Massachusetts Supreme Court’s Decision Sets New Standard for CMs’ Responsibility for Design
The following article is an update on the Coghlin vs. Gilbane case. Michael C. Zisa, Esq. and Warren E. Friedman, Esq. of the law firm of Peckar & Abramson, P.C. describe how the Massachusetts Supreme Judicial Court’s decision creates a new standard governing the Spearin Doctrine and an owner’s responsibility for implied warranties. For additional background, read their article published prior to the Supreme Judicial Court’s decision.
By Michael C. Zisa, Esq. and Warren E. Friedman, Esq.
In the days of design-bid-build project delivery, architects and engineers were responsible for the design, and contractors were responsible for the construction. These days, however, the bright lines of responsibility have been blurred by alternative project delivery methods such as “design-build” and “construction manager at-risk.” As project delivery methods change so do risks for contractors who assume these alternate and expanded roles. A Massachusetts Superior Court decision highlights the potential risks for a Construction Manager At-Risk (CM@R). In what it determined was a matter of first impression, that Massachusetts trial court ruled that, based on its scope of work under the contract and the contract’s broad indemnification provision, a CM@R could not sue an owner for design deficiencies even though the owner provided the plans and specifications for the project. That decision, which was recently reversed by the Massachusetts Supreme Judicial Court, sets a new standard for the CM@R and impacts the business of general contractors performing CM@R work.
In Coghlin Electrical Contractors, Inc. v. Gilbane Building Co. and Travelers & Surety Company of America, No. 2013-1300-D (Mass. Sup. Ct., June 24, 2014) (Davis, J.), the Massachusetts Division of Capital Asset Management on behalf of the Massachusetts Department of Mental Health (Owner) contracted with Gilbane Building Company (CM) to manage the construction for a psychiatric facility pursuant to a CM@R agreement. CM subcontracted the electrical scope of work to Coghlin Electrical Contractors, Inc. (Subcontractor). During construction, the Subcontractor encountered issues resulting in additional costs as a result of the CM’s purported mismanagement of the project, stemming from design changes impacting the Subcontractor’s work. The Subcontractor sued the CM and its surety for the resulting damages and the CM subsequently sued the Owner by way of a third-party complaint, asserting that the Owner was responsible for any damages caused by the design-related changes and design errors. The Owner moved to dismiss the CM’s claims, arguing that the CM@R agreement obligated the CM to “indemnify, defend and hold harmless” Owner from and against “all claims, damages, losses, and expenses . . . arising out of or resulting from the performance of the Work.”
Examining the CM@R agreement, the court found that the provisions imposed upon CM extensive design responsibilities:
The CM shall review, on a continuous basis, development drawings, specifications and other design documents. The design reviews shall be performed with a group of architects and engineers, who are either employees or independent consultants under contract with the CM. . . . The CM shall review the design documents for clarity, consistency, constructability, maintainability/operability and coordination among the trades . . . .
Ultimately ruling for the Owner, the court explained that this was not a typical design-bid-build project, but was rather an “alternative delivery method,” authorized by Massachusetts law, where under the CM@R project delivery system, the purpose is to engage the CM during the design phase of the project so that the public entity can benefit early on from the CM’s expertise. The court further explained that in the CM@R delivery method, the CM takes on additional duties and responsibilities for the project along with added risk; but, according to the court, this additional exposure should be compensated through the CM’s guaranteed maximum price, absent change orders. Despite arguments by the CM that the Owner modified the scope of the CM@R agreement, the court found no contractual support for this argument.
Additionally, the court held that the contractual indemnification language running in favor of the Owner “trump[ed] the long-standing Massachusetts common law principles to the effect that ‘where one party furnishes plans and specifications for a contractor to follow in a construction job . . . the party furnishing such plans impliedly warrants their sufficiency for the purpose intended.’” In fact, the court determined that the doctrine that requires the owner to ensure constructability of the plans and specifications (recognized across the country as the Spearin Doctrine) does not apply in the CM@R context where the CM takes on added roles and responsibilities, including design-related roles and responsibilities. While the CM argued that the indemnity obligation excluded claims involving design changes and design errors and omissions, the court disagreed because no claims had been filed against the designer.
