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Possibility of Third Party Legal Claims

Risks for Architects Who Work for Owner-Builder-Developers

Arthur O'Leary, FAIA, MRIAI
 


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Working for a Conventional Owner
When an architect's services are engaged by a conventional owner, it is understood that the plans and specifications and other documents produced by the architect will be used for the purpose of forming the contract between the owner and a general contractor. Such contract documents are generally expected to be a full set of contract drawings and specifications since they are intended to comprehensively define all of the contractual obligations of the two parties, owner and contractor, each to the other. 

Completeness of these documents is very important because they describe the work to be constructed and will be the basis of all charges and credits to the contract sum. 

During the course of construction, the architect will render the usual construction phase contract administration services consisting of visiting the project to observe the progress of the work, administering periodic payments to the contractor, making rulings on the claims of owner and contractor, processing change orders and time extensions, checking of shop drawings, and making construction progress reports to the owner. 

Upon completion of construction, the architect will perform various additional duties such as issuing the Certificate of Substantial Completion, collecting the contractor's warranties, as-built drawings and operating instructions for the owner, and certifying the final payment to the contractor. The contract documents will fulfill all of these requirements. These services are necessary and valuable to the conventional owner. 

Working for an Owner-Builder-Developer
On the other hand, when a contractor-developer type undertakes to build a project, as owner, the architect is usually engaged on a minimal-service basis. This is normally the case in the construction of speculative projects such as neighborhood shopping centers, apartment houses, condominiums, and light industrial/office/warehouse complexes. 

Abbreviated Services for Owner-Builder-Developer
A typical "contractor-owner-builder-developer," hereinafter for brevity called "developer," does not see the need for the full spectrum of services normally offered by architects. The developer, being the owner of the project at least before and during the construction period, will not usually look to the architect for any more than the meager necessities: only basic design concepts and minimal construction drawings. 

The drawings are expected to serve only three principal criteria: (1) to satisfy applicable governmental agencies sufficiently to obtain the necessary approvals and permits, (2) to obtain financing, and (3) to construct the building. The developer will generally not require any more than the barest of outline specifications. 

For additional economy of architectural fee, the architect is commonly expected by the developer to eliminate from the drawings all of the usual "standard" details, notes, and instructions. All supplementary clarifying details, sections, and elevations are also to be omitted. For convenience, this genre of documents will be referred to as "owner-builder documents," as distinguished from complete contract documents. 

It is the developer's expectation that all of the omitted specifications, details, notes, and drawings will be accounted for in two ways: 

(1) By inclusion of this information in the subcontract agreements and purchase orders which the developer will write and enter into with subcontractors and suppliers, and 

(2) By relying on the developer's own experience and the construction expertise of subcontractors and suppliers who will be coordinating and constructing the project. 

Some developers are very skillful in this process and have been extremely successful in completing construction projects by this system. Many architects who are accustomed to these procedures produce competent and appropriate documents which, in the hands of capable developers, result in commendable and worthwhile projects.

So Where Is the Problem? 
If developers are obtaining good quality architectural services tailored to their specific needs and if architects freely enter into these contracts, everyone should be reasonably happy. If developers or architects are dissatisfied with the situation in any way and need to make changes in their methods of dealing with each other, they can easily resolve these matters in their professional service agreements. 

For architects, the major problems that arise out of this type of professional activity are presented by third parties, that is from people who were not the architect's client. The developer-client is not the usual primary claimant against the architect. 

Third Party Claimants
Then, who are the third-party claimants? During the construction period, it could be any of the subcontractors, suppliers, their employees, lenders, insurers, sureties, trespassers, or merely passers-by. After the project is completed, the list of third-party claimants could be expanded to include renters, lessees, their employees, customers, invitees, repairmen, or cleaning personnel. Often, the building is sold by the developer upon completion, so the new owner is added to the list of possible claimants. 

In the case of a residential, commercial, or industrial condominium development, there will be a multiplicity of owners plus a homeowner or business association. Some of these third-party claimant entities are quite militant and well organized for litigation. Homeowner and business associations are capable of pursuing extensive class action litigation, financed by nominal monthly contributions from each participant. 

Nature of the Claims
Third party claims arise mostly from shortcomings in the construction or from personal injuries occurring in or around the building, during or after the construction period. 

The Legal Claim Against the Architect
Usually the third-party claimant first comes to the architect's attention in an indirect way. The aggrieved party will have filed a lawsuit against the developer, among others, alleging a design defect or code violation in the drawings or the building, and the developer will react by filing a cross-complaint against the architect for indemnity. 

Even though the architect and the developer-client may have enjoyed a satisfactory long-standing and continuing friendly business relationship and a sensitive working rapport, the architect will certainly be sued, as this will be the usual advice of legal counsel for the developer or the developer's liability insurer. 

