Part 1 of a 2-part series: Shackled by liability to third parties
Most claims against engineers come from project owners; but as many as a third come from non-clients—individuals and entities who do not have a contract with the engineer. Negligent misrepresentation—inadvertently providing incorrect information on which a plaintiff relies and consequently suffers a loss—is a growing source of liability for engineers to third parties.
Most claims against engineers come from project owners; but as many as a third come from non-clients—individuals and entities who do not have a contract with the engineer.
Negligent misrepresentation—inadvertently providing incorrect information on which a plaintiff relies and consequently suffers a loss—is a growing source of liability for engineers to third parties. Courts impose liability in these cases based on the plaintiff’s “foreseeable expectation and reliance.”
Engineers find themselves in situations where reliance by third parties could be foreseeable with some frequency. In Craig v. Everett M. Brooks Co. 2, a Massachusetts court allowed a contractor to recover against a civil engineer. The engineer had made a mistake in preparing plans and laying out stakes for a road. As a result, the contractor had to rebuild two catch basins and relocate a road by eight feet. The court held the engineer liable because the contractor was reasonable in relying on the engineer’s plans and specifications. The court said the engineer should have foreseen that reliance. The court allowed recovery because both the contractor and the engineer were under contract with the same owner, and the contractor’s contract contemplated that the contractor would rely on the engineer’s services. The court noted that the defendant engineer knew the only possible plaintiff and the extent of his reliance. In addition, damages were not remote. Under those circumstances, the court felt that imposing liability in the absence of a contractual relationship was reasonable.
The Craig case has been cited favorably more than 40 times. The underlying reasoning follows
“One who, in the course of his business, profession or employment… supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information…” ³
Many cases that applyl rely on those documents to price the job and build the project.
Many courts are uncomfortable with the prospect of imposing “liability in an indeterminate amount for an indeterminate time to an indeterminate class.”4For them,5Claims by people who rely on information from engineers and urge courts to adopt
The key to avoiding liability under the RESTATEMENTeports and opinions that the document is being provided for a certain party and that others who rely on it do so at their own peril. The RESTATEMENT contains comments and examples from actual cases to illustrate how that limitation can work.
Engineers also can limit the class of people who justifiably rely on the information that they prepare by using appropriate language in their contract for services. A precise definition of the scope of services might undercut third-party claims on the theory that the engineer was not retained to perform services for the third party. Engineers can include a provision in their contracts and in their deliverables that their deliverables are for the sole use of the client and not for any other individuals.
Section 6.07.C of the Engineers Joint Contract Document Committee’s (EJCDC) Document E-500, Standard Form of Agreement Between Owner and Engineer for Professional Services (2002 edition), is an example of an attempt to bar claims by third parties:
“C. Unless expressly provided otherwise in this Agreement:
1. Nothing in this Agreement shall be construed to create, impose, or give rise to any duty owed by Owner or Engineer to any Contractor, Contractor’s subcontractor, supplier, other individual or entity, or to any surety for or employee of any of them.
2. All duties and responsibilities undertaken pursuant to this Agreement will be for the sole and exclusive benefit of Owner and Engineer and not for the benefit of any other party.
3. Owner agrees that the substance of the provisions of this paragraph 6.07.C shall appear in the Contract Documents.”
American Institute of Architects (AIA) standard contract forms can accommodate modifications with the same purpose. But will it work?
Courts tend to uphold risk allocation agreements in contracts. “[A] party may, by agreement, allocate risk and exempt itself from liability that it might subsequently incur as a result of its own negligence.”6On that basis, contractual provisions that seek to insulate engineers from claims by third parties should effectively make reliance without the engineer’s permission not “justifiable” and therefore not actionable. The technique might or might not work in states that apply tort-based reasoning to impose liability to third parties on a public policy basis.
Contractors and subcontractors
Contractors and subcontractors are the main class of third parties who bring claims against engineers. The most common claims are for extra costs incurred as a result of alleged design deficiencies, often as a result of the engineer’s refusal to approve a requested change. Contractors might also bring claims against engineers if the contractor suffers delays on the project and the contract for construction has a “no damage for delay” clause.
The case of Lundgren v. Freeman7illustrates contractor claims against engineers. In Lundgren, the owner terminated the contractor on advice from the architect. The contractor sued the owner and the architect claiming:
• Unpaid balance due on the contract (a certificate of final acceptance had been issued)
• Losses due to defects in plans and specifications
• Work not called for by the contract
• Redoing work it had done strictly in accordance with the contract.
The contractor included a claim against the architect for:
• Willful and malicious interference with performance of the contract
• Inducement of owner to breach the contract
• Damage to the contractor’s reputation because of the architect’s claim that the contractor failed to substantially perform
• Damage to credit standing with subcontractors, material suppliers and bonding companies
• Punitive damages.