As a result, based upon this rationale, the court ignored all of the CM’s arguments and dismissed the CM’s claims against the Owner in their entirety and with prejudice. Following the ruling, an appeal was filed by the CM in the Massachusetts appellate court (Case No. 2014-P-1431); and in light of the significance of the decision to the construction industry, amicus curiae briefs were filed by American Council of Engineering Companies of Massachusetts and Massachusetts Chapter of the American Institute of Architects, Construction Industries of Massachusetts, Columbia Construction Company, and Associated General Contractors of Massachusetts, Inc., each of which expressed a different industry view of the issues.
On September 2, 2015, the Massachusetts Supreme Judicial Court reversed the decision of the trial court. In doing so, the court examined three questions: (1) whether the Spearin Doctrine applies in the CM@R context, (2) if so, did the parties in the instant matter disclaim the Spearin Doctrine by virtue of their agreement, and (3) if not, did the indemnity provision in the contract at issue bar the CM’s claim against the Owner. The first question, however, which the court recognized was a matter of first impression, was paramount. The court explained that “[u]ntil today, we have not considered whether the owner’s implied warranty of the designer’s plans and specifications applies in public construction management at risk projects.” Discussing this further, the court stated that “[w]hen we adopted the implied warranty as part of our common law, public agencies were generally limited to using the design-bid-build method . . . where the owner ‘is in control of the design development process’ and the contractor ‘has no ability or opportunity to contemporaneously, meaningfully, or otherwise influence the process of design development and is required to construct in strict conformance with the furnished project design.'” Juxtaposing the CM@R method for contracting, the court found that “[t]he relationship between the owner and the CMAR is different from the traditional relationship between the owner and the general contractor in a design-bid-build project” because “[u]nlike design-bid-build projects where the designer designs and the contractor builds, the CMAR may provide consultation regarding the design of the project and therefore may influence the project’s final plans and specifications.” Additionally, the court found that “the CMAR agrees to a GMP and has the opportunity when negotiating the contract to consider the risk of incurring additional costs.” While it seemed as though the court was initially drawing disparities between the contracting methods, the court ultimately held that “we are not persuaded that the relationships are so different that no implied warranty of the designer’s plans and specifications should apply in construction management at risk contracts . . . and that the CMAR should bear all the additional costs caused by design defects.” To support its ruling, the court offered the following rationale:
The CMAR may consult regarding the design of the project, but the owner, through the designer, ultimately controls the design and is the final arbiter of it; unless the contract states otherwise, the owner is generally under no obligation to accept the CMAR’s suggestions regarding the plans and specifications. The implied warranty derives in part from the basic principle that “responsibility for a defect rests on the party to the construction contract who essentially controls and represents that it possesses skill in that phase of the overall construction process that substantially caused the defect. . . . Although the CMAR may be more likely to bear some responsibility for a design defect than a general contractor in a design-bid-build project, we adhere to this basic principle by applying the implied warranty to public construction management at risk contracts, where the owner maintains control of the design by contracting a separate designer and may be able to transfer liability to the designer responsible for the defect. . . .
The possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects, even those that a reasonable CMAR would not have been able to detect . . . . Even where a CMAR is given substantial consultative responsibilities regarding the design, the owner remains free to reject the CMAR’s advice and suggestions.
(Emphasis added). Here, the court focused on control over the design as the determining factor as to ultimate responsibility for defects in the design. Accordingly, unlike the traditional Spearin Doctrine standard where a general contractor may benefit from the implied warranty where it relied on the plans and specifications in good faith, the court created a limitation on the applicability of the standard in the CM@R context. Specifically, the court explained that a CM@R may benefit from the implied warranty only where it has (1) acted in good faith reliance on the design, and (2) acted reasonably in light of the CM@R’s own design responsibilities. This factually dependent standard requires an analysis of the CM@R’s level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CM@R in order to assess whether the CM@R’s reliance was reasonable. As the court explained by example, “[t]he greater the CMAR’s design responsibilities in the contract, the greater the CMAR’s burden will be to show, when it seeks to establish the owner’s liability under the implied warranty, that its reliance on the defective design was both reasonable and in good faith.”
