Developing Doctrine Of “Economic Loss” Defense For Design Professionals

COLLINS, COLLINS, MUIR & STEWART, LLP
Brian K. Stewart, Esq.
Douglas Fee, Esq.

Question:  Must a design professional pay the general contractor’s damages when errors and/or omissions in plans or specifications increase the cost of a project?

Answer:  Not necessarily . . .

A rapidly evolving defense available to design professionals is the “economic loss” doctrine which says that professionals who are negligent in providing informational services (such as architects and engineers) owe no tort duty of care to non-contractual third parties for their purely economic loss; Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, Weseloh Family Ltd. Partnership v. K.L. Wessel Construction Co., Inc. (2004) 125 Cal.App.4th 152. 

“Economic loss” can include such things as a contractor’s delay damages, cost overruns, excessive change orders, or employment of special consultants to rework plans and specifications.  Such strictly pocketbook loss is distinct from bodily injury or property damage caused by improper design work, where recovery is generally allowed.

Although a duty of care may be found where the non-contracting parties have a “special relationship,” this is the exception, not the rule; Quelimane Co., Inc. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26.  Nonetheless, if the design professional becomes involved in supervision of the work, liability may result; Weseloh, supra. 

The economic loss defense can apply in the common situation where a design professional is retained by a project owner, the project owner separately hires a general contractor who does not have a contractual relationship with the design professional, and the general contractor complains that incorrect information supplied by the design professional has led to increased construction costs, change orders, delays, and the like. 

One of the most closely watched recent cases involving the “economic loss” doctrine was the California lawsuit of McCarthy Building Companies, Inc. v. Teng Li & Associates.  McCarthy was the general contractor for improvements and expansion of a parking structure at John Wayne Airport in Orange County, California.  The Airport’s architect retained engineer Teng Li to prepare construction documents that included specifications for the parking structure’s concrete mix.  Arguing that the spec was improper and Teng Li knew McCarthy would rely on it, McCarthy claimed it was led to underbid the project and sued to recover the money it lost.  The lawsuit ended in a multi-million dollar verdict for McCarthy, which Teng Li appealed.

Our firm was retained to file an amicus curiae (“friend of the court”) brief in the California Court of Appeal on behalf of the Structural Engineers Association of California (SEAOC), joined by the National Society of Professional Engineers (NSPE) and California Society of Professional Engineers (CSPE).  Relying on the design professional’s defense arising from the economic loss doctrine, the brief argued that Teng Li as a design professional owed no duty of care to McCarthy absent a contract, and that for a number of reasons Teng Li was not responsible for preventing McCarthy's economic losses related to the construction project. 

The brief strongly urged that a duty of care running from the designer to the contractor would result in an impossible conflict of interest with the project owner which had hired the designer.  Since no one can serve two masters equally well, the designer would have to make professional decisions between quality and economy which inevitably harmed one side or the other, leading to cries of “foul” by either the owner or the contractor.  Thus, every project could lead to a lawsuit against the designer, an untenable situation.

The result would be vastly increased project costs, or unwillingness of design professionals to take on smaller projects where the overall budget could not justify the increased risk of liability.  This, argued the brief, would lead to a reduction in available design services.

There is also an element of basic fairness to consider, for as the old maxim puts it, “you dance with the one who brought you” (here, the project owner that contracted and paid for design services).  Since a contractor has no agreement with the designer, has paid nothing to the designer for informational services, and contractors should be able to look out for themselves through purchasing insurance or entering into indemnity agreements, then design professionals should not be saddled with after-the-fact liabilities which had never been part of their contemplation or bargain with the owner who brought them into the project and paid for their services.

The Court of Appeal, echoing the major point of our amicus brief, expressed doubt whether a duty of care would extend from the design professional to the contractor.  In its unpublished opinion (4th Civ. No. G030544), the court proceeded to decide the case against McCarthy on other grounds related to the statute of limitations, and reversed most of the judgment.  McCarthy then sought review in the California Supreme Court.  Through an amicus letter written on behalf of our professional engineering association clients, our firm successfully urged the California Supreme Court that the appellate decision in favor of Teng Li should remain undisturbed.

But the fight is not over.  It continues on other fronts and in other states.  For example, Pennsylvania recently decided that the absence of contractual privity between design professional and contractor was no defense; Bilt-Rite Contractors, Inc. v. The Architectural Studio (2005) 866 A.2d 270, 581 Pa. 454.  The court’s majority (against two separate dissents) decided to join a number of other jurisdictions across the country which hold that if the contractor alleges that faulty plans or specifications constitute a negligent misrepresentation, design professionals can be liable.  The Bilt-Rite opinion (in marked contrast to the California case authority discussed above) failed to discuss how imposing liability in favor of the contractor would cause the dilemma of a conflict in the design professional’s loyalty to its contracting client, the project owner.  Later Pennsylvania cases at the trial level have interpreted Bilt-Rite narrowly as applying liability only in the instance of negligent misrepresentation.

The states are split on the issue.  States which have adhered to the expansive Bilt-Rite doctrine of liability include Alabama, Arizona, Florida, Louisiana, Mississippi, and North and South Carolina based on broad principles of foreseeablity of harm regardless of the lack of contractual privity.  The states which have refused to hold design professionals liable for purely economic loss caused by simple negligence in the absence of contractual privity include California, Colorado, Georgia, Illinois, Missouri, Montana, New Mexico, and Wisconsin.

Brian K. Stewart, Esq. and Douglas Fee, Esq. are with the Law Offices of Collins, Collins, Muir & Stewart, LLP located in South Pasadena and Newport Beach, California. The firm represents Design Professionals in all aspects of their professional practice including mediation, arbitration, trials, appellate work, and general transactional work as well as contract review and negotiation.   Mr. Stewart is currently a member of the Legislative Advocacy Committees for AIACC and CELSOC.  Mr. Fee represents his clients at trial, while his practice is concentrated on appeals and writ proceedings in state and federal courts.

 

Note: This article is intended as a general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate legal counsel for advice applicable to individual circumstances.