Mass. court sets new standard in design-defect case involving CM@R

By Martha L. Perkins posted 11-02-2015 11:37 AM

  

In September 2015, a Massachusetts appeals court remanded a case involving a construction-manager-at-risk (CM@R) project and in the process established a new standard for determining whether a CM@R reasonably and in good faith relied on design plans and specifications in cases where defects occur.

 

The case, Coghlin Electrical Contractors, Inc. v. Gilbane Building Co. and Travelers & Surety Co. of America, has been sent back to the Massachusetts Superior Court for reconsideration. In the case, Gilbane Building Co. was CM on a state psychiatric facility project. It filed a lawsuit against the project owner asserting deficient design plans after being sued by a subcontractor with regard to design changes and resulting damages.

 

The lower court, ruling for the owner, dismissed Gilbane's claims against the owner at an unusually early point in the litigation, said Warren E. Friedman of the law firm of Peckar & Abramson. The ruling would have provided an avenue for owners and courts to use reviews of contract language as a basis for disposing of claims without considering any implied warranty or facts outside the pleadings, Friedman said.

 

“However, now that the case has been remanded, the lower court will have to look at Gilbane's claim against the project owner through a different lens, because the appellate court has defined a new standard for the general implied warranty that comes with plans and specifications prepared by a design professional and provided by an owner to a contractor,” he explained.

 

The court has established a new limitation on how the Spearin doctrine standard can be applied, requiring “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,” he said.

 

The standard established in this case allows a construction manager, and thereby a surety, to bring design-deficiency claims against a project owner and mitigate its risk as a result, Friedman said. Had the decision not been reversed, “sureties might lose rights to pursue a principal's claims for defective plans and specifications and could 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,” he said.

 

Variations in contract language means there is no “typical” design responsibility for a contractor under a CM@R arrangement, Friedman said, but the traditional model brings the CM to the table at an early stage to offer design input intended to keep the project's budget and concept on track—resulting in a limited design scope of work for the CM. He added, however, that he regularly sees CM@R contracts that feature more expansive language about factors such as design-related responsibilities and constructability reviews, which “may open the door for greater responsibility for design.”

 

Contract language can address potential additional risks that could emerge from a ruling unfavorable to CMs. Steps toward this goal include buying professional liability insurance as a risk-transfer mechanism and defining limitations on a CM@R's design responsibilities, Friedman said.

 

Taking such precautions is a wise move, he said, because courts in other states could rely on the Massachusetts appeals court's analysis that “[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.”

 

Contracts and project circumstances must be analyzed and understood on an individual basis under the new, factually dependent Massachusetts standard, Friedman added.

 

For more information, read the article by Michael C. Zisa and Warren E. Friedman featured exclusively at the NASBP magazine's website, www.suretybondquarterly.org. 

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