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As the name suggests, an owner’s representative or construction manager not-at-risk (CM) on a construction site is an extension of the owner who ensures that the project meets the owner’s needs, objectives, and expectations. For that reason, a project owner’s use of a CM—a role that is often filled or supplemented by an architect acting in a contract administration role—is commonly considered best practice to ensure that a contractor’s work and progress conform to the contract documents. Such a relationship between the owner and CM is governed by an independent contract. General contractors and subcontractors generally do not contract with a CM. Common sense suggests that if any dispute arises between the owner and the contractor, the CM is only potentially liable to the owner. After all, contracts allocate risk and CMs do not contract with contractors. But the law gives contractors and other third parties recourse in tort such that CMs can be liable to third parties with whom they do not have a contract. Project participants and CMs themselves should be aware of the circumstances that give rise to this exposure.
A common thread among cases as it relates to CMs is the standard of care that is applied to CM tort cases. Akin to engineers and architects, courts generally agree that CMs owe to third parties the level of skill, attention, and diligence that a reasonably competent person in the same role or profession would use in similar circumstances. A CM is correct to believe its top priority is to act in the owner’s best interest, as that is one of the fundamental reasons an owner executes a written agreement with a CM. However, CMs cannot lose sight of the foreseeable reliance by third parties on CM conduct and omissions whether in the form of review or processing of drawings and specifications, value-engineering, cost accounting, submittals, potential change orders, pay applications, requests for information, or certification of termination.
A typical claim brought in court against CMs is negligent misrepresentation or negligent supervision. In John Martin Co., Inc. v. Morse/Diesel, Inc. (1991), the Supreme Court of Tennessee looked at whether the absence of a contract barred a negligent misrepresentation claim brought by a subcontractor against the construction manager. An insurance company entered into an agreement with Morse/Diesel (the Owner) as a consultant to help prepare an expansion to Morse/Diesel’s offices in Hamilton County, Tennessee. The insurance company hired a CM to manage subcontractor hiring and to oversee construction. As the insurance company’s agent, the CM awarded a subcontract to John Martin Co., Inc. for concrete and rough carpentry. During construction, the subcontractor was required to provide extra labor and concrete due to sagging steel in the superstructure which it later alleged was attributable to defective plans. The CM refused to execute change orders for the additional concrete because it argued that the “natural sag of the steel” in the superstructure was something that the subcontractor did not account for. The subcontractor sued both the insurance company and CM on contractual and tort theories. In court, the CM argued that the subcontractor could not recover economic losses from parties not in contractual privity—in other words, parties with whom the subcontractor did not have a contract. The subcontractor argued that the CM breached its duties to properly supervise and direct the project, which caused the subcontractor to incur exorbitant labor and material costs.
The court held that a contractor may make a claim for negligent misrepresentation (whether the negligence is by direction or supervision) against a CM absent a contract. The court explained that the foreseeability of reliance on the inaccurate or misleading information is “critical to liability” of a CM in this context. The court also pointed out that there is a split of authority across states in adopting the test that it used to reach its holding. For instance, more than a decade later, in Presnell Constr. Managers, Inc. v. EH Construction, LLC (2004), a dispute between a contractor and CM, the Supreme Court of Kentucky adopted the same test in holding that parties may bring negligent misrepresentation claims and seek economic loss in Kentucky.
In Florida, the landmark decision on tort liability of CMs and architects to third parties is A.R. Moyer, Inc. v. Graham (1973). The Supreme Court of Florida decided this certified question of law because the architect argued that he was only liable to the owner with whom he contracted. The court answered that a third-party general contractor may indeed bring an action against a negligent architect.
A recent Florida appellate decision in Uddin, Inc. v. Signer Architects, Inc. (2019) discusses the Moyer decision and explains what tests Florida courts apply to this question of third-party liability. There, the contractor sued both Broward County and the architect for breach of contract and professional negligence, respectively, on an airport improvement project. Among other discrete issues, the contractor alleged that the architect caused delays to the contractor’s ability to progress its work and that such delays led to the contractor’s termination. The architect also recommended the contractor’s termination. The architect’s contract with the county tasked the architect with being an initial decision maker of sorts on disputes between the contractor and owner, inspecting and approving completed work, submittal review, change order review, certifying substantial completion, and preparing punch list review to facilitate final completion. The county’s contract with the contractor described “the architect’s role as a consultant and administrator.”
