Skip to main content
A Better Partnership

Publications

Apr 2004
01
April 01, 2004

Construction Law Newsletter

Topics included in this issue:

Protecting the Design Professional From
Construction Project Defaults

The construction project in trouble nearly always results in significant losses. How those losses are allocated among project participants – owner, lender, contractor, subcontractor, and design professional – will be determined most always not by the events immediately leading to the failure of the project, but instead by applicable law, the agreement by which the design professional was engaged and actions taken by the design professional early in the process to protect its position.

The design professional has two principal concerns when a project fails: getting paid and avoiding liability.

When negotiating a design services agreement, the design professional should consider first how it will charge for its services. Common methods include a percentage of the construction cost and fee for services, based upon an hourly rate structure. In addition, the design professional should consider in what intervals payment will be required. To the extent that fees can be "front-end loaded," the design professional will have less at risk if the project does not ultimately succeed. And, if the design professional's work is to be carried out in phases, such as the traditional five phases of architectural design-schematic drawings, design development, construction drawings, bidding and negotiating, and project administration–the design professional can reduce its exposure by being sure that it is being paid in full for each of its tasks when that task has been completed. Hence in the case of a project failure while construction is under way, the design professional would only have fees due it for project administration at risk. Unfortunately, many design professionals defer payment of their fees, leaving the fees at risk.

The careful design professional will also consider the source of the owner's financing for the project. What is the likelihood of construction lending being available? May loan proceeds be used for "soft costs," such as architectural fees? And, does the project owner, standing alone, have the financial wherewithal to bear the costs of its design professional? Many projects are developed via single asset entities. Clearly, such entities may not have the financial strength to ensure payment of design fees.

In some cases, the design professional should consider requiring a security deposit to assure it is fully compensated or being named as an obligee on the owner's payment bond.

When the project fails and the design professional is unpaid, recourse will almost always be indirect. Does the mechanic's or construction lien statute in place in the state whose law governs the project permit a design professional to assert a lien? Are the design professional's lien rights limited in any way, such as to services provided at the jobsite in connection with actual construction activities? Project administration would probably be covered under such a statute; design work probably would not be.

Can the design professional recover the plans and specifications from the local building authority and, hence, effectively pull the project's building permit? As someone will no doubt want to finish the project, and a building permit will be required, this can be a powerful weapon in the hands of an unpaid design professional.

Who owns the drawings and specifications? Who has the right to use them? A design services agreement that is well drafted from the standpoint of the design professional will provide that the drawings and specifications are instruments of service owned by the design professional and will grant the project owner a limited license to use the drawings and specifications only in connection with the initial construction of the project and then only so long as the design professional is being paid for its services on a current basis. It and the drawings and specifications themselves should clearly protect the design by identifying it as the copyright-protected work of the design professional.

Many construction lenders require an assignment of the drawings and specifications for the project from the design professional as a prerequisite to approving a construction loan. Avoiding such an assignment altogether may enhance the design professional's rights in the case of a project failure. On the other hand, a lender's requiring such an assignment can provide the design professional with an opportunity to negotiate with the lender for a provision in the document of assignment that requires, as a prerequisite to utilizing the drawings and specifications, the lender to cure all payment defaults by the owner and assume the forward obligations of the owner under the agreement for design services. A simple blanket assignment, on the other hand, will leave the design professional out in the cold.

Design professional liability typically arises in connection with the failed project for one of three reasons: allocations of defects in the drawings and specifications themselves, charges that the design professional certified faulty or unfinished work for payment or that the design professional erred in its estimate of the cost of the project.

Projects typically fail either because of cost overruns or because unexpected difficulties were encountered. Each of these circumstances can lead to an assertion that the design professional provided faulty drawings and specifications. In fact, it is fairly typical for contractors to blame the design professional when something goes wrong with the project. They may assert that the construction drawings did not present a buildable project, or that they were ambiguous or unclear or lacked sufficient detail. Any of these assertions, if true, will result in liability for the design professional. Obviously, the best way to avoid such liability is to produce plans and specifications that are wholly adequate. However, that answer begs the question. To avoid the issue altogether, it is wise to insist that the contractor review the drawings and specifications prior to implementing construction utilizing them. Requiring the contractor to verify that the drawings and specifications are complete, unambiguous, sufficiently detailed and buildable can help avoid a charge to the contrary later on.

