind-driven rain from penetrating through the joint into the cavity. These special skills are not always stated in the contract documents but are still required.
Conclusion
There are considerable obstacles to the contractor to successfully sue the architect for monetary damages. If privity is law in the state where the suit is brought, e.g. Texas, the contractor’s suit will not be allowed. If the issue is taken to court in a friendlier state and the premise of the lawsuit has the potential for making precedent the AIA could, in their own interest, provide the architect with additional legal representation. Once it is in the hands of the attorney’s there is little likelihood that it will come out costing less than a compromise. The amount involved must be quite large to make it worthwhile. It is most often better to negotiate a compromise than hiring an attorney.
NOTE: I am not an attorney and I am not offering legal advice. Common law varies from state to state and it is best to hire an attorney familiar with common law in your state.
FOOTNOTES
1.In 532 Madison Ave. Gourmet Foods v. Finlandia Ctr., 750 N.E.2d 1097 (N.Y. 2001), the New York Court of Appeals applied the Economic Loss Rule in cases involving construction disasters that resulted in streets being closed in the heart of Manhattan. Though nearby businesses were not physically damaged by the construction-related collapse, they either were evacuated and closed or were inaccessible to customers for long periods of time. The damages resulting were real and very substantial. However, the court held that a landowner did not have a common law “duty to protect an entire urban neighborhood against purely economic losses.” Id. at 1102. https://www.lexisnexis.com/community/casebrief/p/casebrief-532-madison-ave-gourmet-foods-inc-v-finlandia-ctr-inc
2. AIA Trust: The Architect’s Risk” Two legal doctrines – the economic-loss rule and contractual privity – shielded architects from liability. These defenses were so effective that, only a handful of decades ago, many architects did not carry professional liability insurance. https://www.theaiatrust.com/whitepapers/contractor-termination/why-sue-the-architect.php#nav
3. https://www.natlawreview.com/article/economic-loss-rule-and-why-it-matters-construction-litigation
4 https://www.natlawreview.com/article/economic-loss-rule-and-why-it-matters-construction-litigation
5. The most common tort exception to privity of contract is for claims of “negligent misrepresentation” made by contractors against design professionals. This exception allows a contractor who relies on a design professional’s plans and specifications and experiences financial loss as a result to make a claim against the architect for “negligent misrepresentations” Such theory of liability is based upon ALI §522 of the Restatement (Second) of Torts, which allows a contractor to sue an architect who negligently provides guidance to others as part of their business. https://www.theaiatrust.com/whitepapers/privity/breakdown-of-the-defense.php
6. AIA B101 Standard Form OF Agreement Between Owner and Architect Section 10, Para. 10.5 “Nothing contained in the agreement shall create a contractual relationship with, or a cause of action in favor of, a third party against either the Owner or Architect”.
7. Negligent Misrepresentation Is an Exception to the Economic Loss Rule—Bilt-Rite v. The Architectural Studio Pennsylvania law, for instance, allows a claim to be made by a contractor if it relied on incorrect plans and specifications based on the Restatement (Second) of Torts provision set forth above. https://www.theaiatrust.com/whitepapers/privity/breakdown-of-the-defense.php#nav
8. https://law.justia.com/cases/delaware/superior-court/1990/583-a-2d-1378-5.html
9. AIA A101® – 2017 Standard Form of Agreement Between Owner and Contractor ARTICLE 1 The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary, and other Conditions), Drawings, Specifications, Addenda issued prior to the execution of this Agreement, other documents listed in this Agreement, and Modifications issued after execution of this Agreement, all of which form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations, or agreements, either written or oral. An enumeration of the Contract Documents, other than a Modification, appears in Article 9.
10. General Conditions AIA A201 https://www.aiacontracts.org/contract-documents/25131-general-conditions-of-the-contract-for-construction
11. Document A401® – 2017 AIA Standard Form of Agreement Between Contractor and Subcontractor § Article 1.1 The Subcontract Documents consist of (1) this Agreement; (2) {flow-down} the Prime Contract, consisting of the Agreement between the Owner and Contractor and the other Contract Documents enumerated therein; (3) Modifications to the Prime Contract, whether issued before or after the execution of this Agreement, in accordance with the provisions of Article 5; (4) other documents listed in Article 15 of this Agreement; and (5) Modifications to this Subcontract issued after execution of this Agreement, in accordance with the provisions of Article 5. These form the Subcontract, and areas fully a part of the Subcontract as if attached to this Agreement or repeated herein.