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A design professional has been held to owe a third party condominium unit purchaser a duty of care in the performance of its professional services for the developer despite language in the design professional contract stating otherwise.  The court relied on both the common law as well as California Civil Code section 1368.3 (a) for the proposition that if a design professional performs its services negligently, it will be liable for damages to the ultimate purchasers of residential property.  Beacon Residential Community Association v. Skidmore, Owings and Merrill, 3211 Cal.App.4th 1301 (2012).  In reaching its decision, the court acknowledged that the “rule of liability may negatively impact the cost of housing” and that “Liability concerns may also limit the willingness of design professional to undertake large residential construction projects at all.”

[Author’s comment]   It’s good to see the court’s candid observation about the negative impact on housing and the willingness of design professionals to undertake residential construction projects.  Particularly with regard to condominium projects, it may seem like the almost-inevitable claims by the condo association and unit purchasers would make these projects too risky for designers and their insurance carriers.  I sometimes compare it to insuring a burning building.  How do you price professional services when you know there is nothing you can do by contract to limit who can file a claim, when a claim can be filed, or to otherwise limit liability.  And how can an insurance carrier underwrite insurance for services on these projects when it is almost a sure thing that claims will be filed against the insured design professional?   Risk Management 101 admonishes us to wisely select our clients and projects, and then to appropriately allocate and reduce risk.  Good luck with that when choosing to design condominium projects in California.

Duty of Care to Future Residents

Skidmore, Owings & Merrill LLP (SOM) and HKS Architects provided architectural and engineering services, as well as construction administration and construction management for the Beacon Residential Condominiums.   The homeowners’ association that manages the Project sued them and others for alleged construction defects.  The theory of the association complaint was that the design professionals had a duty of care to the association and future residents when designing the project and that their professional negligence caused the project to violate residential construction standards established in state Senate Bill No. 800.

One of the key defects alleged is “solar heat gain,” whereby the plaintiffs alleged that “the condominium units are rendered uninhabitable, unhealthy, and unsafe during certain periods due to excessively high temperatures.”  The plaintiff further avers that the solar heat gain resulted from the designer’s approval “of the substitution of less expensive, and ultimately nonfunctional, windows,” as well as a design lacking adequate ventilation within the residential units.

The trial court dismissed the complaint against the designers because it found they owed no duty of care to the association or its members and could therefore not be liable.  The court concluded that that the association had to show that the designers had “control” in the construction process and assumed a role beyond that of providing design recommendations to the owner.  No allegations of such control were made.  Moreover, the trial court found that “Even if [the designers] initiated the substitutions, changes, and other elements of design that [the association] alleges to be the caused of serious defects, so long as the final decision rested with the owner, there is no duty by [the designers] to the future condominum owners….”  [Author’s Note:  The reasoning of the trial court is consistent with court decisions in many (probably the majority) of states. The subsequent reasoning of the appellate court is not followed in as many states].

In reversing the trial court, the California Court of Appeal applied a series of balancing factors for rendering a determination of whether in a specific case the defendant will be held liable to a third person with whom it is not in privity of contract.  As explained by the court, the factors to be considered include “the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” (Citing Biakanja v. Irving, 49 Cal.2d 647.)

In a devastating rejection of the parties’ contractual intent with regard to avoiding any responsibly to third party beneficiaries, the court stated the following:

“In this case, Respondents attempted to limit their liability by providing in the HKS contract with the developer that: ‘Except as set forth in this section 12.1, or as expressly agreed in writing by Architect and Owner, no person other than the parties or their successors and assigns shall be a third-party beneficiary of the obligation contained in the Agreement or have the right to enforce any of its provisions. It is understood that (i) Owner reserves the right to sell portions of the Project to one or more condominium associations or purchasers during or after the conclusion of the Project; (ii) Architect is solely responsible to Owner and not to such condominium associations or purchasers for performance or Architect’s obligations under this Agreement; and (iii) no such condominium association or purchaser shall be a third-party beneficiary or third-party obligee with respect to the Architect’s obligations under this Agreement.’ This intended limitation, however, only serves to emphasize the fact that Respondents were more than well aware that future homeowners would necessarily be affected by the work that they performed. And, in any event, liability to foreseeable residential purchasers is determined by the scope of the duty of professional care, not whether those purchasers are, or are not, third party beneficiaries under contract. While a duty of care arising from contract may perhaps be contractually limited, a duty of care imposed by law cannot simply be disclaimed.”

Having found the contract language to be ineffectual at eliminating third party rights, the court reviewed the Biakanja factors described above and found nothing in those factors that would preclude imposition of liability upon the design professionals of residential construction for alleged negligence in the rendition of professional services.

Next, the court said that a purchaser of residential housing “is certainly more fairly characterized as a ‘consumer’ and residential housing as a ‘product,’ and numerous cases have done so.”  As a result, said the court, “While the individuals and entities participating in the development process may have the ability to privately order allocation of liability among themselves by contract or through structuring of insurance overage, the buyer does not.”

The court concluded that even if the design professionals had not been found subject to liability under common law, they would nevertheless be subject to suit by the homeowners pursuant to statutory law.  As explained by the court,

“The plain language of Senate Bill No. 800 provides that a design professional who “as the result of a negligent act or omission” causes, in whole or in part, a violation of the standards set forth in section 896 for residential housing may be liable to the ultimate purchasers for damages. The legislative history confirms the legislature’s intent. In construing a statute, our general goal must always be to effectuate the legislative intent. To the extent that a Biakanja/ Bily policy analysis is not otherwise dispositive of the scope of duty owed by design professionals to a homeowner/buyer, Senate Bill No. 800 is.”

Based on this reasoning, the court reversed the trial court.  The case will now proceed to trial for a jury to determine whether the design professionals breached the duty of care that the appellate court concluded they owed to the plaintiffs.

Comment

This case is just one more example of the difficult legal climate in California for design professionals.   When contrasted with decisions in other states, we see how important a role legislative and judicial philosophy plays in the outcome.

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. 5 (May 2013).

Copyright 2013, ConstructionRisk, LLC