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September 5, 2014

Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, et al.

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In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, et al., the Supreme Court of California affirmed the Court of Appeal’s ruling that a principal architect can owe a duty of care to future homeowners.  This duty of care extends to architects even if they do not contract with the homeowners, or actually build the project, or exercise ultimate control over construction.

The Court’s ruling sets forth the evolution of case law supporting a duty of care owed to future third-parties. In Biakanja v. Irving (1958) 49 Cal.2d 647, the Court permitted the intended beneficiary under a will to recover damages from a notary public who failed to have the will properly attested.  In concluding the notary owed a duty to an intended beneficiary not to mishandle the will’s drafting and solemnization, the Court held a defendant’s negligent performance of a contractual obligation resulting in damage to economic interests of a person – even one who is not in contract – could support recovery if the defendant was under a duty to protect those interests. The Biakanja ruling solidified the factors in weighing such a determination:  (1) the extent to which the transaction was intended to affect the future homeowners; (2) the foreseeability of harm; (3) the degree of certainty that the future homeowner suffered injury; (4) the closeness of connection between the actor’s conduct and the injury suffered; (5) the moral blame of preventing future harm; and (6) the policy of preventing future harm.

The Beacon Court also considered the holding in Bily v. Arthur Young & Co., Inc. (1992) 3 Cal.4th 370.  In contrast to Biakanja, in Bily, the Supreme Court held an accountant’s duty of care in auditing financial statements for a client’s stock offering did not extend to persons other than the client.  In limiting general negligence liability to the auditor’s direct client, the Supreme Court focused on the following policy considerations:  whether the imposition of liability is out of proportion to fault, the ability of third parties to contract around liability, and which party is best suited to bear losses.

The Beacon Court found “three considerations that drive the analysis and distinguish this case from Bily:  (1) the closeness of the connection between defendants’ conduct and plaintiff’s injury; (2) the limited and wholly evident class of persons and transactions that defendant’s conduct was intended to affect; and (3) the absence of private ordering options that would more efficiently protect homeowners from design defects and their resulting harms.”

The Court’s analysis and holding make it more difficult for A/E firms to insulate themselves against liability to future homeowners by way of contract.  Although the Court believed the ruling will support a policy of decreasing negligent design, as a practical matter, the result may be an increase in the number of construction defect claims made by third-party property owners against design professionals.  The ruling will also make early dismissal of such a claim more difficult.  Below are a few practice pointers A/E professionals should keep in mind when considering future contracts, especially for residential projects.

  • Construction Administration – The trend to forgo CA work to insulate oneself from future liability is no longer viable. The Beacon ruling is clear that liability can attach with or without performance of construction administration.  Design professionals should be discouraged from performing CA on a “time and materials” basis, and should be encouraged to perform CA services so they can be on-site routinely during construction.
  • Third-party beneficiary – The Beacon Court cited the parties’ “no third party beneficiary” language in the contracts and stated the parties could not by contract limit their statutory duty under SB800 to third parties. The Court found this language only emphasized the architects were well aware future homeowners would necessarily be affected by the work they performed. Accordingly, design professionals should consider the language in such a provision.
  • Documentation of design decisions – Although the Beacon case stands for the premise that design professionals owe a duty of care to future homeowners, A/E firms can still defend themselves by showing they met that duty. Implementing a routine of documenting decisions, particularly in response to requests for change due to cost savings reasons, is key to this defense.
  • Indemnity – The Beacon ruling may result in increased exposure to design professionals and is likely to extend the time before a design professional can extract itself from litigation. For this reason we recommend A/E firms fully understand the scope of their current contractual obligations and to carefully consider indemnification language for future contracts.

In summary, Beacon will slightly increase the chances that the architect will be a named party in a condominium claim, because often times the developer will name the architect in a cross-complaint. Our experience is that the demurrers or motions to dismiss that we filed when the developer did not name the architect but the Homeowners Association did, were successful less than half the time. Also we were eventually brought in by the developer with whom the architect did have a contract.

The case does present problems where the design professional has limited its liability by contract with the developer.  In this situation, the HOA could sue the design professional directly and effectively void a limitation of liability clause with the developer.

On a positive note, we believe the case can be narrowly tailored to apply to residential condominium projects and there is strong language that may assist sub-consultant engineers from being brought in directly by the HOA. The case seemed to focus on the principal architect being the party that would owe a duty but specifically mentioned that this would not apply to other design consultants.

 

Practice Area: Design Professionals Defense & Counseling
Attorney: Verita J. Molyneaux

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