Liability of Design-Builders for Design, Construction, and Acquisition Claims (2015)

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4related to design development and contract admin- istration issues affecting the design process. The heart of this digest is Sections V, VI, and VII. Section V provides a comprehensive discussion of the right-of-way acquisition process, both from an administrative and a risk/liability perspective. Sec- tion VI examines design–build case law relating to design and construction liability. It considers many of the challenging issues confronting transportation agencies in the design process, including the liabil- ity arising out of defective preliminary design and site condition information, as well as liability associ- ated with the design review and approval process. It also reviews cases discussing the liability of design- ers that work as part of the design–build team. Sec- tion VII examines state laws and concepts relative to statutes of limitation and repose, anti-indemnity statutes, and sovereign immunity. The digest closes with case studies in Section VIII and concluding thoughts in Section IX. The case studies are diverse and focus on three discrete top- ics. One involves the results of arbitration between a design–builder and its lead designer on the South Carolina Department of Transportation’s Cooper River Bridge project. The second set is derived from information received from professional liability insurance carriers, each of whom has substantial experience in addressing claims for design defects under design–build and other project delivery sys- tems. The last set of case studies summarizes a handful of design–build projects where the trans- portation agency adopted some creative design development approaches. II. PRINCIPLES OF CONSTRUCTION AND DESIGN LIABILITY The liability framework for the U.S. construction industry, and particularly the transportation sector, has been based largely on projects delivered through the design–bid–build process. As a consequence, disputes against designers and contractors on design–bid–build projects are resolved through fairly predictable legal standards, even though ulti- mate liability is highly dependent on the specific facts of the dispute. Although it is beyond the scope of this digest to provide a comprehensive review of the liability issues that can arise on a construction project, it is useful to examine some basic liability concepts that affect owners, designers, and contractors. This sec- tion will review these concepts, focusing on cases arising on design–bid–build projects. Liability prin- ciples on design–build projects will follow in subse- quent sections. That said, it is helpful to begin by contrasting the design–bid–build and design–build delivery sys- tems. Let us begin by looking at design–bid–build. Among its other attributes, design–bid–build calls for the owner to: 1) fully design the project either with its own personnel (as is often the case with state transportation agencies) or through a contract with an architect or an engineer, and 2) construct the project with a general contractor that submits the lowest bid. The general contractor is selected on the basis of low price and has no role whatsoever in the design process.1 Moreover, although the designer and contractor interface with each other on a num- ber of levels during construction, they do not have a direct contractual relationship. As will be addressed in this section, liability under design–bid–build is complicated by virtue of this three-party contracting arrangement. When things go wrong, the owner generally expects that one of its two contracting parties will bear responsibility. This can pose a challenge, as it is often difficult to deter- mine conclusively whether defective design or con- struction is the root cause of the problem. This deter- mination is exacerbated by the self-interests of the designer and contractor, each of whom is incentiv- ized to point to the other as the one who should bear responsibility. The lack of a contract between the contractor and designer also means that, in many states, a contractor is not able to sue a designer for economic damages, such as delay damages or the direct costs of correcting a defective design. Often, the result is that the owner has no recourse to either party for the consequences of the problem. Design–build profoundly differs from design– bid–build on a number of levels. It uses a “single point of responsibility” concept, where the owner enters into a contract with an entity that has the responsibility to both design and construct the proj- ect. Because of this, the owner generally does not have a direct contract with the designer but instead contracts with a general contractor, who will have a subcontract with the designer.2 The single point of 1 An exception to this can be for elements of the work where the contract specifically delegates design responsi- bility to the contractor, as might be the case for fire protec- tion and sheeting and shoring. 2 This “contractor-led” design–build approach is typical of most transportation agency projects. Readers should note that there are several ways to structure a design–build entity where the designer is in direct contract with the owner. Depending on the nature of the project, some design firms serve as the prime design–build contractor and sub- contract with construction contractors. In addition, some designers and contractors can enter into a joint venture to contract for design–build services, and other organizations have in-house capabilities to serve as lead designer and lead contractor for their design–build projects.

