It’s a multi-million dollar construction contract and it’s halfway done. Then a snag—a terrible design error, so terrible that doing it the way the architect wants will cause the project to quite literally cave in on itself. What to do? Request a change? Denied.
“Proceed as planned,” says an unreasonable owner’s rep. and rejects your shop drawings that change the design and double the cost of the project. “You read the original plans and specifications before you bid this job.” She yells. “And you had a chance to visit the project site.”
“Terminate my contract and walk? Can I legally do that?” The contractor wonders aloud.
The owner finally agrees to some costly changes that will save the project from imploding, but refuses to admit that her architect made a mistake, and even worse, she hides behind the contract she made with the contractor and refuses to pay the contractor for the additional work.
“This is on you.” She says.
A lawyer advises the contractor that the contract’s one-sided terms in favor of the owner are going to make it very difficult to get paid for the additional work.
“What about the architect?” the contractor says. “He’s the one the made the mistake. He’s the one that should be on the hook. He’s the one that should pay. Can I sue the architect?”
The short answer is “no.” Generally, if you don’t have a contract with someone, then you can’t sue him for purely economic loss. By economic loss I mean money—your costs and expenses—payments made because of someone else’s actions. On a construction project, contractors typically don’t enter into contracts with architect. The owner is the party that has the contract with the architect. Contractors are therefore not in “privity,” with the architect, so can’t sue him for economic loss. Privity is a weird concept, sounds almost obscene. It’s a contractual relationship—an agreement with definite terms and a bargained-for exchange, you know, a quid pro quo. Without privity with someone, in this case an architect, that someone cannot be held responsible for causing you to lose money in a business transaction. Liability in a contractual relationship—for breach of contract—is based solely on whether one party performed the promises contained in his contract with the other.
And when you have a contract with someone, you usually can’t also sue him for negligence. By negligence we mean some action or failure to act that causes you harm. Harm, like injury, not economic loss. You need a contract with someone to sue him for economic loss, remember?
It works the other way too. If an owner sues both an architect and a contractor for defective construction, the architect can’t sue the contractor because there is no privity between them.
But, as with almost everything, there are exceptions. If a party (such as a contractor) can establish that the relationship was so close as to be the “functional equivalent of privity,” it may recover damages. So close, that the architect has a “duty of care” to the contractor. What does that mean? Here’s what: the contractor and architect are working closely together and the architect acts in a way or says things that make the contractor rely on the architect. Here’s what New York State’s highest court said:
“The rule is not that ‘recovery will not be granted to a third person for pecuniary loss arising from the negligent representations of a professional with whom he or she has had no contractual relationship.’ The long-standing rule is that recovery may be had for pecuniary loss arising from negligent representations where there is actual privity of contract between the parties or a relationship so close as to approach that of privity.”
“A relationship so close as to approach that of privity”—here are some examples of that taken from a legal treatise on the issue:
- When an architect communicates with contractor in a way that is misleading, makes an affirmative misrepresentation to the contractor that cause the contractor harm.
- The relationship between the prime contractor and the architectwas the functional equivalent of privity where 1) the architect was aware that its drawings would be used for the construction of the project by the contractor, 2) the contractor relied on the architect’s drawings and the architect was required to oversee construction. 3) There was actual “linking conduct” between the architect and the contractor. The architect reviewed submissions from the contractor and oversaw the actual construction.
- Architect exercised a substantial amount of control over the project, which established a nexus between the parties sufficient to “substitute for privityof contract.”
- The architect assumed extensive responsibility with respect to the project including, negotiation of the contract, interpretation of the contract, supervision of the work, and ultimately deciding to remove the contractor from the job.
- The architect’scontract required the architect to administer the construction contract, to become familiar with the progress and quality of the work, and to determine if the work was proceeding in accordance with the contract documents. The architect also had the duty to interpret the contract documents, review the contractor’s payment requests, determine when the project was substantially completed, and the owner could terminate the contractor’s work if notified by the architect of the contractor’s “delay, neglect, or default.”
Upshot seems to be that anything more by the architect than simply preparing the plans and specifications prior to bid, and then disappearing from the scene, could make them liable for errors and omissions with respect to design.