More Problems for the Architect
Aside from the abbreviated features of owner-builder documents, there are two additional characteristics of their use that create potential problems for the architect: 

(1) The developer is under no obligation to anyone to follow the drawings, except for the obligation to comply with the drawings insofar as compliance with governmental regulation is depicted. The developer in some situations may also have a contractual obligation to a lender or a lessee to follow some limited aspects of the drawings. But, otherwise, essentially, the developer can comply with the drawings or not, in the developer's sole discretion, since the developer is the owner of the land and building, and 

(2) The architect's services that would normally be performed during the construction period are commonly not contracted for. Consequently, misconceptions in interpretations of the documents are frequently carried into construction. Often features which the architect would have regarded as important to design, safety, or function will be changed or left out, either through inadvertence, misunderstanding, lack of coordination, or by the developer's economic decision. Had the architect been retained for field observation of construction and checking of shop drawings, such alterations or omissions could have been at least discussed at the appropriate time for informed decisions to be made or to avert untimely extra costs. 

Judging and Evaluating the Quality of Owner-Builder Documents
When third-party claimants, their lawyers, and other expert consultants are reviewing the owner-builder documents, commonly they will be judging them, erroneously, on the same scale as the complete contract documents normally produced for conventional owners. This error in understanding of the quality of architectural work product has proven to be a very costly burden to the architectural and engineering professions. 

The developer's completed building may not have been constructed in conformance with the documents produced by the architect and frequently an attempt will be made to hold the architect legally responsible for the differences, even though the architect had no control over the construction process. When the developer exercises its right of not complying with the architect's construction documents, the developer has tacitly assumed the design prerogative along with the attendant design liability. To the extent that the developer has thus perpetrated a design defect, the developer should be considered liable for the unwelcome consequences. 

Non-architects, including some lawyers and judges, often have difficulty in discriminating between the characteristics and quality of complete conventional contract documents and that of abbreviated owner-builder documents. 

Usually such claims against architects will not ultimately be perfected in the courtroom because there will be adequate opportunity for architect's counsel to present well-researched briefs, expert testimony, and compelling legal arguments. This is a very time-consuming and expensive process, even if the architect's position is sustained. 

On many occasions, the expense of trial and the risk of losing can be forestalled by a pre-trial voluntary settlement. This is usually made after considerable legal expense and research has already been incurred and any settlement contribution by the architect is heaping insult on injury. It is tantamount in the architect's mind to extortion. This is particularly offensive to the architect's sense of fair play and justice when the professional work product is within the normal standard of care for owner-builder documents. 

Defensive Notes on the Drawings. 
Attempts to prevent this type of problem by the mere addition of cleverly worded caveats and exculpatory notes on the drawings or in the architectural service agreement is not highly effective, as many of the possible third-party claimants will not have ever seen these documents. 

So What Practical Measures Can an Architect Take to Minimize or Eliminate this Exposure? 

The real underlying cause of the problem is the owner-builder's desire to obtain low cost professional services. Thus, it would seem that the owner-builder should, as a quid pro quo, be willing to indemnify the architect against third-party suits in which the plaintiff's damages are not proven to be caused by the architect's negligence. An indemnity clause to this effect could be negotiated for and included in the architect's professional service agreement with the developer-client. 

Appropriate legal advice should be sought from your own legal counsel and/or from your errors and omissions insurance firm's legal counsel to obtain contract language that will be effective in limiting or eliminating this area of professional liability. 

For additional reading on legal claims against architects, refer to "A Guide to Successful Construction - Effective Contract Administration," Third Revised Edition, by Arthur F. O'Leary, FAIA, MRIAI, published by BNi Publications. 

50th Anniversary Bonus: DCD Salutes Art O'Leary On His 100th Article

DCD Contributing Editor, Arthur F. O'Leary, FAIA, MRIAI, reaches a milestone in this month's issue with the publication of his 100th article in this 50th Anniversary Issue of Design Cost Data.

As a leader in the field of architecture, O'Leary has provided the industry with benefit of sharing from a lifetime of experience and insight.

Although retired, and living in Ireland, O'Leary's knowledge on industry topics such as AIA Contract Documents, Construction Law, and other pertinent subjects - such as this issue's piece on the Possibility of Third Party Legal Claims - continues to keep readers abreast of current pertinent industry issues.

A library of O'Leary's articles is available on our website, DCD.COM.

To Art O'Leary, DCD extends a warm, "Thank You," for his dedication to sharing his wisdom with the industry.

Note to readers: Art is seeking topic suggestions for future articles. If you have a topic that you would like to see addressed in a future article, please email art@dcd.com.
 



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