5responsibility can significantly impact the treat- ment of design liability, as it shifts risk of design errors to the contractor (assuming it is the design– builder) and those furnishing design services to the contractor. In addition, because the contractor and designer have a contractual relationship, the designer can be directly liable to the contractor for the consequences of design defects, including delay and inefficiency claims. In addition to being impacted by the structural aspects of the delivery system, dispute resolution is affected by several important legal principles that have evolved over time. These are addressed in the following subsections. Although the principles, and the cases giving rise to them, generally apply in the context of design–bid–build, many of them are also applicable under design–build. The liability results, however, may differ because of design–build’s single point of responsibility feature. Now let us examine some basic liability concepts that affect owners, designers, and contractors. A. Contractor’s Standard of Care Most construction contracts, whether in the pri- vate or public sector, require the contractor to war- rant to the owner that all construction work is of good quality, free from faults or defects, and in strict conformance with the contract documents. This is the case under design–bid–build as well as in design–build. If the contractor fails to comply with this warranty, it will be liable for the consequences. This could result in the owner rejecting the contrac- tor’s work and requiring it to correct the defect at its own cost. It could also result in the owner terminat- ing the contractor for default. Hundreds of cases involving design–bid–build cite the principle that contractors are responsible for strictly complying with the plans and specifications. The cases often arise in the context of a contractor having an interpretation that differs from the explicit terms of the contract documents and asking for a change order when it is directed to perform in strict accordance with the contract documents. They also arise in the context of an owner finding defective work during the inspection process and the parties debating about how this should be handled. One of the most recent cases is Appeals of James G. Davis Construction Corporation,3 which involved a dispute over the cost of installing insulation on seg- ments of a building’s heating, ventilation, and air con- ditioning (HVAC) system. The specifications included a listing of ductwork and casings to be insulated and specified “outside air ductwork, casings and plenums.” The contractor claimed that under HVAC trade prac- tice and custom, outside air (OA) ductwork is sub- stantively supply air ductwork, which does not need to be insulated pursuant to American Society of Heat- ing, Refrigerating, and Air-Conditioning Engineers (ASHRAE) standards. The Board of Contract Appeals rejected this argument, stating: To the extent [the contractor] argues that we should substi- tute trade practice and custom for the QA ductwork require- ment as written, as seems to be the case, we reject that argument. The government has the right to demand strict compliance with its requirements, which can vary from the norm in the trade.4 (Emphasis added.) The board concluded that the plain language of the specification was unambiguous, and that trade practice and custom could not be used to create an ambiguity where none existed.5 Although the contractor has an obligation to strictly comply with the specifications, this does not mean that the owner’s only remedy is to order the removal of the defective work. The contractor typi- cally has the right to propose a correction that will allow substantial compliance with the specifications. This occurred in Granite Construction Company v. United States,6 where the contractor failed to prop- erly install a polyvinyl chloride (PVC) waterstop in the vertical joints of a lock and dam project’s con- crete walls. This failure was discovered by govern- ment inspectors after 10 percent of the waterstop was permanently embedded in the walls. The con- tractor acknowledged its mistake and proposed sev- eral remedial methods that did not involve removal of the waterstop. All of the methods were rejected by the government, as it would accept nothing less than strict compliance with the specification. The contractor removed and replaced the water- stop at great cost and filed a claim, and was ultimately successful in arguing that the government had been economically wasteful, with the court stating: We recognize that the government generally has the right to insist on performance in strict compliance with the con- tract specifications and may require a contractor to correct nonconforming work. …However, there is ample authority for holding that the government should not be permitted to direct the replacement of work in situations where the cost of correction is economically wasteful and the work is other- wise adequate for its intended purpose. In such cases, the government is only entitled to a downward adjustment in the contract price.7 The court was particularly critical of the govern- ment’s failure to evaluate the quality of the water- stop that had been installed in relation to the 4 Id. at 33. 5 Id. at 32–33. 6 962 F.2d 998 (Fed. Cir. 1992). 7 Id. at 1007. 3 ASBCA Nos. 58000, 58002, 2015-1 B.C.A. ¶ 35, 818; 2014 ASBCA LEXIS 396 (Nov. 19, 2014).

