The wall that shields design professionals from lawsuits by contractors with whom the designer has no contractual relationship continues to be whittled away.
Where a contractor alleges that it has been damaged by faulty or untimely drawings, it may, in certain circumstances, maintain a lawsuit for negligence against the designer. The lawsuit must be based upon negligence, rather than breach of contract, because in the traditional design/bid/build delivery system there is no direct contractual relationship between the designer and the contractor.
The economic loss doctrine
Whether an injured party can maintain a lawsuit against a design professional depends on the type of damages involved. Where the design professional negligently designs a roof that collapses, causing personal injury or property damage, the designer is universally held accountable. On the other hand, where the designer negligently submits drawings that are incomplete and/or late, the contractor who is harmed economically because of constructability issues may not be able to recover economic losses from the design professional because it did not have a contractual relationship with the offending party. This concept, referred to as the 'economic loss doctrine,' originated in the product-liability field and has been transplanted into the construction arena.
The economic loss doctrine may make sense where products are introduced into the stream of commerce, but the rationale for barring actions in the construction field is not as logical. Although there are strong advocates for maintaining the economic loss doctrine, courts around the country are recognizing the difficulty of using a product-liability concept to deny recovery to a damaged contractor. Design professionals need to be aware that they are becoming exposed to greater risk for having to defend actions brought by contractors with whom they have no privity of contract.
The Wisconsin Court of Appeals, for example, has rejected the application of the economic loss doctrine. In this case, a land surveyor contracted with prospective homeowners to plot land for the placement of a house. The surveyor's contract with the owners did not provide that the surveyor place any excavation stakes. But the contractor asked the surveyor to do so, and the surveyor made an error in their placement. Thus, the foundation was improperly located in violation of the building code. The contractor sought to recover damages from the surveyor, even though no contract, personal injury or property damage was involved.
The court stated, however, that while the surveyor had no direct contract with the contractor, he had a duty to place the stakes so that they would not cause foreseeable harm [KHLH Inc. vs. Wisconsin Land Surveyors, 619 N.W.2d 307].
In a recent New York case, the U.S. Court of Appeals for the Second Circuit allowed a $7.6 million jury verdict to stand against design professionals for damages stemming from their professional malpractice with regard to hydroelectric plants. The developer committed $23 million to develop six projects: It asked an engineering firm to prepare an analysis that could be used by potential lenders to evaluate whether to invest in the projects. The evidence showed that under the best conditions, the energy-output estimates provided by the engineering firm were overly optimistic.
The Court of Appeals ruled that even though the parties may have entered into contracts governing some aspects of their relationship, the damages assessed against the engineering firm were for a harm distinct from those contracts arising from the engineer's failure to provide proper estimates of energy output, and to provide appropriate services.
The significance of this decision for design professionals is that the court did not limit damages to harm suffered by reason of violating terms of the contract, but allowed additional damages (economic losses) under a negligence theory without regard to the contract. The design professionals were held liable for huge economic losses [Hydro Investors Inc. vs. Trafalgar Power Inc., 227 F.3d 8].
Lessons learned
In jurisdictions that allow direct actions against design professionals for economic losses where there is no contractual relationship, the designer's best defense is that it was not foreseeable that the injured party could be harmed by the acts or omissions of the designer. Courts, acting as the enforcers of public policy, are sometimes willing to limit damage awards to persons within a fairly small circle measured by a somewhat subjective test of foreseeability. But they are understandably not willing to expose design professionals to indeterminate liability.
Richard A. Stockenberg is a member of the St. Louis law firm of Gallop, Johnson & Neuman LC, where he limits his practice to construction law. He can be reached at rastockenberg@gjn.com. No statement here should be acted upon until your attorney assures you that it applies to your situation.