It is the rare project, however, that fails because of a total lack of buildability or other fatal defect in the drawings and specifications. Instead, whatever flaws may exist in the drawings and specifications lead to delays and cost overruns. Once again, early builder review will provide the design professional with significant protection. Design professionals will also be on the lookout during the course of construction for indications that design problems exist or may be claimed by persons working on the project. Unusual or excessive requests for information and tradesmen who do not seem capable of properly performing their responsibility are two signs that claims may be made based upon the design professional's drawings and specifications. The design professional should alert the owner at once to the existence of such symptoms and see that they are dealt with promptly.

The design professional should also be protected in its agreement with the project owner for excessive fees that may be incurred as a result of "claimsmanship" by the general contractor or trade people.

Design professionals are often called upon to estimate the cost of constructing the project they design, or to design a project that meets an owner's budget, or both. Some case law supports the proposition that a requirement may be implied in a design services agreement that the project be designed so that it can be constructed within either certain cost parameters or a stated variance from the estimate. However, a careful design professional can avoid the risks inherent in cost estimating or designing to a budget by providing in a design services agreement that the designer does not guarantee the accuracy of any statement or estimates of probable construction cost and that they are just that:  estimates. In the absence of such exculpatory language, the law of some states burdens the design professional with responsibility for cost estimates.

As part of its construction administration responsibilities, the design professional will be called upon to certify applications for payment. This process involves, to a greater or lesser degree, an attestation from the design professional that the work for which payment is sought has been satisfactorily completed. Design professionals should be careful that the design services agreement establishes a clear and reasonable standard of care applicable to such certifications and verify the accuracy of each certification they are giving, or they may find themselves liable for damages suffered in the event of its inaccuracy. Because typical construction loan agreements require the design professional to certify pay applications to both the owner and the construction lender, the liability risk is significant.

Design professionals, particularly engineers, are more and more seeking to incorporate clauses into their design services agreements limiting their liability in the case of project problems. Typical language might limit claims against the design professional to a stated amount or the fee received for the project. The courts have generally, though not uniformly, enforced such clauses.

The foregoing represents a generalized statement of the prevailing law and industry practices in the United States. The law of the several states, and local industry practices, vary considerably, however. Hence the careful practitioner will always check the rules applicable to the matter at hand. Citations of authority for the propositions set forth in this paper may be found in Chapters 5, 6, and 7 of A Practitioner's Guide to Construction Law, by John G. Cameron, Jr., published by ALI-ABA.


Construction Liens - An Often Overlooked
Remedy for Architects, Engineers and
Surveyors

While construction liens are often understood as a remedy available to contractors and subcontractors who have physically built a structure yet not been paid, the Michigan Construction Lien Act (the "Act") also provides a remedy for architects, engineers and surveyors who have not been paid for work performed.

The Act provides that "Each contractor, subcontractor, supplier or laborer who provides an improvement to real property shall have a construction lien upon the interest of the owner or lessee who contracted for the improvement to the real property . . . ." Under the Act, "improvement" includes surveying, engineering and architectural planning. Additionally, under the Act, "contractor" means a person who, pursuant to a contract with the owner or lessee of real property, provides an improvement to real property.

Often architects, engineers and surveyors will be retained by the owner or lessee and therefore will qualify as contractors for purposes of the Act. In other cases where the agreement is with a general contractor or a construction manager, the architect, engineer and surveyor will still be entitled to the remedies provided by the Act, though their role will be that of a subcontractor. Therefore, in that situation, they must be sure to comply with the additional requirements placed upon subcontractors under the Act. These additional requirements include the provision of a notice of furnishing within twenty days of beginning the work. In protecting one's lien rights, it is always important early on to identify the nature of your relationship with the owner or lessee.

Of course, an architect, engineer or surveyor seeking to enforce his or her rights under the Act is bound by the same rigorous time constraints and requirements that apply to all claimants under the Act. These include, but are not limited to, recording a claim of lien with the register of deeds for the county in which the project is located within ninety days after the last day labor or materials are furnished on the project and instituting an action to foreclose on the lien within one year of the date the claim of lien is recorded.