6project’s needs. The court concluded that had the government done so, it would have discovered that the waterstop was adequate and its replacement was unnecessary. B. The Spearin Doctrine Although contractors are obligated to strictly comply with the contract documents, they are not responsible for errors in those documents. As a con- sequnce, if the contractor fully complies with the plans and specifications, and the project fails to meet the owner’s intended purposes (e.g., pavement that prematurely ruts), the owner has no recourse against the contractor. Likewise, if it is determined during construction that the plans and specifica- tions are defective (e.g., one element of the work con- flicts with another), the owner is obligated to pro- vide the contractor with a change order to pay for the consequences of those defects. The legal principle behind this nearly century-old concept derives from the U.S. Supreme Court case United States v. Spearin.8 The Spearin doctrine makes the owner liable if the detailed plans and specifications it furnishes create problems for the contractor that the contractor could not reasonably foresee. Under Spearin, the owner is deemed to impliedly warrant that its design documents are sufficient to construct the project and will, if fol- lowed, result in a functioning system. Stated another way, “In exchange for the right to direct specifically how a project shall be performed, the government warrants that its directions are not defective.”9 The owner’s implied warranty applies even though the owner hires a design professional to pre- pare the design documents and furnishes them to the contractor: When the Government assumes responsibility for the prep- aration of the plans and specifications through the use of architects and engineers of its own selection, it assumes responsibility for making the necessary engineering calcu- lations for and assuring the correctness and soundness of the design; and the contractor is under no obligation to make his own engineering calculations for the purpose of verifying the correctness and adequacy of the Government specifications.10 Although the Spearin doctrine is based on federal government contracting principles, it has been widely adopted in state and federal courts. For example, in Commonwealth Dep’t of Transp. v. W.P. Dickerson & Son, Inc.,11 a Pennsylvania court found that the contractor was not liable to the Pennsylva- nia Department of Transportation (PennDOT) for cracked beams and was entitled to additional com- pensation for the extra work and expenses involved in shifting or removing the beams from the bridge and testing them. The evidence showed that PennDOT provided the contractor with detailed specifications relating to all materials to be used in the construction of the beams, as well as the compo- sition, mixing procedures, and test requirements for the concrete. The contractor had little, if any, inde- pendent discretion in the construction of the beams, and there was no evidence that it had failed to follow the specifications. Citing Spearin, the court stated, “It is well established that a contractor who per- forms according to detailed plans and specifications is not responsible for defects in the result.”12 For a contractor to recover under the Spearin doc- trine, it must demonstrate that it reasonably relied upon the accuracy of the owner’s design documents. If a contractor has pre-award knowledge of a defect in the specifications, it must bring this to the atten- tion of the owner, or it will be deemed to have assumed the risk.13 The cases featuring contractor pre-award knowledge often involve owners who spe- cifically call out the alleged defect to the bidders, or contractors who previously worked on a project involving the same specification and defect. In real- ity, most of the cases addressing reasonable reliance arise in the context of whether the existence of a defect is obvious (i.e., patent) from a review of the bid package.14 If there is an obvious defect in the documents, bidders are required to raise those defects during the bidding process or they will lose their Spearin rights. If the defect is not obvious (i.e., latent), then the bidder does not lose these rights. C. Designer’s Standard of Care Many owners who face financial exposure to con- tractors from defective specifications believe that designers should bear the ultimate burden of this problem. It is difficult, however, for an owner to “pass-through” these claims to the designer. Although the designer is generally responsible to provide its client with a design that meets the own- er’s program requirements, common law does not require the designer to provide perfect performance, with a design that will be error-free. 8 248 U.S. 132, 39 S. Ct. 59, 63 L. Ed. 166 (1918). 9 Concrete Placing Co. v. United States. 25 Cl. Ct. 369, 375 (Cl. Ct. 1992), citing Spearin, 248 U.S. at 136. 10 Greenhut Constr. Co., Inc., ASBCA 15192, 71-1 B.C.A. ¶ 8845, 1971 ASBCA LEXIS 256 (Apr. 21, 1971), at 1. 11 42 Pa. Commw. 359, 400 A.2d 930 (1979). 12 Id. at 362, 400 A.2d at 932. 13 Appeal of S. Head Painting Contractor, Inc., ASBCA 26249, 82-2 BCA ¶ 15,886, 1982 ASBCA LEXIS 288 (July 12, 1982); Johnson Controls, Inc. v. United States, 229 Ct. Cl. 445, 671 F.2d 1312 (1982). 14 Allied Contractors, Inc. v. United States, 180 Ct. Cl. 1057, 381 F.2d 995 (Ct. Cl. 1967).