The Court of Appeals found the architects not liable to the contractor for acts as agents of the owner, because the contractor had agreed to arbitrate claims against the owner. The court also found the architects not liable to the contractor for acts as quasi-arbitrators: “If their decisions can thereafter be questioned in suits brought against them by either party, there is a real possibility that their decisions will be governed more by the fear of such suits than by their own unfettered judgment as to the merits of the matter they must decide.”8
The architect’s immunity as arbitrator does not extend to fraudulent actions or to actions taken with willful and malicious intent to injure one of the parties. If the contractor could prove that the architect damaged him by actions outside the scope of the architect’s authority as agent or quasi-arbitrator, the contractor can recover damages that naturally flow from that action. The contractor need only show that the architect’s action was willful and intentional. The contractor does not have to show a specific intent to injure him. Loss of credit standing and damage to his reputation as a builder may be within the damages recoverable, if it can fairly be said that, under the circumstances, such damages were reasonably foreseeable.9
Contractors also might claim that an engineer interfered with the contractor’s contract by any of the following means:
• Refusing to approve “qualified” subcontractors. The case of Vojak v. Jensen10involved an architect who wrote a letter to owners and general contractors saying that a particular roofing subcontractor’s work was unsatisfactory, so the architect would not approve the subcontractor on future projects until the subcontractor could prove to the architect’s satisfaction that it was reliable.
• Issuing contradictory instructions
• Changing plans and specifications without regard to the contractor’s schedule
• Withholding funds arbitrarily, or approving less than the requested amount on payment requisitions.
Contractors also sometimes bring claims against engineers for failing to catch the contractor’s errors so as to benefit from the engineer’s obligation to “endeavor to guard the owner against defects and deficiencies in the Work.”11They claim that a engineer who failed to catch the contractor’s error was negligent in fulfilling a contractual duty, even though that duty was to the owner, not to the contractor. Because that negligence caused the contractor to incur additional cost, the contractor thinks the engineer should be liable to the contractor in that amount.
Engineers have a powerful defense, however, based on the contractor’s contributory negligence. After all, the contractor is the one who did wrong in the first place. Skillful contract drafting that clarifies that the owner, not the contractor, is the only intended beneficiary of the engineer’s construction administration duties could head off these claims.
Lenders, insurers and sureties
Lenders, insurance companies and sureties rarely have contracts with the engineer they hope to sue. This group is probably the second largest class of potential third-party claimants. The essence of their claims is usually that they relied on some representation that the engineer made. These claims seek to apply a RESTATEMENT (SECOND) OF TORTS
If a surety takes over a job for a defaulting contractor, the surety stands in the shoes of the defaulting contractor and has all the same claims (and is subject to the same defenses) as the contractor. Sureties taking over for defaulting contractors want to minimize their out-of-pocket costs and often look beyond the assets of their defaulting contractor client for ways to recover their costs. For that reason, sureties might be even more aggressive at pursuing claims against engineers than contractors.
For the engineer to be liable under the RESTATEMENT view, the plaintiff’s reliance must be justifiable. For reliance to be justifiable, the plaintiff must be someone the engineer intended the information to influence [
Lenders, insurers and sureties often ask engineers to provide a letter authorizing them to rely on some information the engineer has provided to another party, usually the client. Lenders, insurance companies, sureties and anyone else does not need permission or assistance from the engineer to decide whether to rely on information from the engineer or from any other source. These people are all adults and are arguably at least as sophisticated as the engineer in business matters. The only reason these people want a reliance letter is to make sure they qualify to bring suit under RESTATEMENT
In Aliberti, LaRochelle & Hodson Eng. v. F.D.I.C.12, an engineer and construction manager provided information they knew a lender would use to evaluate the viability of a project and to help it decide whether to grant financing. The engineer and construction manager had a duty to be “honest when making representations to the Bank regarding the accuracy of the construction budget.”13The court found that this duty exists, even though the bank had retained its own expert, and the bank’s own expert had told the bank that “in his opinion there [was] some risk.14
The defense that the engineer’s statements are only expressions of opinion will not always succeed: ”[T]he relationship of the parties or the opportunity afforded for investigation and the reliance, which one is thereby justified in placing on the statement of the other, may transform into an averment of fact that which under ordinary circumstances would be merely an expression of opinion.”15“[I]f one knows an opinion to be erroneous, the matter is as to him, not an opinion but a subsisting fact; and, if he makes a statement contrary to what he knows to be the fact, he should not be allowed to escape the consequences on the theory that his statement concerns a matter of opinion.”16
Aliberti, LaRochelle was an extreme case, where the engineer had direct dealings with the lender and participated in an unscrupulous developer’s misrepresentations. In many cases, lenders and sureties who want to rely on engineers’ judgments and certifications such as approvals on payment requisitions simply want free professional advice. Lenders and sureties argue that they need that information to do their jobs and the designers of record are in the best position to provide it.
