Subcontractor Allowed to Sue Designer for Negligence: California Courts Chip Away at the Economic Loss Doctrine (Independent Duty Rule)
An architect may have to pay over $1 million to a subcontractor who was contractually obligated to rely on the designer’s plans – even though the architect was not a party to the contract. That was the ruling in U.S. f/u/b/o Penn Air Control, Inc. v. Bilbro Constr. Co., Inc.
The dispute involved a $7.3 million design-build contract award to Bilbro Construction (“Bilbro”) to renovate a facility for the Naval Facilities Engineering Command in Monterey, California. Bilbro hired an architect (“FPBA”) to serve as the designer of record and provide all the architectural design services. FPBA’s design team included an acoustical sub-consultant (Sparling). The general contractor (design builder) also retained Alpha Mechanical (Alpha) as the mechanical electrical and plumbing (“MEP”) design/build subcontractor. Alpha, in turn, subcontracted the MEP design to Shadpour Consulting Engineers. During the design phase of this project, Alpha’s MEP design was reviewed by FPBA, Bilbro, and Sparling at the 35, 75, and 100 percent design completion levels. Alpha demonstrated that it regularly received direct communications during design development from Sparling and FPBA, including comments, changes, and revisions. One example Alpha cited was it raised some concerns about anticipated noise level in eight rooms. Sparling made several recommendations to Alpha and Shadpour that were implemented.
After Alpha completed the mechanical subcontract work on the project, the Navy noted that 23 rooms exceeded its noise level requirements, which was attributed to fans and air handling units in the heating, ventilating, and air conditioning system (HVAC) system. None of the 23 rooms had been singled out as potential problems by Bilbro, FPBA, or Sparling during their review of the design. After the problem was identified, Bilbro, FPBA, and Sparling made several suggestions to Alpha as to how to reduce the noise levels. Alpha implemented those suggestions, but did not effectively reduce the noise level and ultimately Bilbro terminated Alpha for default.
Bilbro sued Alpha seeking damages for its failure to achieve the noise levels that satisfied the project requirements. Alpha countersued Bilbro, FPBA, and Sparling for approximately $1.1 million and also sued Shadpour for indemnity. Alpha’s allegation was that FPBA and Sparling were negligent. They had failed to meet the applicable standard of care to properly inspect Alpha’s design prior to approvals, to detect problems with the Alpha design before the work was completed, and to provide proper and effective solutions to address the noise level. FBPA (the architect), MEP and acoustical designers filed motions to dismiss based on the economic loss rule (independent duty rule). The economic loss rule provides that when contractors are confronted with extra costs caused by architects and engineers who were hired by the owner (and have no contract with the contractor), unless there is some personal injury or property damage involved, contractors are precluded from suing an entity with whom it lacks privity of contract. Since the contractor generally does not have a contract with the engineer or architect (who are hired by the owner), the economic loss rule precludes recovery. In this instance, the MEP subcontractor was seeking recovery from the project architect (hired by the design builder) and its acoustical sub-consultant.
The court denied the architect’s motion to dismiss while agreeing there was no contractual privity, it concluded that the architect and Alpha had a “special relationship” that gave rise to a legal duty of care. In California, the determination of a “special relationship” requires the balancing of several factors, including the extent to which the defendant’s actions were intended to affect the plaintiff, the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, and the closeness of connection between the defendant’s conduct and the injury suffered. Alpha was able to convince the court that these factors existed by arguing that FPBA was the designer of record and therefore actively involved in the MEP design process, having made comments, suggestions, and revisions during the design review process. FPBA also proposed several recommendations to address the anticipated noise issues, which Alpha implemented. Alpha’s subcontract required it to perform its MEP work in accordance with FPBA’s plans and specifications. The court concluded that, though there was a special relationship between Alpha and FPBA, no such relationship existed between Alpha and Sparling (the acoustical sub-consultant). Although Sparling gave Alpha “suggestions” and was actively involved in reviewing the MEP design, the court found that Alpha was not required to implement Sparling’s suggestions.
Comment: We have been following the development and inroads being made on the “economic loss rule” (termed “independent duty rule”) in Washington. See blogs dated 7/11/13 and 3/4/14. Courts recently have been willing to accept direct suits by persons who are not in privity when “unique facts” exist. It is difficult to say what the Washington State Supreme Court might do when presented with the facts in Bilbro, but it is likely that the Washington Court could find as the California Court did, that a subcontractor under certain circumstances, where a special relationship exists, that they will find an exception to the independent duty rule exists. ASCE, Civil Engineering, Loulakis and McLaughlin “The Law” (January 2017).  216 U.S. Dist. Lexus 115809 (S.D. Cal.) Aug. 26, 2016.