7Instead, the standard of care for performance of design services is generally defined as “the ordinary and reasonable degree of care required by a prudent professional under the circumstances.”15 Commonly referred to as the “professional negligence” standard of care, it requires a plaintiff to meet the following elements: 1) a duty owed by the designer to the plaintiff; 2) a breach of that duty by the designer; 3) a causal connection between the negligent con- duct and the resulting harm; and 4) actual loss or damage caused to the plaintiff. Professional negli- gence can only be proven by the testimony of an expert qualified in the same field as the person or entity accused of being negligent. It is not sufficient to simply identify the problem.16 In design–bid–build contracts, the professional negligence standard of care is often reflected in the underlying contract between the owner and designer. For example, the Standard Form of Agreement between Owner and Engineer for Professional Ser- vices prepared by the Engineers Joint Contract Doc- uments Committee (EJCDC) states: The standard of care for all professional engineering and related services performed or furnished by the Engineer under this Agreement will be the care and skill ordinarily used by members of the subject profession practicing under similar circumstances at the same time and in the same locality. Engineer makes no warranties, express or implied, under this Agreement or otherwise, in connection with Engineer’s services.17 Even though this would be the standard if the contract were silent on standard of care, most parties include this type of clause to avoid disputes over whether the designer owed its client a higher standard. State court cases contain century-old references to the professional negligence standard of care. In Coombs v. Beede,18 the dispute involved an architect who designed a house where the bids were higher than the homeowner expected. When the home- owner refused to pay the architect’s fees, the archi- tect sued and ultimately won, as the court concluded that the architect did not guarantee that its design could be built within that expected price: The responsibility resting on an architect is essentially the same as that which rests upon the lawyer to his client, or upon the physician to his patient, or which rests upon any one to another where such person pretends to possess some skill and ability in some special employment, and offers his services to the public on account of his fitness to act in the line of business for which he may be employed. The under- taking of an architect implies that he possesses skill and ability, including taste, sufficient to enable him to perform the required services at least ordinarily and reasonably well; and that he will exercise and apply, in the given case, his skill and ability, his judgment and taste, reasonably and without neglect. But the undertaking does not imply or warrant a satisfactory result. It will be enough that any failure shall not be by the fault of the architect. There is no implied promise that miscalculations may not occur. An error of judgment is not necessarily evidence of a want of skill or care, for mistakes and miscalculations are incident to all the business of life.19 Myriad federal and state court cases apply this general standard. Designers have been found to be negligent for miscalculating loads, failing to follow code requirements, and a plethora of other matters. Given that this digest focuses on design–build, it is instructive to review design–bid–build cases where the owner had separate design and construc- tion contracts—instead of design-build’s single point of responsibility. Consider BPLW Architects and Engineers, Inc. v. United States,20 where the dispute arose from a contract the designer had with the U.S. Army Corps of Engineers to provide an underfloor piping design for two student dormitory buildings. Shortly after construction finished, below-grade pip- ing problems occurred, resulting in flooding to sev- eral dorm units. The Corps repaired the broken pipes, replaced the entire subsurface sanitary pip- ing system, and regraded around the dorms. It then filed a claim against the designer to recover the $7.6 million incurred for the repair. At trial, both parties agreed that the applicable standard of care required the engineer to comply with a certain soils report when designing the pip- ing system. The parties disagreed, however, on which sections of the report applied to the under- floor piping. Based upon the report’s prediction that the soil underneath the dorms had the potential to heave over 9 in., the Corps contended that the designer was required to design a plumbing system capable of withstanding over 9 in. of heave. The designer, however, looked to different provisions of the report and contended that it was required to design a plumbing system that could accommodate only 1 in. of movement. The court found that the designer’s underfloor piping designs and grading plans failed to comply 15 Joseph A. Demkin, The ArchiTecT’s hAnDbook of pro- fessionAl prAcTice 737 (13th ed., 2001). 16 An exception is the designer’s failure to comply with building codes, which is typically considered negligence per se (i.e., no additional proof is needed). consTrucTion lAw 146 (William Allensworth, Ross J. Altman, Allen Overcash & Carol J. Patterson eds., American Bar Asso- ciation Forum on the Construction Committee, 2009). 17 Engineers Joint Contract Documents Comm., Agree- ment between Owner and Engineer for Prof’l Servs. 4 (2011). 18 89 Me. 187, 36 A. 104 (1896). 19 Id. at 188, 36 A. at 104. 20 106 Fed. Cl. 521 (2012).

