Unallocated risk is what keeps lawyers, and sometimes their wizened clients, up at night.
Many contractors ask about their duty to verify the quality of architectural design plans. Specifically, they ask: Am I liable if I construct a building according to the provided plans but the designs are faulty and something bad happens?
The short answer is: it depends on what is specified in your contracts.
To illustrate, we look at Leininger v. Stearns-Roger Mfg. Co., a surprisingly straightforward case with an uncommonly happy ending for the general contractor.
The Story: The general contractor installs a fan and the fan explodes
Way back in 1960, outside of Mexican Hat, Utah, inside a uranium ore processing plant, an industrial fan exploded. Archie Leininger, an employee of Texas-Zinc Minerals Corporation, was working on that fan and was injured as a result of the explosion.
Rewind to 1956: Texas-Zinc hired Stearns-Roger Manufacturing Company as the general contractor to build the uranium ore processing plant. According to their contract, Stearns-Roger was responsible in general for the quality of construction, but they would “have no responsibility for the adequacy of certain major items of equipment selected solely by [Texas-Zinc].” One of those “major items” was a Durco type B-124 corrosion resistant exhaust fan manufactured by the Duriron Company, Inc. of Dayton, Ohio – the fan that exploded. According to the recommendation of Texas-Zinc’s chief chemist, Texas-Zinc requested Stearns-Roger install that specific fan.
And they did.
And Texas-Zinc approved.
And then it blew up.
The Law: Liability depends on where the risk is allocated
When a general contractor builds a project and something goes wrong, generally two types of claims can be brought against her.
•1. A tort claim on the basis of negligence or strict products liability, or
•2. A breach of contract claim.
The strength of these claims and how they develop depends on the contractual organization of the parties involved.
Construction contracts can organize parties in various ways. Here are four of the most common types:
•● Owner-architect-contractor. This is also referred to as a design-bid-build contract. In this contract type, the owner, or the person who wants to build something, will usually first obtain architectural design plans from an architect. Then the owner will take those plans and seek bids to select a general contractor. Once selected, the general contractor will then execute the plans and build the project.
•● Turnkey. A turnkey contract is one where the owner buys the site, design, and finished building as a package. The seller secures financing, and designs and builds the project. A regular subdivision home is a good example of this.
•● Design-Build. In a design-build contract, the owner only makes a contract with a general contractor who then designs and builds the project, sometimes simultaneously. This fosters cooperation between the builder and designer at the cost of eliminating traditional checks and balances.
•● Construction management. Sometimes the owner feels competent in overseeing the construction of her own project. In this case she can contract for the consultation of experts throughout the project.
Each one of these contract types places a different amount of liability on the general contractor to verify the soundness of the plans. A turnkey contract places the most liability on the general contractor, whereas the owner-architect-contractor places less.
Additionally, several other factors can vary the amount of risk that is allocated to the general contractor.
The Spearin Doctrine provides a high level of protection for contractors. It states that if a contractor is required to build according to plans provided by the owner then the contractor is not responsible for consequences of defects in those plans.
The Economic Loss Doctrine also protects contractors. It states that a party who suffers only economic harm cannot win a case based on a tort claim. Instead, the party can only recover on a contract claim.
In construction projects, most parties engage in design defect risk shifting; that is, they allocate the risk to other parties through contracts. Which means, if something goes wrong, the other person pays for it. For example, to counteract the Spearin doctrine, many owners insert a provision into their contracts which states the general contractor “shall notify the owner of any design defects which the general contractor actually identifies or reasonably should have identified in the design documents.”
Additionally, designers and architects don’t want to be left out of the risk-shifting game so they create limitation-of-liability clauses and add those to their contracts. These in effect cap their liability. So if delays due to a design defect occur and they cost $100k, and the design has a limitation-of-liability cap at $25k, then the owner is responsible for the other $75k.
In summary, these principles create a game of risk-shifting musical chairs where it is very costly to be the guy without a chair when the music stops playing. Luckily for the general contractor, it wasn’t him this time.
(Don’t forget, Utah recognizes implied warranties on homes.)
The Ruling: The general contractor gets off the hook
The case between Leininger and Stearns-Roger found its way before the Utah Supreme Court. The Supreme Court’s ruling was quite simple. It cited a rule similar to the Spearin doctrine:
A builder or contractor is justified in relying upon the plans and specifications which he has contracted to follow, unless they are so apparently defective that an ordinary builder of ordinary prudence would be put upon notice that the work was dangerous and likely to cause injury.
In other words, since the general contractor had built the project according to plans provided by the owner, the general contractor was off the hook.
The Takeaway: Allocate the risk
Don’t allow the happy ending in this case to fool you into believing the rules are always so nice to general contractors; they aren’t. In this case, the advice is the same for everyone: allocate the risk away from yourself as much as is reasonable.
Begin by speaking with an attorney.