Based on the Moyer decision, the court evaluated the nexus between the architect and the contractor as the measure of the corresponding degree of control the architect had over the project and consequent economic impact of the architect’s decisions on the contractor. To put it simply, the court looked at how much the architect’s decision-making authority directly influenced the contractor. Facts such as the contractor being the GC and not a subcontractor, whether the architect effectively was the owner’s representative, whether the architect could recommend work stoppage and contractor payment, and the extent of the county’s reliance on the architect all tipped the scales toward finding the requisite control. The court found as follows: “Although the county had final authority to terminate the contractor or otherwise stop work, it relied on the architect’s duty as consultant to make its ultimate determination to terminate the contractor.” In conjunction with the architect’s “near absolute authority regarding payments to the contractor,” the court concluded the architect had sufficient control to be liable to the contractor absent a contract under Moyer.
CMs can also be liable for a claim of negligent professional undertaking. In the Louisiana case of Lathan Co. v. State, Dep’t of Educ., Recovery Sch. Dist. (2017), Lathan executed a public works contract with the Louisiana Department of Education, Recovery School District (RSD). RSD engaged an architect and a CM under separate contracts. Among other allegations, Lathan alleged (1) that the bid documents and drawings were defective and required numerous Requests for Information (RFI) to be submitted to the architect and CM, and (2) that the architect and CM “did not perform inspections in the manner prescribed by industry standards.” Lathan also counted among the CM’s wrongful acts “extremely delayed responses to Lathan’s questions and submittals,” “its refusal to give needed responses to reasonable questions,” “its refusal to properly recommend substantial completion,” and “its refusal to properly manage the oversight of the project.” In the trial court below, the CM contended that it did not owe Lathan a duty of care due to the absence of a contract. The trial court agreed with the CM. However, as requested by Lathan, the Louisiana appellate court considered extending to CMs the duty owed to third parties by engineers and architects.
As emphasized by the Tennessee court in John Martin Co. for the claim of negligent misrepresentation, the Lathan court looked closely at the foreseeability of Lathan’s reliance on the CM’s professional conduct. The court distinguished the duty of care claims from those based on design acts or omissions by the architect or alleged construction defects. Because Lathan alleged a claim against the CM for “fail[ing] to oversee and administer the project according to industry standards of similarly situated project management professionals,” and provided examples of such failures, the court held that the CM owed a duty of care to the contractor.
Taken together, the link between these types of third-party claims is the foreseeability of reliance on information or lack thereof arising from the CM’s acts or omissions. Tort claims that can be brought against CMs vary by state. For example, as already mentioned, Tennessee applies a specific test to negligent misrepresentation claims and the Supreme Court of Kentucky later adopted the same test. On the other hand, Florida gives attention to the control an architect or CM has over the project and a contractor’s financial health.
CMs should also be wary of intentional conduct performed in concert with an owner that financially harms a contractor. In Barr Inc. v. Studio One, Inc. (2015), the U.S. District Court for the District of Massachusetts reviewed a claim under Massachusetts law for tortious interference with contract brought by a general contractor against an architect that was administering an apartment complex remodeling project. The GC alleged that the owner and architect “fabricated grounds for terminating Plaintiff from the Project.” Rejecting the architect’s motion to dismiss for failure to state a claim, the court was satisfied that the GC alleged facts sufficient to meet all five requisite elements. The key element for readers to note from this case is whether “Defendant’s actions were improper in motive and means.” The GC alleged that the “[architect’s] certification of termination was motivated by the prospect of additional compensation,” which was in fact provided for in the design and contract administration agreement. Architects and CMs alike may be acting in the owner’s best interest as required by their contracts, but an owner’s poor decision, if aided by the CM or architect, can expose the CM or architect to third-party claims.
Some states limit the amount of exposure CMs have to third parties based on legal doctrines adopted by state legislatures or courts. For example, in Georgia, the economic loss rule presents a bar to third-party claims against CMs. The economic loss rule limits the liability of a CM to duties that arise independently of the CM’s contract with the owner. In other words, GCs and subcontractors cannot sue CMs on duties that stem from a CM’s contract. With this in mind, it is extremely important that CMs read, understand, and stick to their scope of services. Performing extra-contractual duties can open the CM up to third-party liability in Georgia.
The CM’s obligations arising from its contract with the owner may differ from the responsibilities of the CM set forth in the prime contract. Recall that in the Uddin case above, the prime contract detailed the architect’s role, which is common. If possible, it is advisable for a CM to have a copy of the prime contract and make sure any obligations that implicate duties of the CM are consistent with the CM’s contract with the owner.
It certainly is prudent for CMs to contractually allocate risk as much as possible, but a contract is never perfect. A CM should consider the duties it owes to third parties, not just to the owner. It is important to understand under what circumstances a CM can be liable to a third party before and after signing a contract. Contact a competent construction attorney to effectively address the potential liability of CMs in your contracts and during operations on your projects.
Smith Currie Oles LLP provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.