Due to the fact that architects, engineers and surveyors frequently begin work prior to the actual physical improvement of a subject property, they may run into difficulties that are not encountered by the average contractor. This is in part because the priority of various liens is based upon the beginning of actual physical improvements. Furthermore, an architect, engineer or surveyor that performs work prior to his or her client's obtaining an interest in the subject property does not have a lien in the property if the contemplated transaction does not close. In cases where work will be performed under these circumstances, appropriate counsel is essential in order to protect (as much as is possible) the architect's, engineer's or surveyor's right to receive payment for work performed.

Although the remedies under the Act can, with proper attention to detail, be very effective, they can also be quite complicated or even useless if one is careless or fails to follow proper statutory procedures. With proper care, the remedy of obtaining and foreclosing on a construction lien can be one of the most effective weapons in the arsenal of architects, engineers and surveyors.

The Two-Year Malpractice Statute
of Limitation Now Applies to, and
Protects, Not Only Doctors and Lawyers,
But Also Architects and Engineers

By Rodrick W. Lewis

Most of the claims we see made by owners of projects against architects and engineers are claims for defective design and, when the architect or engineer has undertaken construction observation duties, failure to observe and timely notify the owner of defects in the work. Until recently, it was unclear whether such claims are subject to the three-year negligence statute of limitation, the six-year breach of contract statute of limitation, or the two-year professional malpractice statute of limitation. Although no binding Michigan court opinions have yet held that architects and engineers are protected by the two-year malpractice statute of limitation, a 1995 Michigan Supreme Court opinion and more recent cases indicate that they are.

The Local 1064 Case

Since enactment of the Revised Judicature Act in 1961, the period of limitation for actions charging professional malpractice is two years. Historically, however, the two-year statute of limitation for malpractice actions was applied only to claims against medical professionals and attorneys. That situation changed in 1995, with the Michigan Supreme Court opinion in Local 1064 v Ernst & Young, 449 Mich 322 (1995). In Local 1064, the client-plaintiff sued an accounting firm for breach of contract, a claim subject to a six-year statute of limitation. The gist of the claim was that the accounting firm had failed to properly submit reports to government agencies and as a result the plaintiff was assessed higher rates than it otherwise would have been assessed. The case ultimately went to the Michigan Supreme Court, which reversed the Michigan Court of Appeals and held that claims against accountants for breach of professional duties are governed by the two-year professional malpractice statute of limitation. In doing so, the Supreme Court looked beyond the common law of Michigan to see whether a cause of action for malpractice had historically been recognized in the accounting profession. The court found that accountants had been subject to common-law malpractice liability since at least the mid- 1900s. The court also noted that the legislature has recognized the practice of accounting since 1925 when it enacted a statute to regulate the work of public accountants. The court therefore held that claims against accountants for violation of their professional duties are in fact malpractice claims subject to the two-year malpractice statute of limitation.

The reasoning of the Supreme Court in Local 1064 applies straightforwardly to claims by owners against architects and engineers for defective plans and specifications or negligent construction observation. The legislature has recognized the practice of architecture since 1937 when it enacted a law to regulate the profession. (1937 PA 240.) Furthermore, claims against architects for professional malpractice have been recognized not only in other states, but also in Michigan, for a long time. In two cases decided by the Michigan Supreme Court in 1898 and 1912, the Court recognized and described the claims against the architects as claims for professional malpractice, although the two-year statute of limitation was not yet enacted and the statute of limitation was not an issue in those cases. Case law from other jurisdictions also recognizes that claims against architects and engineers for design deficiencies and negligent supervision of construction are, in reality, claims for professional malpractice. Although there is as yet no binding opinion from either the Michigan Court of Appeals or Supreme Court holding that claims by owners against architects and engineers are covered by the two-year malpractice statute of limitation, the opinion in Local 1064 supports that conclusion, as does a recent opinion in a federal case.

The City of Dearborn Case

In City of Dearborn v DLZ Corp, 111 F Supp 2d 900 (ED Mich 2000), an engineering firm which contracted with the city of Dearborn to construct a storm and wastewater retention system proposed a retention treatment tunnel in lieu of retention basins. The city accepted the proposal and a contract was executed. The tunnel project was later found to be unworkable. Dearborn terminated the engineer's contract and later sued the engineering firm for negligence (three-year statute of limitation) and breach of contract (six-year statute of limitation), among other claims. The federal court found that both the negligence and breach of contract claims were, in reality, malpractice claims subject to Michigan's two-year malpractice statute of limitations. Because the claims had not been filed within the two-year period, the court dismissed the claims. (Federal court opinions construing state law are not binding on state courts. They may, however, be considered by a state court as persuasive authority.)