8with the contract and the applicable standard of care. It also held, however, that the Corps was not entitled to recover its repair costs because it did not meet the third test for negligence—causal connec- tion to the Corps’ damages. In this case, there was testimony that the general contractor had not cor- rectly performed the piping installation. Moreover, the Corps was unable to show that the contractor had constructed the grades in accordance with the designer’s design, as it had no as-built data and pre- sented no witnesses on the as-built condition of the site grading. As such, the Corps was unable to show that the negligent design led to the improper grades and pooling of water. Even if the Corps had prevailed on this, the court noted that it would have faced dif- ficulty proving its damages, as not all were shown to be directly related to the repair work. Another recent case illustrates the challenges that an owner faces when it is in the middle of design and construction. In a highly publicized dispute, the Tampa Bay Water authority (TBW) sued HDR Engi- neering, Inc., for what it alleged was HDR’s negli- gent design of the C.W. Bill Young Regional Reser- voir.21 The problems with the reservoir arose soon after construction was completed, when large cracks were discovered in its earthen embankments. TBW filed suit against both HDR and the general contrac- tor for approximately $140 million. HDR’s design called for the use of a geomem- brane, a protective 2 ft to 3 ft layer of soil and an overlay of soil cement designed to prevent erosion of the reservoir’s inner walls. The owner alleged that HDR’s design was defective because it failed to account for excess pore pressure, arguing that the layer of soil between the soil cement and the geo- membrane was trapping excess water and leading to the cracks. HDR defended the suit by arguing that the cracking was not caused by the soil cement being pushed up by excess pore pressure but rather by the cement’s collapse. According to HDR, the pro- tective soil layer on top of the geomembrane was too thick, too loose, and too dry in the two areas where the soil cement cracked. When the soil became satu- rated with water, it became denser and lost volume, causing the soil cement to collapse and crack. HDR’s theory placed the blame on the contractor. The owner made a tactical decision to blame HDR for the problem and, in doing so, settled with the contractor for a relatively nominal amount. It had anticipated that the contractor’s allegedly defective work would not be raised to the jury. However, the trial court judge did not let this happen, and HDR was able to present its theory that its design met the standard of care, and that the cracking problem was caused by the general contractor’s defective work. The jury returned a verdict completely exonerating HDR of liability. It was upheld by the appeals court. Ultimately, HDR was able to recover all of its legal fees (in excess of $20 million) from the owner’s failed attempt to sue it. In addition to the difficulty of proving whether the design or construction causes design problems, owners face challenges in demonstrating that the designer should have discovered defective construc- tion work during inspection. Courts have rejected efforts to make design professionals the guarantors of the quality of construction in the absence of spe- cific contract language requiring this. Given the pro- fessional negligence standard discussed above, most cases that have addressed a design professional’s inspection obligations hold that the designer must perform a reasonable inspection given its contrac- tual inspection of scope of work. One of the leading cases in this area, Mounds- view Indep. School Dist. No. 621 v. Buetow and Assocs., Inc.,22 involved a school where, after con- struction was complete, portions of the roof were ripped off during a windstorm. At the time the architect was retained, it offered the owner three options regarding the level of construction supervi- sion it would provide: 1) no supervision; 2) general supervision; or 3) continuous on-site inspection of the construction project by a full-time project repre- sentative or “clerk of the works.” Moundsview elected the general supervision option, the opera- tive clause of which expressly disavowed any liabil- ity for the contractor’s failure to properly carry out the work. The clause called for the work to be inspected by the architect at intervals appropriate to the stage of construction. It also stated that the architect was not required to make an exhaustive or continuous on-site inspection. During the 79-week construction period, the architect visited the site 90 times to perform its gen- eral supervision obligation. After the damage occurred, it was determined that the roof had not been secured by washers and nuts to the south wall of the school as required by the plans and specifica- tions. Moundsview claimed that the architect breached its supervision obligation. In affirming the trial court’s grant of summary judgment in the 21 Tampa Bay Water v. HDR Eng’g, Inc., 731 F.3d 1171 (11th Cir. 2013). See also Michael C. Loulakis & Lauren P. McLaughlin, Florida Jury Exonerates Design Engineer- ing Firm, 82 civil engineering 88 (2012), and Michael C. Loulakis & Lauren P. McLaughlin, Federal Appeals Court Affirms Jury Award to Engineering Firm, 84 civil engi- neering 84 (2014). 22 253 N.W. 2d 836 (Minn. 1977).

