Design Professionals Hit a Legal Home run

As baseball’s pennant races heat up, one is reminded of a tightly contested legal battle decided earlier this year in California between an architect and a construction manager, where the pitching team served up a high, hard fastball, that resulted in a grand slam for the engineering community.

The case, The Ratcliff Architects v. Vanir Construction Management, Inc. , 88 Cal.App.4th 595, 106 Cal.Rptr.2d 1 (1st Dist. 2001), dealt with potential liability that architects, engineers and construction managers have to one another .

Specifically, the case involved an architect filing a cross-complaint against a construction manager. For the purposes of the engineering community, let’s turn the parties around, as the principles of law are identical.

In this scenario—the end of a power plant “job from hell”—the owner sues the construction manager and the engineer. The lawyer representing the construction manager has no shortage of candidates to pass off his client’s liability: the contractor, subcontractors, suppliers and engineer.

In the complaint, the construction manager argues the terms of the contract, which include an indemnity provision calling for the engineer to indemnify the owner and its agents against claims. The construction manager’s lawyer reasons that the construction manager is an agent of the owner, and therefore, the engineer has an obligation to indemnify the construction manager.

But the engineer’s lawyer can also read contracts, and counters that the contract has a standard boilerplate provision that prevents enforcement by so-called “third-party beneficiaries.” Specifically, the defendant argues that nobody other than a party to the contract has the right to enforce any contract provisions.

Conflicting contract provisions

Which provision is correct? One claims that the contract is for the benefit of the owner’s agents, and the other says that an owner’s agent does not have the right to enforce the contract. Which provision will the court enforce?

Before revealing the court’s answer, it’s helpful to review designer liability. Engineers can pick up liability either under the law of contracts or under the law of torts. The basic doctrine of contract law is that parties should keep their promises. The fundamental premise of tort law is that people should conduct themselves so as to avoid inflicting injury on others.

In examining the relationship between the engineer and the construction manager, there are plenty of opportunities to help each other out, but there are just as many ways to cause each other an almost infinite amount of trouble, anxiety and expense. The parties may have a relationship under contract law because each has a written contract with the owner. Additionally, under tort law, the parties may have a duty to avoid causing injury to each other. Here’s where the court stepped in.

One rule of contract interpretation is that a provision that relates to a specific subject controls more general provisions. In this case, the attorneys for the construction manager took this tack, arguing that the indemnity provision was more specific. The court, however, saw it otherwise. The provision dealing with third-party beneficiaries, they ruled, specifically controls the subject matter of who may enforce the contract, and that provision applies to every clause in the contract whether general or specific.

Moreover, the court declared that a contract should be interpreted so as to fulfill the intention of the parties. It is hardly likely that the owner would have intended the indemnity provision to apply to claims made by the owner. The provision was probably intended to apply to claims made against the owner, not to claims made by the owner.

After failing to retire the side with the contract theory pitch, the construction manager’s attorney fired a curveball using tort law, arguing that the engineer had a duty to produce a design and respond to request for information proposals with a degree of professional competence that would avoid damage to the interests of the construction manager.

Under tort law, the existence of a duty is determined by the court, and not by the jury. In deciding whether a duty exists, courts will often consider whether the plaintiff—here, the cross-complainant—was sufficiently diligent in protecting its own interests. In this case, the defending batter was able to foul off the pitch as the court ruled the construction manager could have protected itself with a provision in its contract with the owner.

Out of the ballpark

But the pitch that allowed the design team to knock the ball out of the park was concern for potential conflict of interest. The primary duty of the engineer is to protect the interests of its client. In making interpretations of contract documents and processing payment requests and requests for change orders, the engineer should protect the owner. To impose on the engineer, at the same time, a duty to protect the interests of the construction manager—a duty that would also logically extend to contractors and subcontractors—would create an intolerable conflict of interest.

On such reasoning, in the actual case, the court dismissed the cross-complaint.

In reviewing this case, one might be tempted to generalize that engineers, architects and construction managers can never be liable to one another in the absence of a direct written contract establishing a duty running from one to the other. But the law treats liability for physical injury much differently from liability for economic loss.

There may be a duty to protect persons and property from physical injury where the law would not recognize a duty to protect against economic loss.

Physical injury results from the application of physical force against person or property so as to produce bodily injury or property damage. Economic loss, by contrast, can be described as an injury to economic interests, such as a person’s ability to make a profit from a job or an owner’s expectation of collecting high rent from a successfully completed building project. In most states, absent contract, courts do not recognize a duty to protect against economic loss.

A contractor claims a loss because of defective plans; a subcontractor claims economic loss because of over-inspection by an engineer; a second or third owner of a building claims its value is diminished because of improper design of HVAC ducting. Although the claimant in such cases may have sustained economic loss, there has been no physical damage. Therefore, in many states, absent a contractual obligation to the plaintiff, the engineer has no liability. On the other hand, engineers have often been held liable for injuries to workers—including construction managers and their employees—caused by collapse, explosion, fire, electrocution and other such accidents. And, as opposed the argument extolled in this case, an engineer cannot defend him or herself against an unsafe design on the grounds that the cost of a “safe” building design would be prohibitive and therefore in conflict with the interests of the owner.

The Value of an Engineering Firm

Valuation of an engineering firm is a tricky business, and not all firms are created equal, according to a survey from Natick, Mass.-based A/E consultant ZweigWhite.

The 2001 Valuation Survey of A/E/P and Environmental Consulting Firms uses five value ratios for a valuation comparison of 330 diverse design firms between 1996 and 2000.

“Smaller firms and younger firms that tend to be growing faster are receiving higher valuations relative to their revenue and backlog than older, more established firms,” says Colvin Matheson, vice president at ZweigWhite.

The firms with the highest value ratios included the obvious ones—fast growth firms and those forecasting future growth and profits.

However, there are some surprising results from the survey. Small firms, especially those with 24 or fewer employees, rank among the firms with value ratios well above the median for the overall sample. Additionally, young firms—those founded since 1980—ranked well, as did single-discipline engineering firms and environmental firms.

Some firms, whose value ratios were well below the median, were predictable—firms that reported declining revenue or flat revenue and profit projections at the time of the survey. Interestingly, mid-size firms of 250 to 499 employees and older firms had lower than average value ratios.

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