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Indecent Exposure

The erosion of privity and expanding design professional liability

September 20, 2018 Photo

The common law requirement of privity of contract has long protected design professionals from liability to third parties unrelated to the contract. Under the common law doctrine, a design professional could only be held liable to the person or entity with whom the design professional contracted.

Accordingly, design professionals had little reason to worry about liability to third parties, even parties who suffered injury as a result of their work. In recent years, however, courts have begun to rely upon new theories of liability that discard the common law privity requirement, exposing design professionals to claims by unrelated third parties. There is no consensus on the issue, and various state courts are on opposite ends of the spectrum, with some quick to navigate around the privity requirement, while others looking for reasons to maintain it. The overall trend, however, likely represents a shift away from the common law requirement of privity, one which will see design professionals increasingly subject to liability to unrelated third parties.

The Common Law Rule and Requirement of Privity

With common law, a design professional’s liability was limited to those parties with whom the design professional had a contract—claims against design professionals brought by unrelated third parties with no contractual relationship with the design professional were barred in their entirety. Unrelated third parties not in contractual privity with the design professional could not state a claim against the design professional, as under the common law rule, the design professional had no duty of care to those parties, and those parties were not third-party beneficiaries to the design professional’s contract.

Over the last few decades, several courts around the country have weighed in on the issue, and many have upheld the common law doctrine requiring privity of contract. In SME Industries Inc. v. Thomason, Ventulett, Stainback and Associates Inc., the Supreme Court of Utah affirmed the dismissal of a subcontractor’s claims against a design professional, holding that the subcontractor could not get around the common law requirement of privity by asserting a claim for negligent misrepresentation. Courts of final appeal in other states, such as Virginia and Washington, have decided the issue in similar fashion, and have upheld the dismissal of claims against design professionals brought by parties who were not in privity of contract with a design professional. See Blake Construction Co. v. Alley and Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1.

Erosion of the Privity Requirement

Over the last decade, however, a movement toward eroding the common law requirement of privity has begun, and courts are becoming increasingly amenable to allowing claims by unrelated third parties against design professionals to move forward. The most significant recent case to abolish the longstanding requirement of privity was the Supreme Court of California’s decision in Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP. Should this trend continue, design professionals will likely face significantly increased exposure, as eliminating the common law requirement of privity of contract will greatly expand their exposure to claims from unrelated third parties—parties with whom the design professional may have had no interaction or authority to supervise. Additionally, eliminating the common law requirement of privity will limit design professionals’ ability to manage their risks through careful contract drafting and negotiation.

In Beacon, a homeowners’ association sued a developer and two architectural firms for alleged construction defects. While the two architectural firms were responsible for the principal design, both were also actively involved during construction. Both firms were involved in altering designs in the field, inspecting the work of the developer’s subcontractors, and making recommendations to the developer to reject non-conforming work. The developer offered units in the property for rent for two years after substantial completion, at which point the property was converted into condominium ownership. Following transition of the property, the homeowners’ association made complaints of water infiltration, structural cracks, and excessive solar heat gain, which it attributed to design deficiencies.

The trial court granted the design professionals’ demurrer, holding that as the scope of the design professionals’ work on the project was merely to make recommendations to the developer, the design professionals owed no duty of care to future homeowners with whom there was no privity of contract. The Court of Appeal reversed, holding the design professionals owed a duty of care to the homeowners, despite the lack of privity.

Sweeping away the privity requirement entirely, the Supreme Court of California affirmed the Court of Appeal, and established a new bright-line rule that greatly expanded the scope of exposure to design professionals operating in California. Under the Supreme Court of California’s holding in Beacon, the principal architect on a residential project owes a duty of care to future homeowners, even in situations where the architect does not take part in construction or exercise ultimate control over construction.