However, those are their problems, not the engineers’. Engineers are ordinarily under no obligation to create a situation where lenders and sureties justifiably rely on the engineers’ representations. However, as in the Aliberti, LaRochelle case, if engineers are aware of and consent to that reliance, they must adhere to the same standard of care that applies to their other clients.
Contractor and subcontractor employees
Likely claims from contractor employees are claims for bodily injury or property damage. There is a long history of liability for those whose negligence injures another person regardless of any contractual relationship between the parties.
Today’s AIA and EJCDC form contracts recognize that engineers do not control the construction site, and therefore, do not have the means to manage site safety. These form contracts also specifically assign responsibility for site safety to the contractor, satisfying public policy considerations that someone has to accept responsibility for construction site safety. The distinction between the architect’s contract, that “contained no undertaking by [the architect] to assume any duty of supervision and control with regard to the actual construction of the building” and the contractors’ contracts that “had the duty to protect the workers from the hazards on the construction site” seemed important to the court in Young v. Eastern Engineering & Elevator Company, Inc.17The Young court held that “absent an undertaking by an architect, by contract or conduct, of the responsibilities of the supervision of construction and the maintenance of safe conditions on a construction project, an architect is not under a duty to notify workers or employees of the contractor or subcontractors of hazardous conditions on the construction site.”
Favorable contract language will not protect engineers from liability for site safety under all circumstances. In Carvalho v. Toll Brothers18, the owner hired an engineer to provide inspection services during construction. A worker died when a trench collapsed on him. The engineer was aware of the dangerous condition and witnessed the accident. The New Jersey Superior Court, Appellate Division found that the engineer had a duty to warn workers if the engineer becomes aware of a condition that presents a risk to serious bodily injury to the workers. The New Jersey Supreme Court concluded that “it would be unfair to exonerate [the engineer] from its liability to decedent on the basis of its exculpatory agreement with the [owner]. Their financial arrangements and understanding do not overcome the public policy that imposes a duty of care and ascribes liability to the engineer in these circumstances.”19The court relied on the “foreseeability of harm” and “considerations of fairness and policy” to decide to that the engineer should be liable.
As for submittal review, while most worker claims against engineers for bodily injury arise out of the engineer’s activities at the site, plaintiffs have tried to hold engineers liable for bodily injury arising out of more traditional “design” activities like shop drawing.
The case of Day v. National U.S. Radiator Corporation20involved a subcontractor’s employee who died when a boiler exploded after the employee lit it to test its operation. The subcontractor had installed the boiler without the thermostatic control or the pressure and temperature relief valve that the plans and specifications required.
The architect had approved a shop drawing, which the subcontractor’s supplier prepared, that showed only the components the supplier was going to provide. It did not show the required pressure relief valve.
After a trial finding the architect liable to the deceased worker’s family, the Louisiana Court of Appeal affirmed.21
Restatement (Second) of Torts
(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or, competence in obtaining or communicating the information.
(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered
(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.
(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.
Under this section, as in the case of the fraudulent misrepresentation (seee information is supplied. It is enough that the maker of the representation intends it to reach and influence either a particular person or persons, known to him, or a group or class of persons, distinct from the much larger class who might reasonably be expected sooner or later to have access to the information and foreseeably to take some action in reliance upon it. It is enough, likewise, that the maker of the representation knows that his recipient intends to transmit the information to a similar person, persons or group. It is sufficient, in other words, insofar as the plaintiff’sidentity is concerned, that the maker supplies the information for repetition to a certain group or class of persons and that the plaintiff proves to be one of them, even though the maker never had heard of him by name when the information was given. It is not enough that the maker merely knows of the ever-present possibility of repetition to anyone, and the possibility of action in reliance upon it on the par of anyone to whom it may be repeated.
Illustration 9 to Comment h:
The City of A is about to ask for bids for work on a sewer tunnel. It hires B Company, a firm of engineers, to make boring tests and provide a report showing the rock and soil conditions to be encountered. It notifies B Company that the report will be made available to bidders as a basis for their bids and that it is expected to be used by the successful bidder in doing the work. Without knowing the identity of any of the contractors bidding on the work, B Company negligently prepares and delivers to the City an inaccurate report, containing false and misleading information. On the basis of the report C makes a successful bid, and also on the basis of the report D, a subcontractor, contracts with C to do a part of the work. By reason of the inaccuracy of the report, C and D suffer pecuniary loss in performing their contracts. B Company is subject to liability to C and to D. [Illustration is based on M. Miller Co. v. Central Contra Costa Sanitary District, 198 Cal.App.2d 308, 18 CalRptr 13 (1961)]