Architects can't afford to be negligent under new laws.

An architect's or design professional's liability to contractors and subcontractors for money damages arising out of negligently prepared plans and specifications has undergone major changes in the past two decades. Architects and other design professionals were previously insulated from such liability because there was no privity of contract between the parties, that is, no contract between the architect or design professional and the contractor. Historically, an architect or design professional was held to owe a duty of care only to the party with whom he had a direct contractual relationship, usually the owner of the project. As a result, the owner was generally the only person entitled to bring a lawsuit against the architect for defective plans and specifications.

Under this traditional view, contractors and subcontractors could not recover damages for economic loss from the architect or design professional because of the lack of a direct contractual relationship, even though the contractor performed extra work and incurred increased costs resulting from defective plans and specifications. Under this reasoning, since a contractor is not a party to the contract between the owner and the architect or design professional, the duty to exercise reasonable care in the preparation of plans and specifications does to him.

The unfairness of applying the lack of privity of contract defense to protect the design professional from liability to contractors led to its gradual erosion through court decisions. In 1989, the Court of Appeals in Ossining School District v. Anderson held that a cause of action for an engineer's negligent misrepresentation could be maintained even though the owner-school district was not in actual privity of contract with the engineer, who had been hired by the architect on the project, because the underlying relationship between these parties was "so close as to be the functional equivalent of contractual privity."

Whether a relationship between the design professional and a contractor or subcontractor is "so close" as to approach that of privity depends on the particular facts of each case. The three-prong test that is now used to determine whether a "close to privity" relationship exists between a design professional and a contractor or subcontractor is as follows: (1) awareness that the plans and specifications will be used by the contractor for a particular purpose; (2) reliance by the contractor on the plans and specifications in formulating its bid; and (3) some conduct linking the design professional to the contractor which evidences his understanding of the contractor's reliance.

In Ossining, the Court found that the engineer could not possibly have been unaware that the engineering reports he furnished would be transmitted to and relied upon by the school district. Thus, New York's highest court concluded the bond between the engineer and the school district to be the functional equivalent of contractual privity.

In Travelers Casualty & Surety Co. v. The Dormitory Authority of the State of New York, recently decided by the federal court in New York, the defendant architect, KPF, moved to dismiss the complaint of Travelers, the surety for a contractor, Trataros, based upon a claim that there was a lack of privity of contract between Travelers and KPF.

DASNY had contracted with KPF to perform "programming, design and certain construction phase services" in connection with the construction of a building on the Baruch College campus. The contract obligated KPF to prepare and supply the contract documents for bidding and the eventual award of contracts by DASNY to the contractors. KPF was also contractually obligated to investigate questions posed by bidders and to issue written replies to them, and to assist DASNY in reviewing and analyzing the bids. In addition, KPF was required to review approved submissions from contractors, and to monitor the construction of the project. The contractors were instructed that all communications regarding questions and concerns with respect to the project should be directed to KPF "as a final decision-maker."

Trataros successfully bid on the contract. The project was completed, but not on schedule. Travelers, as the surety for Trataros, had the right to present any claim and use any argument available to Trataros. Travelers sued KPF, claiming that KPF made considerable design errors which lead to significant delays and increased costs during the course of the construction.

The federal court applied the three-prong test set forth in Ossining to determine whether the parties' relationship was so close as to approach that of privity of contract and thus provide the contractor with the right to sue the architect. The Court determined that Travelers' complaint sufficiently set forth a functional equivalent of privity basis to support its claim to recover damages for economic loss caused by KPF.

The Court stated that KPF's submission of instructional materials to DASNY with knowledge that the material would be utilized by Trataros, a prospective bidder, provides sufficient notice to KPF that its materials will be utilized for a particular purpose. The Court specifically noted that last year a New York Appellate Division case had concluded that "by its very nature, architects are put on notice that the designs which they create will be utilized by contractors or construction workers." The court had little difficulty determining that KPF was well aware that its designs, bid responses and site management services would be used for a particular purpose by Trataros.

The Court next discussed the second prong of the Ossining test--reliance by a known party in furtherance of that purpose. Trataros was a known party. Most significantly, KPF, as architect, was required to inspect the progression of the construction work to ensure compliance with the designs it created and submitted to DASNY. Trataros had clearly relied on both KPF's designs and KPF's architectural inspections as the project unfolded.

The third-prong of the Ossining test requires "linking conduct" between the parties. This linking conduct requires "more than phone calls, general communications or unacknowledged assertions of reliance." The third prong of the test was met because Trataros' reliance on KPF's services was well within the contemplation of the parties. The Court determined that KPF's design of the project, oversight obligations through the building phase of the project and the involvement in the bidding process clearly satisfy the linking requirement.

The rationale of the New York courts in permitting contractors to recover economic loss damages for negligent misrepresentation is that contractors who bid on projects have very little choice but to rely upon the specifications prepared by architects.

The contractor has the right to rely upon the specifications as being reasonably accurate, even if there are boiler plate warnings and disclaimers in the bid documents. The design professional is fully aware that the contractor will base his bid on the information that is given to him. If the design professional is negligent, he will not be permitted to avoid liability by attempting to shield himself behind a lack of privity of contract defense.

HENRY L. GOLDBERG AND ROBERT C. BUFF

GOLDBERG & CONNOLLY