Architect responsible for insuring payment

South Carolina court says architect must assure that general contractor pays subcontractors
August 11, 2010

With some notable exceptions, design professionals have enjoyed insulation from liability when their actions have caused damages to contractors and subcontractors. The courts have rationalized that since there is no contractual relationship between design professionals and contractors, it would be unfair for contractors to claim damages against design professionals because of the lack of foreseeability that the design professional's errors and omissions may damage contractors.

However, in a recent case, the South Carolina Supreme Court has expanded the potential liability of a design professional by holding that an architect may owe a duty to a subcontractor to assure that the general contractor pays its subcontractors. [Cullum Mechanical Construction Inc. vs. South Carolina Baptist Hospital, 554 S.E.2d 838 (SC 2001)]

Subcontractor sues architect

Cullum Mechanical Construction Inc. filed suit against the owner-hospital, the owner's architect, the general contractor and the surety, seeking more than $425,000 for unpaid goods and services. Other subcontractors filed similar suits, but Cullum was the only subcontractor who sued the architect. The basis of Cullum's suit was that the architect owed a duty to the subcontractors to use reasonable care in the administration of contractual provisions in the architect's contract with the owner that were designed to assure payment to subcontractors.

The owner contracted with the architect who prepared a project manual for potential contractors to use in submitting bids. Eventually, the owner entered into a contract with a general contractor which in turn entered into various subcontracts.

The architect had a contractual duty with the owner to review the general contractor's payment applications, certifying the amounts due. The architect's issuance of a certificate of payment constituted "a representation that [general] Contractor [was] entitled to payment in the amount certified." However, the issuance of a certificate of payment was not a representation that Architect had "ascertained how or for what purpose [general] Contractor [had] used money previously paid on account of the contract sum."

Pursuant to its contract with the owner, the architect had the ability to withhold the certification of payments if the general contractor failed to properly pay subcontractors. Another fact which hurt the architect was that the architect had knowledge that the general contractor was in breach of its contract with the owner for failing to provide a payment bond, but nevertheless continued to certify payments and reduce the amounts of retainage from 10 percent to 5 percent. The court's decision is not clear when the architect first became aware that there was no bond: that information apparently came late in the process.

Cullum filed suit against the architect and others, but the trial court dismissed Cullum's suit against the architect without a trial, ruling as a matter of law the architect had no duty to the subcontractor to assure payment by the general contractor. The Court of Appeals affirmed, but that decision was appealed to the Supreme Court, which reversed the appeal. It was supported by the Legal Defense Fund of the American Subcontractors Association.

Special conditions cited

The Supreme Court ruled that an architect generally does not have a duty to assure payment to subcontractors, but that special conditions and contract documents may give rise to a special relationship between the subcontractors and the architect, and therefore, a duty of care.

The court's decision was not that the architect necessarily owed a duty to the subcontractor. The decision was that the subcontractor was entitled to a trial so that a jury could make that decision. The two lower courts had ruled that Cullum was not entitled to a trial. If the jury finds that the architect did owe a duty to the subcontractor, then the jury would have to decide whether the architect's release of progress payments and retainage without a payment bond was negligent and whether the subcontractor suffered damages as a result.

In a case of first impression in West Virginia, the Supreme Court of Appeals held that an architect may be liable to a contractor for economic losses caused by (1) negligent design defects, even though there is no contract between the contractor and the architect, and (2) breach of an implied warranty of design. The West Virginia court, like the South Carolina court, reasoned that there is a "special relationship" between a design professional and a contractor. Such special relationship may be proven through evidence of foreseeability of the nature of harm to be suffered by the party claiming damages. Contractors fulfill this requirement because they are members of a limited class comprised of contractors bidding on a particular project, and they must rely on design documents to calculate their bid.

As a practical matter, the court found that it is foreseeable that if a design professional negligently performs its duty in the preparation of plans and specifications that it will be the contractor who suffers economic loss, even though the design professional has no contract with that contractor. [Eastern Steel Constructors Inc. vs. City of Salem, 549 S.E. 2d 266 (W. Va. 2001)]

Lessons learned

It behooves contractors and subcontractors to pay close attention to contract documents between other parties. In this case, contractual provisions between the architect and the owner may give rise to unsuspected additional liability on the part of the architect to other parties for not caring out those responsibilities. Design professionals need specific contractual language negating the notion that any person who is not a party to its contract may claim the benefit of any of its terms.

         
 

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