Where the project architect sued the construction manager (CM), asserting that that the CM negligently performance its services and thereby impacted the architect’s services, costs, fees, and profits, the court held that the contract between the CM and owner did not create a duty of the CM to the architect, and that the architect no third party rights against the CM under the contract.
Courts sometimes impose a duty to protect against pure economic loss even in the absence of a contract between parties if the injured party is an intended beneficiary of a contract between the defendant and another party such as an owner. Here, however, the court found that the contract between the project owner and the CM specifically excluded third party beneficiaries and stated that no third parties would have any rights under the contract. Moreover, the court was impressed by the fact that the very purpose of the CM was to assist the school in retaining and negotiating with other contractors, including architects. They were expected to review the architect’s cost estimates and designs. Having such a duty to the school, “any duty to Architect would represent a potential conflict of loyalty….”
If the architect was concerned about protecting itself against losses that the CM might cause, it could have added provisions to its contract with the owner to give it such protection. Another claim by the architect that was rejected by the court was that the CM owed a duty to indemnify the architect for losses it sustained. The contract between the CM and owner stated that the CM would indemnify the owner and its “officers, agents, representatives, and employees.” The owner settled a claim against the CM and chose not to require the CM to indemnify its agents and representatives. In arguing its right to be indemnified by the CM, the architect asserted that it had an independent right to enforce the indemnity requirement in the Owner-CM contract.
Several reasons for rejecting this argument were given by the court. Although it agreed that the CM could be required to indemnify agents and representatives of the owner, the court concluded that the owner had the exclusive right to decide whether to enforce the provision. This was supported by the clause stating that no third-party beneficiary rights were intended under the contract. If the architect wanted the right to independently enforce the indemnity provision against the CM, the court says it should have included such language in the contract. Ratcliff Architects v. Vanir Construction Management, Inc., 106 Cal. Rptr. 2d 1 (2001).
—–Risk Management Note—– This case demonstrates the difficulties that one professional has in suing another professional for damages alleged to arise out of contracts with owners on construction projects. Generally, a party will submit a claim directly to the owner for its damages (or possibly sue the owner), whether the damages are caused by the owner or some other party for whom the owner is responsible. What this court is saying is that if an architect wants to have recourse directly against a third party such as a construction manager or contractor, it must clearly make itself a named third-party beneficiary under that third party’s contract with the owner. For more examples of cases prohibiting negligence suits arising out of breaches of other parties’ contracts, see the cases discussed in previous issues of this newsletter in the subject index under “economic loss.” http://www.constructionrisk.com/articles.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 3, No. 8 (Nov 2001).
Copyright 2001, ConstructionRIsk.com, LLC