9architect’s favor, the Supreme Court of Minnesota held that: It is the general rule that the employment of an architect is a matter of contract, and consequently, he is responsible for all the duties enumerated within the contract of employ- ment. …An Architect, as a professional, is required to per- form his services with reasonable care and competence and will be liable in damages for any failure to do so. * * * * Moundsview cannot be allowed to gain the benefit of the more detailed “clerk-of-the-works” inspection service while in fact contracting and paying for only a general supervi- sory service.23 Other cases have adopted similar philosophies. In Weill Constr. Co. v. Thibodeaux,24 the owner of an ice skating facility sued an architectural firm because water had seeped through the concrete slab and damaged the rink floor. The owner claimed that the architect had negligently supervised the construc- tion of the work, inasmuch as the general contractor had poured the slab so as to create a horizontal cold joint through which the seepage had occurred. The court concluded that the architect had no duty to supervise the construction of the floor slabs. It looked to the potential fee that the architect would have required if it had been contracted to supervise such work. Columbus. v. Clark-Dietz, Etc.,25 dealt with a city’s action against an engineer and contractor for dam- ages resulting from the failure of a protective levee surrounding a wastewater treatment plant con- struction site. Several claims arose against the engi- neer as a result of the defective design. Another claim related to the failure of the engineer to dis- cover certain construction defects. The contract between the engineer and the owner limited the engineer’s duty for supervising construction to an obligation to generally observe the work and not to make continuous and exhaustive inspections. The court found that the engineer performed this con- tractual duty by generally overseeing construction and conducting tests with reasonable care. The court further stated that the contract did not require the engineer to inspect and verify every step of the con- tractor’s work. Given the above, owners often face challenges in proving that the root cause of a problem is the designer’s responsibility. Even if owners are able to prove this responsibility, they face an additional challenge in demonstrating that the damages they seek flow directly from the designer’s breach. In breach-of-contract actions, courts generally hold that the damages awarded should place the plaintiff in the same position it would have been had the con- tract been performed, but not in a better position. Applying this principle to situations where designers have negligently omitted something from the design documents, courts require owners to pay what the omitted item would have cost had it been included in the original design.26 The theory is that if the designer had done its work properly, the other- wise-omitted item would have been included in the design documents bid by the contractor and part of the contract price to be paid by the owner. Awarding the owner damages for this would be, in essence, let- ting the owner get something for free. This general concept is called the “betterment” or “added benefit” doctrine. Its application significantly reduces the amount of damages an owner is able to obtain from a designer in an action for professional negligence. For example, in Grossman v. Sea Air Towers, Ltd.,27 the structural engineer was found to have underdesigned a building deck. The court held that the owner would not be able to recover the addi- tional construction costs associated with increasing the load capacity of the deck—i.e., the owner would have paid for these costs if the engineer had prop- erly designed the deck. As a result of this doctrine, the type of damages that owners are able to claim for negligent design omissions are typically limited to: 1) premiums asso- ciated with having the work done by the contractor in a noncompetitive environment; 2) remediation costs, such as the contractor having to tear out work to install the omitted work; and 3) schedule disrup- tions. If, however, the omission was discovered early enough, before the contractor actually performed any work that had to be removed, the consequences of the omission would be relatively minor. The result of the professional negligence stan- dard of care can be troubling from the project own- er’s perspective. By some assessments, construction cost overruns of 3 to 5 percent caused by profes- sional errors and omissions may fall within the acceptable professional standard of care and not give rise to liability against the designer.28 As a con- sequence, most owners are required to pay the 23 Id. at 839. 24 491 So. 2d 166 (L.A. App. 1986). 25 550 F. Supp. 610 (N.D. Miss. 1982). 26 Jerome V. Bales, Shamus O’Meara & Mark R. Azman, The Betterment or Added Benefit Defense, 26 consTrucTion lAwyer 2 (2006). 27 513 So. 2d 686 (Fla. App. 1987). 28 DAviD s. hATem, kenneTh b. wAlTon & DAviD h. corkum, Chapter 4: Architect-Engineer Contracting, feD- erAl governmenT consTrucTion conTrAcTs (American Bar Association, 2d ed. 2010), citing wAller s. poAge, The builDing professionAl’s guiDe To consTrucTion Docu- menTs 40 (3d ed. 2000) (referencing National Research Council and Construction Industry Institute).