In the context of this case, and not unlike many other CM@R contracts, the court found that the contract delegated extensive responsibilities to the CM to “carefully study” and “carefully compare” all design-related documents, “take field measurements and verify field conditions,” compare them to the designs, and “report to the designer any questions, errors, inconsistencies, or omissions,” review the designs on a “continuous basis with a group of architects or engineers in order to discover inconsistencies, errors and omissions, and review the design documents for clarity, consistency, constructability, maintainability/operability and coordination among the trades.” Although the court recognized that the CM undertook significant design related responsibilities in this contract, the court found that the contract did not contain an express abrogation of the Spearin Doctrine. Therefore, the court employed its new standard to assess the extent of the CM’s control over design and found that the contract stated that “‘recommendations and advice of the [CM] concerning design modifications and alternatives shall be subject to the review and approval of [the Owner]’ and, the Designer shall decide all questions which may arise as to the interpretation of the designs and as to the fulfillment of this Contract on the part of [CM].” Where the contractual provisions demonstrate that the designer and the Owner maintain final control over the design, the court found that “the plain language of the contract supports, rather than disclaims, the implied warranty.” Thus, under its holding and supporting rationale, where the implied warranty applies, the CM could only recover additional costs from the Owner to the extent that such additional costs were caused by the CM’s reasonable and good faith reliance on the defective plans and specifications that resulted in a breach of the Owner’s implied warranty, despite the CM’s own contractual design responsibilities. Consequently, the court remanded the case for further proceedings.
Despite the reversal, the appellate decision and its new standard poses a significant risk to CMs. This potential risk should be accounted for in the guaranteed maximum price, and CM@R agreements should be reviewed carefully and the court’s new standard on the implied warranty should be considered. Another method for addressing or mitigating the risk associated with potential design liability for a CM is to purchase a professional liability policy prior to commencement of a project. These policies are intended to provide coverage to contractors for such liability, including, but not limited to, design errors or omissions or negligence of the contractor in rendering its construction and related services to a project. In fact, some owners are even requiring by contract that contractors (especially in a CM@R setting) procure these professional liability policies.
This decision also raises issues for sureties providing payment and performance bonds for CM@Rs. Specifically, sureties may lose rights to pursue a principal’s claims for defective plans and specifications and may be confronted with performance bond claims arising out of a principal’s failure to fulfill its design-related or attendant indemnification obligations under the CM agreement.
As a case of first impression, this decision will likely have far-reaching consequences and change the way CM@R agreements are understood and operate as, traditionally, CM@R agreements do not assume responsibility for design. Furthermore, the decision has created a new and different standard governing the Spearin Doctrine and an owner’s responsibility for implied warranties in any construction contract where a contractor participates in or assumes some contractual responsibility for even a portion of the design process. Because the new standard is factually dependent, each contract and individual project circumstances will need to be reviewed, analyzed, and understood independently; and this alone creates added risks.
Michael C. Zisa is a partner in the Washington, DC office of Peckar & Abramson, P.C. and focuses his practice on construction, surety and government contracts law and chairs the Firm’s Surety practice group. He represents sureties, general contractors, subcontractors and owners in all aspects of their business–from contract review and negotiation to contract administration and claim analysis and development to litigation in federal and state as well as various contract appeals boards and alternative dispute resolution forums. Zisa regularly speaks and writes on surety and construction issues and was recently recognized again by Washington, DC Super Lawyers in the areas of construction litigation, surety, and government contracts.
Warren E. Friedman is a Florida Board Certified Construction lawyer in the Miami office of Peckar & Abramson, P.C. Friedman regularly represents contractors, construction managers, and sureties on both private and public construction projects and places particular emphasis on providing strategic business counseling to his clients designed to prevent costly disputes before they arise.