Design and construction services on projects are more integrated now than ever before. As construction and design firms are using BIM software and other resources to improve construction efficiency, that integration is only going to increase. Owners, contractors and designers must understand their potential liability for design issues on a project before the project starts. This affects the management of the project, insurance, bonds and, ultimately, profit on a project.
Understanding how design liability gets allocated requires a comprehension of the overriding legal framework used in the analysis. With this understanding, these principles can be used to evaluate most situations encountered during contract negotiations and in potential claims.
When evaluating potential design liability, there are two general legal principles that control how design risk is allocated.
The Spearin Doctrine generally states that if a contractor is required to build according to plans and specifications prepared by the owner (or the owner’s representative), then the contractor will not be held responsible for consequences of defects in those plans and specifications.
For example, assume an owner provides the contractor with engineering drawings related to a construction of a bridge. Under the Spearin Doctrine, the contractor should be able to rely on the accuracy and completeness of those drawings in completing the contractor’s work. If there is any defect in the design, the contractor will not be held liable.
The Economic Loss Doctrine generally states that a party who suffers only economic harm may recover damages for that harm based only upon a contractual claim and not on a tort theory, such as negligence or strict liability. While the Economic Loss Doctrine is not followed in every state, many states hold that in the construction context, the risks allocated among the parties are best suited to their contractual relationships rather than a general theory of negligence.
For example, consider a concrete subcontractor working on a slab. The subcontractor’s only contract is with the general contractor. However, the subcontractor relies on the concrete design by the owner’s engineer with whom the subcontractor does not have a contract. As it turns out, the engineer’s design is faulty and consequentially, the subcontractor must repair some of the work. The only potential claim the subcontractor may have directly against the engineer would be a claim of negligence.
Under the Economic Loss Doctrine, the subcontractor could only bring a contract claim against the party with whom it has a contract (the general contractor). The general contractor could then have a claim against the owner who, in turn, could make a claim against the engineer.
These two overarching concepts generally apply to how design liability is allocated on a construction project: 1) contractors are usually not responsible for design defects in the designs provided by the owner; and 2) any claims related to design defects must follow the contractual relationship of the parties on the project.
Contract Risk-Shifting of Design Liability
Construction and design contracts can be drafted to greatly affect who is assigned liability for design defects and how much of that liability each party will assume.
Design Defect Risk-Shifting—Many owners and general contractors push design defect liability down the chain. Construction contracts often contain a provision which states the general contractor or subcontractor “shall notify the owner of any design defects which the [contractor or subcontractor] actually identifies or reasonably should have identified in the design documents.” This provision is an attempt to avoid the effects of the Spearin Doctrine, as it effectively shifts at least some design liability from the owner to the relevant contractor or subcontractor.
For example, assume a contractor has the above risk-shifting clause in a contract for the construction of an entryway to a restaurant. During construction, the contractor realizes the doorway is 2 inches shy of meeting ADA requirements.
Normally, the Spearin Doctrine would state that the contractor is not responsible because the owner supplied the design. However, if it is shown that the contractor should have known of that ADA design deficiency when he reviewed the design, he could be liable for the costs to repair.
Limitation of Liability for Architects/Engineers—Many architecture and engineering clients include a limitation-of-liability clause in contracts. This is an effective method to limit an architects’ and engineers’ liability for potential design defects and shift more of the responsibility for those defects to the owner and contractors.
For example, assume a contractor incurs $100,000 in additional costs to construct a movie theatre because of design defects in the seating arrangements.
If the owner’s contract with the design professional contains a limitation of liability of $25,000 for the design professional, then the owner could be liable to the contractor for the remainder.
While these four concepts can apply to most construction contracts, and all parties involved can use the general principles to analyze potential design liability in almost any circumstance, each participant should think through the situation in terms of specific responsibility.
Owners should consider whether they can accept a reasonable limitation of liability from the design professional.
This depends on the nature and complexity of the project and whether the specifications are primarily design or performance related.
Another consideration is to what extent can the owner push liability for design defects down to the general contractors and subcontractors.
Some contractors may be willing to accept a level of design defect identification on projects where the contractor is very familiar with the requirements.
However, on new or novel projects, contractors should be wary of accepting significant design liability.
Also of concern is to what extent the architect or engineer has limited liability by placing more with the owner.
If the designer has a relatively small amount of liability compared to the project size, the contractors need to weigh their risk.
This analysis depends on the owner’s creditworthiness and the complexity of the design issues.
Finally, contractors must consider whether the Economic Loss Doctrine will be applicable in their state.
Architects and engineers should be concerned with their ability to ask for a limitation of liability.
Shifting liability makes sense in many situations for designers, especially when the risk associated with the work is much higher than the fee the designer expects to receive.
The main thing to consider when evaluating design liability is how these interrelated concepts work together and how that relationship will affect each party.
An experienced construction attorney should be able to offer some guidance if necessary.