10 contractor to correct design errors and omissions without assurance that the error or omission arises to a level of professional negligence and will ulti- mately be paid by the designer. D. Designer’s Higher Standard of Care To overcome the challenges faced in proving neg- ligence, some owners have attempted to include contract language that holds designers to a higher standard of care than professional negligence or requires that they expressly warrant their work. A recent case shows the potential impact this can have on liability. In Sch. Bd. of Broward County, Florida v. Pierce Goodwin Alexander & Linville,29 a school board con- tracted with an architectural firm for major renova- tions to a high school. The design contract required the architect to perform its services “in compliance with any and all applicable codes, laws and ordi- nances.”30 It further stated that the school’s chief building official (CBO) had final authority to deter- mine the correct interpretation of all applicable building codes, statutes, and regulations. When the preliminary design plans were submit- ted, the school’s independent peer reviewer raised red flags with the school, believing that the fire codes required an exterior staircase as an emer- gency exit. The architect disagreed. The CBO ini- tially agreed with the architect and allowed the pre- liminary design plans to go out for contractor bids without the staircase. Once construction com- menced, the CBO determined the design plans were not code-compliant. The architect redrafted the plans, which resulted in a series of significant change orders and increased construction costs. The school sued the architect for breach of con- tract, arguing that the appropriate standard of care was whether the initial plans were code-compliant. The architect contended that, so long as the final plans used for construction were code-compliant, it met its contractual obligations and, in any event, it was bound by a professional negligence standard of care. The trial court interpreted an indemnity provi- sion in the contract as limiting any damages the school could recover to those arising from the archi- tect’s “negligent performance.”31 As such, the trial court did not permit the school to introduce evidence that the initial plans were not code-compliant. It stated that the jury should only consider whether the architect was negligent. With those instructions, the jury found that the architect did not breach the negligence standard of care. The Court of Appeals reversed and remanded for a new trial, finding that the lower court incorrectly instructed the jury on the appropriate standard of care. This court opined that the trial court overlooked important contractual terms that assigned a “higher standard of care” to the architect—in particular, the duty to comply with all applicable laws, statutes, rules, regulations, and building codes.32 The court held that this required the architect to deliver code-compli- ant design plans in each phase of its performance (not simply at the construction documents phase). The court also revisited the trial court’s interpre- tation of the parties’ standard indemnity provision, which stated “…the [Architect] shall indemnify and hold harmless the Owner…from and against any and all liability…to the extent said losses…are caused by the [Architect’s]…negligent, reckless, or intentional wrongful acts.”33 The court held that this indemnity provision was intended to apply to third- party claims, not claims between the school and architect, and did not limit the damages the school could recover to only those caused by negligence. Although it might seem expedient for an owner to require its designer to perform to a higher standard of care, myriad issues are associated with this. Pro- fessional liability insurance covers only professional negligence claims; it does not cover “warranties” or other higher standards of care. In addition, if the contract states that the designer is held to “the high- est standard of care for engineering services in the industry,” what does that mean? What would the designer need to do differently to perform at the highest standard of care? Some owners have argued that design profession- als owe them an implied warranty that their designs will be fit for the intended purpose even if there is no contract clause to this effect. In City of Mounds View v. Walijarvi,34 the architect was sued by its client for failing to design a watertight and damp-free facility. The City argued, among other things, that archi- tects should be deemed, as a matter of law, to war- rant that the structure, when completed in accor- dance with its plans, will be fit for its intended purpose. The court, in a lengthy and well-reasoned decision, rejected this argument. It first stated that the traditional professional negligence rule does not imply or warrant a satisfactory result. Then, turn- ing to the issue of whether a higher standard of care was appropriate, the court stated that it was “not persuaded that the time has yet arrived for the abrogation of the traditional rule.”35 It asserted: 29 137 So. 3d 1059 (Fla. App. 2014). 30 Id. at 1066. 31 Id. at 1063. 32 Id. at 1066. 33 Id. 34 263 N.W.2d 420 (Minn. 1978). 35 Id. at 424.

