California Court Expands Architects’ Liability To Future Homeowners

A Laurie & Brennan article featured in the Construction Law Corner Fall 2014 eNewsletter.

by Daniel J. Brenner

Earlier this summer, the Supreme Court of California handed down its decision in Beacon Residential Community v. Skidmore, Owings & Merrill LLP, 327 P.3d 850 (Cal. 2014) that moves California law one step closer to recognizing a duty of care between design professionals and third parties despite a lack of contractual privity. Indeed, in a decision eagerly awaited by design professionals — not only in California but around the country — the Court ruled that an architect owes a duty of care to future homeowners where the architect is the principal project architect and is not serving in a subordinate role to other design professionals. This ruling potentially opens the door to claims by third-parties against design professionals for breach of the duty of care for negligently prepared plans, specifications and/or design modifications, despite the lack of a direct contractual relationship between the third-party and the architect. This decision could not only weaken a design professional’s ability to defend itself against claims by third parties for design negligence but also lead to significantly higher costs for professional liability insurance coverage as a result.

Project Background

The case arose out of architectural and engineering services provided by Skidmore, Owings & Merrill LLP and HKS, Inc. (collectively referred to as the “Architects”) for the development of 595 residential condominiums in San Francisco, California. The Architects contracted directly with the project developers to provide their architectural services. The contract specifically stated: “the architect is solely responsible to the Owner [developer] and not to such condominium associations” and specifically disclaimed the existence of any third-party beneficiary obligations. In exchange for earning a fee in excess of $5 million, the Architects agreed to provide a scope of services that included both design and construction administration services. This included the coordination of the design and construction teams, conducting weekly site visits and inspections, recommending design revisions and reviewing the construction team’s compliance with the design requirements.

Following completion of the project and sale of the condominium units, the homeowners association (the “Association”) sued the Architects, the project developer and others involved in the construction of the condominiums. The Association alleged that as a result of the Architects’ negligent design, the unit owners experienced extensive water infiltration, inadequate fire separations, structural cracks and other safety hazards. Additionally, the Association alleged that due to the Architects’ approval of substandard windows and failure to properly design the ventilation system, the condominium units were uninhabitable and unsafe during certain weather conditions as a result of “solar heat gain.”

Procedural Background

Upon the Architects’ motion, the trial court ruled that the Architects did not owe a duty of care to the Association or its members. Specifically, the trial court found that as long as an owner retained final decision making authority relating to an architect’s design, architects do not owe a duty of care to future condominium owners. The trial court permitted the Association to amend its complaint to allege that the Architects “actually dictated and controlled the decision to eliminate ventilation ducts, acting in a manner that was contrary to the directions of the owner, or that ignored the owner’s directions” but the Association declined and instead appealed the trial court’s ruling.

The California Court of Appeal reversed. The appellate court relied upon the following six factors to find that the Association’s pleadings alleged sufficient facts to support a duty of care by the Architects:

The extent to which the transaction was intended to affect the plaintiff;
Foreseeability of harm to the plaintiff;
Degree of certainty that the plaintiff suffered injury;
The closeness of connection between defendant’s conduct and the injury suffered;
The moral blame attached to the defendant’s conduct; and
The policy of preventing future harm.

Specifically, the appellate court’s analysis focused on the first and sixth factors, which the court believed weighed heavily in favor of the existence of a duty of care.

The California Supreme Court’s Ruling

The Court began its analysis by noting that although an architect’s liability for defective services has “historically required privity of contract … the significance of privity has been greatly eroded over the past century.” After analyzing prior precedent, the Court focused its analysis on three considerations:

The closeness of the connection between the Architects’ conduct and the Association’s injury;
The limited and wholly evident class of persons and transactions that the Architects’ conduct was intended to affect; and
The absence of private ordering options that would more efficiently protect homeowners from design defects and their resulting harms.

Upon further application of these three factors to the Association’s allegations, the Court found the following alleged facts dispositive:

There were no other architects involved in the project;
The Architects played a lead role not only in designing the project but also in implementing the project design throughout the construction process;
The Architects recommended a reduction in ventilation ducts and changed the specifications for the exterior windows — both of which contributed to the unhealthy condition of the condominium units;
The Architects received a fee in excess of $5 million;
The Architects performed their services with the knowledge that the project would be sold as residential condominium units; and
The typical homeowner has no architect or professional adviser of his own and instead relies on the skill of the developer and the implied representation that the home will be built in a reasonably workmanlike manner and reasonably fit for habitation.

Moreover, the Court rebuffed the Architects’ argument that a duty of care should not be extended to the third-party homebuyers where the developer and the construction team retained control over the construction process and had ultimate authority on how the design was effectuated. In rejecting this argument, the Court relied on an analogy of a lawyer’s duty to a third-party beneficiary:

Just as a lawyer cannot escape negligence liability to clearly intended third party beneficiaries on the ground that the client has the ultimate authority to follow or reject the lawyer’s advice, so too an architect cannot escape such liability on the ground that the client makes the final decisions.

Ultimately, the Court relied upon the factors set forth above and those discussed by the First District, Court of Appeal to reach the following holding:

an architect owes a duty of care to future homeowners in the design of a residential building where, as here, the architect is a principal architect on the project — that is, the architect, in providing professional design services, is not subordinate to other design professionals. The duty of care extends to such architects even where they do not actually build the project or exercise ultimate control over construction.

The Implications

Although design professionals have always faced exposure to claims for breach of the duty of care originating from third-parties, typically such claims take the form of a third-party complaint by a developer who has been sued directly by a condominium association or homeowner. By allowing a third-party homeowner to sue the design professional directly for breach of the duty of care, Beacon has provided the homeowner with another potential source of recovery from whom recovery is often more feasible given the difficulty many plaintiffs encounter in collecting from a single purpose entity (typically an LLC or partnership) that developed the project.

However, though Beacon has arguably greatly extended an architect’s duty to a third-party homebuyer for negligently prepared plans, specifications and/or design modifications, the design professional is not left completely defenseless. For example, depending on the specific facts underlying the dispute, the architect may be able to point to the following facts in an attempt to distinguish the Beacon opinion and argue its inapplicability:

Involvement of other architects in the project;
The architect served in subordinate role to other project architects;
Relative lack of involvement of defendant architect in designing the project and/or during the construction process; and/or
Negligible cost of design services.

Unfortunately for architects, such factual defenses will likely be subject to a balancing test similar to the Beacon court’s analysis and therefore likely ineffective for dismissal of a complaint during the early pleadings stage of a lawsuit. As such, reliance on such arguments will be considered premature until the court allows the architect to file a motion for summary judgment on the issue of its duty to the third-party homebuyer. However, by the time a court will entertain a motion for summary judgment, significant legal fees and expenses will likely have been incurred.