Caveats

The two-year malpractice statute of limitation will normally begin to run at the end of the professional relationship between the architect or engineer and the owner of the project; however, the statute has a six-month "discovery" period, meaning that an owner-plaintiff has six months from the time the claim is discovered, or should have been discovered, to bring the claim, even if the two-year period has already expired. The six-month discovery period would apply in situations where the defect is hidden or latent, for example, a structurally unsound foundation which causes cracks to develop in walls months or years after completion of construction. (Note, however, that Michigan's Statute of Repose sets an outside limit for bringing claims involving property damage or personal injury of ten years after completion of construction.)

Architects and engineers can lose the benefit of the two-year statute of limitation if they make contract promises or guarantees beyond the fairly nonspecific obligations in typical form contracts, and beyond what is required to comply with the professional standard of care. For instance, a promise to design a building to withstand a particular force of wind or to be earthquake proof, if not met, may entitle a plaintiff to sue for breach of contract and therefore have six years to bring the claim.

Conclusion

Architects and engineers should consult qualified construction law counsel when preparing their contracts to ensure that the protection of the two-year malpractice statute of limitation is preserved. When claims arise, qualified construction counsel can determine whether the claims may be barred by the applicable statute of limitation.

Rodrick W. Lewis serves clients in west and southeast Michigan from the Grand Rapids office. For over 15 years Rod has represented and counseled businesses and individuals in a broad range of commercial disputes and tort claims, including breach of contract, breach of warranty, and product liability claims. He has special expertise in construction disputes, representing designers, engineers, owners and contractors in courts and arbitration.

The Recently Revised Construction of
School Buildings Act Is Still a
Trap for Architects and Engineers

By Rodrick W. Lewis

The original Construction of School Buildings Act made architects and engineers who prepared plans and specifications for public school buildings responsible for defects in construction even when they did not supervise the construction. The Act was amended effective December 23, 2002, to address this problem, but the revised Act remains a potential trap for architects and engineers.

The Old Act

Under the Construction of School Buildings Act, first enacted in 1937, all plans and specifications for the construction or remodeling of public schools had to be prepared by an architect or engineer registered in the state of Michigan. The construction also had to be "supervised" by an architect or engineer registered in the state of Michigan, whether or not that architect or engineer was the same person who prepared the plans and specifications. (MCLA 388.851, pre-Dec. 23, 2002, amendment.) If the architect or engineer who prepared the plans and specifications did not supervise the construction of the school building, however, that architect or engineer could still be held responsible to ensure that the construction of the building was according to the plans and specifications:

The architect or engineer preparing the plans and specifications or supervising the construction of any school building shall be responsible for constructing the building of adequate strength so as to resist fire, and constructing the building in a workmanlike manner, according to the plans and specifications as approved. (MCLA 388.852, pre-Dec. 23, 2002, amendment.)

This statute created an obvious dilemma for architects and engineers preparing plans and specifications for construction of public school buildings. They could be held responsible for construction defects under the Act even if they were not hired to supervise the construction. Furthermore, it is not typical for architects or engineers to undertake extensive construction observation duties in their contracts with owners. For instance, in AIA document B141-1997, Standard Form of Agreement between Owner and Architect with Standard Form of Architect's Services, there are no construction observation duties. Even under AIA document B141-1997, Standard Form of Architects Services: Design and Contract Administration, the architect is obligated only to:

Visit the site at intervals appropriate to the stage of the Contractor's operations, or as otherwise agreed by the Owner and Architect in Article 2.8, (1) to become generally familiar with and to keep the Owner informed about the progress and quality of the portion of the Work completed, (2) to endeavor to guard the Owner against defects and deficiencies in the Work, and (3) to determine in general if the Work is being performed in a manner indicating that the Work, when fully completed, will be in accordance with the Contract Documents. (Article 2.6.2.1.)