11 Adoption of the city’s implied warranty theory would in effect impose strict liability on architects for latent defects in the structures they design. That is, once a court or jury has made the threshold finding that a structure was some- how unfit for its intended purpose, liability would be imposed on the responsible architect in spite of his diligent application of state-of-the-art design techniques. If every facet of structural design consisted of little more than the mechanical application of immutable physical principles, we could accept the rule of strict liability which the city pro- poses. But even in the present state of relative technological enlightenment, the keenest engineering minds can err in their most searching assessment of the natural factors which determine whether structural components will ade- quately serve their intended purpose. Until the random ele- ment is eliminated in the application of architectural sci- ences, we think it fairer that the purchaser of the architect’s services bear the risk of such unforeseeable difficulties.36 Another case demonstrating this point is K.B. Weygand and Assocs. v. Deerwood Lake Land Co.,37 where an engineer was sued for negligence and breach of implied warranty when the road it designed failed. The cause of the failure was impermeability of the underlying soil, which enabled water to accumu- late between the soil and asphalt and caused the asphalt to crack. The trial judge found that the soil condition was an unexpected differing site condition (DSC) and that the engineer was not negligent. The judge also found, however, that the engineer had impliedly warranted that its design would be suit- able for its intended purpose and held it liable for the correction costs. This was overturned on appeal, as the appellate court concluded that there was no evi- dence that the engineer knew or should have known that the soil would not drain: It would be contrary to justice and fair dealing between the parties to hold a civil engineer strictly liable for a road fail- ure where an unknown soil condition can cause the failure despite the exercise of reasonable skill and diligence in the preparation of the plans and specifications. The Deerwood road was built on Townley soil which is commonly found in Shelby County. A known characteristic of the soil is that it has a slow percolation rate, that is, water passes through it slowly. However, the failure of the road did not result from that characteristic. Instead, the road failed because the soil beneath it was wholly impervious and, therefore, would not drain at all. None of the engineers who testified had seen or heard of another similar situation.38 These results are generally consistent with how other courts around the country have viewed the issue of a designer owing an implied warranty on the efficacy of its design.39 E. Rights of Third Parties to Sue Designers As noted earlier, under the design–bid–build pro- cess, the designer’s contract is with the owner. Prior to 1956, designers could not be sued by anyone other than the owner, as there was a requirement that parties be in privity of contract and that the subject injury occurred in the course of that relationship.40 Since that time, with regard to physical injury, courts around the country began recognizing that designers owed a duty of care to those third parties who were physically injured as a result of the designer’s negligence, and that privity of contract was not a defense. The issue has not been as clear with economic losses suffered or alleged by contractors, subcontrac- tors, and others. Approximately one-half of the states allow designers to be sued by third parties for economic losses, on the grounds that designers may owe a duty of care to those third parties. The remain- ing states disallow this on the basis of the economic loss doctrine, which says that recovery of economic losses (e.g., delay claims, direct costs of correcting design defects, etc.) can only come from a party with whom the plaintiff is in privity of contract. In those states that allow third parties to sue designers, the extent of liability is fairly substantial. In Bilt-Rite Contractors, Inc. v. The Architectural Stu- dio,41 a school district hired an architect to design a new school on a design–bid–build basis. Shortly after construction started, the contractor discovered that the project design, which included an aluminum cur- tain wall, sloped glazing, and metal support systems, could not be installed using standard construction techniques. The contractor sued the architect on the theory of negligent misrepresentation, claiming that its specifications were false and misleading. The architect successfully argued to the trial court that the contractor’s claims were barred by the economic loss doctrine and that the architect owed no duty to the general contractor. The state’s highest court reversed the decision, finding that a design professional could reasonably expect contractors to rely on information supplied in project design docu- ments. It also found that it was foreseeable that con- tractors could incur economic losses if the design information was flawed or defective. The court noted that economic losses resulting from negligent mis- representation were considered a well-recognized exception to the economic loss doctrine, and that it would not bar a contractor’s recovery against an architect for misrepresentation. 40 AmericAn insTiTuTe of ArchiTecTs, The ArchiTecT’s hAnDbook of professionAl prAcTice 30 (15th ed. 2013). 41 581 Pa. 454, 866 A.2d 270 (2005). 36 Id. 37 812 So. 2d 1165 (Ala. 2002). 38 Id. at 1169. 39 See, e.g., Ryan v. Morgan Spear Assoc., Inc., 546 S.W.2d 678 (Tex. Civ. App., 1977), where a court rejected that the designer had impliedly warranted that its foundation design would be sufficient for the building’s intended purpose. See also Allensworth, Altman, Overcash & Patterson, supra note 16, at 151, note 30.