In rejecting the common law requirement of privity of contract, the court held that as the design professionals’ work was intended to benefit the homeowners, it was foreseeable to the design professionals that plaintiffs would comprise the limited class of individuals harmed by their work. Significantly, the Supreme Court of California did not hold that it was establishing a “new” duty on the part of design professionals; it indicated that design professionals’ duty to future homeowners always existed, it was simply the common law requirement of privity of contract that had previously shielded those design professionals from such claims (but would no longer).

Ultimately, under the Supreme Court of California’s decision in Beacon, design professionals serving as the principal architect on a project owe a duty of care to future homeowners, even in the absence of privity of contract, thus greatly increasing their potential exposure.

Other Decisions After Beacon

There is no indication that the Supreme Court of California’s holding in Beacon will be adopted wholesale by other jurisdictions. Since it was issued, no reported decision has cited Beacon for its central proposition. Troublingly, however, other courts—even in jurisdictions generally regarded as conservative, defense-oriented venues—have issued decisions with language that is uncomfortably close to the Supreme Court of California’s decision in Beacon. Even courts in Texas, of all jurisdictions, seem to be open to eroding the common law rule and are showing a willingness to allow claims against design professionals by parties with no contractual relationship to the design professional.

Around the time that the Supreme Court of California issued its groundbreaking decision in Beacon, a Texas court of appeals held in Black + Vernooy Architects v. Smith that an architect held no duty to a homeowner injured by the architect’s design, and absent a contract between the architect and homeowner, the homeowner could not state a claim against the architect, suggesting that given the right set of facts, courts in Texas might be amenable to the Supreme Court of California’s reasoning in Beacon, and willing to erode the common law requirement of privity. The issue in Texas—as in most jurisdictions—is far from settled, however.

Three years after the Texas Court of Appeals’ decision in Black + Vernooy, the Supreme Court of Texas bolstered the common law rule by reversing a jury verdict in favor of a contractor that had sought delay damages against an architect in the case Lan/STV v. Martin K. Eby Construction Company Inc. While in Lan/STV the Supreme Court of Texas did not overturn the rule enunciated in Black + Vernooy, its decision may be an indication that, in Texas, at least, the trend toward abrogating the common law requirement of privity has its limits, and that courts may be unwilling to upend it in the manner of the Supreme Court of California in Beacon.

For instance, in 2010, the Arizona Supreme Court reaffirmed a prior Arizona decision in Flagstaff Affordable Housing Limited Partnership v. Design Alliance Inc., holding that design professionals owed duties to parties without privity of contract but relying upon the design professional’s work (such as contractors), as well as for foreseeable injuries to foreseeable victims proximately caused by design professionals’ negligence. Further, in Flagstaff, the Arizona Supreme Court held that while a lack of privity would not protect design professionals from claims by third parties, any damages claimed by parties who were in privity of contract with a design professional would be limited to contractual remedies under the economic loss rule.

What Does the Future Hold?

The Supreme Court of California’s decision in Beacon was groundbreaking not because it has established a significant following or because jurisdictions around the country have accepted it wholeheartedly, but rather by the ease in which the court was able to sweep aside decades of precedent and establish a duty on the part of design professionals in the complete absence of contractual privity. With Texas and California at opposite ends of the spectrum, courts around the country have come out somewhere in between, and have been finding various nuanced ways to get around the common law requirement of privity.

Nevertheless, the Supreme Court of California’s decision in Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP and the Texas Court of Appeals’ decision in Black + Vernooy Architects v. Smith may herald a coming change in the law, and serve as an ominous warning to design professionals that the common law requirement of privity is in the process of being discarded in favor of various theories that would expose design professionals to claims by unrelated parties.

The authors wish to thank Mark S. Fanelli, III, a summer associate with Black Marjieh & Sanford, and a third-year law student at Pace University School of Law, for his significant contributions to this article.

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About The Authors
Multiple Contributors
Lisa J. Black

Lisa J. Black is a founding partner of Black Marjieh & Sanford LLP. She can be reached at lblack@bmslegal.com

Mark D. Shifton

Mark D. Shifton is a senior partner with Seiger Gfeller Laurie LLP. He can be reached at  mshifton@sgllawgroup.com

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