Architects and engineers typically do not undertake, and typically are not paid by the owner to undertake, the extensive construction supervision required by the Construction of School Buildings Act. Under the pre-amendment version of the Act, architects and engineers were therefore exposed to risk of liability for construction defects despite disclaimers in the contract with the owner as to the architect's or engineer's liability for construction defects. (Article 2.6.2.1 of the Design and Contract Administration version of AIA Document B141 states: "[T]he Architect shall not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work"; Article 2.6.2.2 states: "[T]he Architect shall not be responsible for the Contractor's failure to perform the Work in accordance with the requirements of the Contract Documents.")

The Revised Act

The Construction of School Buildings Act was recently revised, effective December 23, 2002, in an apparent attempt to address the obvious practical problems with the Act. Importantly, the Act no longer requires that the construction of public school buildings be supervised by an architect or engineer, but instead that the construction be supervised by "an architect or professional engineer licensed in this state or another person qualified to supervise construction." (MCLA 388.851, as amended.) The licensed architect or engineer preparing the plans and specifications remains responsible, however, "for assuring that the design documents provide for a structure with sufficient structural strength and fire resistance and that the building will meet all applicable codes, standards, and regulations." (MCLA 388.852, as amended.) Furthermore, the person, or persons, hired to supervise the construction of a school building, whether it is an architect or engineer "or another person qualified to supervise construction" (presumably meaning a general contractor or construction manager), remains "responsible for the construction of the school building in conformance with the approved plans and specifications prepared by the licensed architect or engineer." (Id.)

The revisions to the Act do not eliminate the catch-22 features of the original Act for architects and engineers who undertake any supervisory responsibility for construction. For example, an architect who undertakes the construction supervision responsibilities, albeit limited, in Article 2.6 of the Design and Contract Administration version of AIA document B141 remains at risk of fines, imprisonment, loss of professional license, and civil liability, even if another party has more direct responsibility for construction supervision, in the event the construction does not conform with the plans and specifications.

Potential penalties for violation of the Act were, and still are, quite onerous. A violation of the Act can result in civil penalties of up to $10,000, and imprisonment for up to 180 days, or both. The current Act also still provides that upon conviction of violation of any provisions of the Act, the license or registration of an architect or engineer shall be revoked. (MCLA §§ 388.852; 388.854.)

Violation of the Act by an architect or engineer does not, in and of itself, create a civil legal claim which can be asserted by an owner. In other words, a public school owner cannot sue an architect or engineer for construction defects based on the architect's or engineer's failure to comply with the requirements of the Act. Nevertheless, a violation of the Act will create a presumption of negligence on the part of the architect or engineer, and the jury may be instructed that they may infer negligence from the architect's or engineer's violation of the Act.

Practically, when the architect or engineer who prepares plans and specifications for construction of a public school building undertakes only limited construction supervision responsibilities, while either a general contractor or construction manager has primary construction supervision responsibilities, the architect or engineer may not be at significant risk of criminal conviction, loss of professional license, or civil liability if the construction does not conform to the plans and specifications. Nevertheless, the risk is certainly not eliminated by the recent revisions to the Construction of School Buildings Act. Architects and engineers who are involved with public school building projects should give careful thought to the degree of construction supervision, if any, they will undertake, and should consult a qualified construction law attorney in preparing their contracts.

* * * * *

Construction Law

Warner Norcross & Judd LLP has a large, experienced construction law group that practices throughout the United States. Our multidisciplinary practice includes attorneys experienced in labor, contracting, lending and insurance issues affecting businesses in the construction industry as well as litigation, mediation and arbitration of disputes. Our attorneys handle all aspects of construction law matters for a broad base of large and small clients in the commercial, industrial and residential construction industry. Clients we serve include:

Owners

   

Landlords

Contractors

 

Tenants

Subcontractors

 

Real estate brokers

Construction managers

 

Consultants

Design professionals

 

Financial institutions and
mortgage brokers, owners
and investors

Suppliers

 

Municipal agencies

Architects and engineers

 

Public and private
owners/corporations

Banks

 

Condominium and cooperative
associations

Developers

   

 

* * * * *

Construction Law is published by Warner Norcross & Judd to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Construction Law Group at 616.752.2000.
 

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL

Text

+ -

Reset