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Where a structural steel subcontractor filed suit against the project owner’s architect, alleging that the architect’s plans and specifications were defective and caused delays that economically damaged the contractor, a trial court applied the economic loss doctrine to dismiss the suit, but that was reversed on appeal, with the court holding the contractor can amend its complaint to include factual allegations addressing nine factors that are used to determine whether, in the absence of privity, a defendant owes a plaintiff a duty of care to prevent economic loss. Olson & Co. Steel v. Nestor + Gaffney Architecture, 2012 WL 5332041 (Cal.App. 2012).

This case involves a subcontractor negligence claim against the architect.  The prime contractor had already settled its own claim against the project owner (not the architect) for additional time and extra work due to conflicting plans and specifications.

In analyzing the facts and law, the appellate court stated its decision by explaining that the California Supreme Court has recognized exceptions to the economic loss rule and set forth guidance for courts making the policy determinations as to whether a duty of care exists in a particular case and provided the following guidance:

 “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are [1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm.”

 The appellate court quotes another Supreme Court decision that added three additional factors to be considered:

 “(7) the degree to which there might be a potential liability out of proportion to fault, (8) the level of sophistication of the plaintiff in the context of the transaction (including the potential for what the court called “ ‘private ordering’ ” to contractually protect against the risk), and (9) the balance between, on the one hand, efficient loss spreading, and, on the other hand, and the potential for dislocation of resources.”

 The court was apparently satisfied that the subcontractor had pleaded sufficient facts to suggest that there could be a duty of care owed to it by the architect.  For example, the court stated the following:

 “For instance, the SAC and the attached portions of the Agreement show that N+G was aware that the plans and specifications would be part of the bid package and, thus, would be used by bidders in submitting bids on the Project. In addition, the SAC alleged that N+G knew or should have known that the plans and specifications also would be used in the construction of the Project. Thus, it is reasonable to infer that County and N+G intended the plans and specifications to be relied upon by (1) the various contractors and subcontractors bidding on the Project and (2) the successful bidders in building the Project.”

 After reviewing the allegations contained in the complaint, the court concluded they did not provide enough information to properly evaluate the nine factors set forth above to reach a conclusion as to whether the architect owed a duty of care to the subcontractor.  Because there was a chance under California law, that notwithstanding the normal application of the economic loss doctrine, a subcontractor could present sufficient facts to prevail against the architect for breach of a duty of care, the court stated: “We are reluctant to reach a conclusion based on matters that are not set forth in the pleadings …[and] we direct the trial court to grant Olson leave to amend to include allegations directed at the [nine factors].”

Comment:  This decision and others like it in California are unfortunate because they throw the door wide open to suits against design firms by any project participant at any tier, and circumvent the normal contractual requirements and expectations that the proper recourse for recovering economic losses is from the party with whom one has a contractual relationship.  Where the economic loss rule is accepted as a general rule, but exceptions are permitted, there is a tendency for the exceptions to swallow the rule.  That is particularly problematic on construction projects where parties should reasonably be expected to recover for breach of contract rather than under creative tort (i.e., negligence) theories.

Historically, if a contractor sustains damages as a result of defective specifications, it makes a claim against the project owner with whom it contracted. The owner generally is held responsible for the defective specifications, pursuant to the Spearin doctrine, whereby courts hold that owner’s grant an implied warranty of specifications when they provide an architect’s plans and specifications to contractors to construct.  Through the contract it is possible for parties to allocate and limit their risk.  When courts allow contractors and their subcontractors to do an end-run around the contract risk allocation, this dishonors the intent of the parties and the contract and does harm to the design and construction process.

 

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. 15, No. 4 (April 2013).

Copyright 2013, ConstructionRisk, LLC