Chapter 14 Professional Liability

• Library: Arkansas Construction Law Manual (2016 Ed.)

Professional Liability

Carl J. Circo^* and David L. Gershner^**© 2016

14.1 Scope of Chapter........................................ 14-1

14.2 Contractual Bases for Professional Liability.. 14-3

14.3 Tort Bases for Professional Liability –

Generally................................................... 14-9

14.4 Professional Malpractice........................... 14-11

14.5 Ordinary Negligence................................. 14-14

14.6 Negligent Misrepresentation..................... 14-15

14.7 Negligence Per Se..................................... 14-15

14.8 Tortious Interference................................ 14-16

14.9 Other Tort Theories of Liability................. 14-18

14.10 Considerations Relating to Particular

Activities and Roles................................... 14-21

14.11 Professional Liability Insurance................. 14-25

14.12 Conclusion............................................... 14-27

__________

14.1 Scope of Chapter

This chapter discusses the most common legal bases for imposing liability on design professionals. Liability for claims arising from professional services of architects, engineers, and other design professionals typically stems either from contract or from tort, although tort theories account for a substantial majority of claims. Section 14.2 of this chapter deals with contractual liability of design professionals. Then, consistent with the dominant role that tort law plays, most of the remaining sections cover tort theories. Section 14.10 reviews particular activities and roles that design professionals commonly perform that often lead to liability claims, and Section 14.11 briefly discusses professional liability insurance. This chapter does not deal extensively with licensing and regulation of design professionals or lien rights of design professionals, mentioning them only as collateral matters. ¹

The distinction between a contract and a tort basis of liability is more than a matter of legal theory.² Depending on which legal basis applies, the evidence required to prove a claim may vary significantly, as may the measure of damages and the availability of other forms of relief. Additionally, different defenses and limitations periods will apply.³ The applicable legal basis of liability may also affect coverage under the design professional’s errors and omissions insurance policy, particularly because the policy may exclude coverage for contractually assumed liability or liability based on a contractual standard that is higher than the tort standard of care.⁴ In some circumstances claims against design professionals may be pled alternatively in contract and in tort. Sometimes, the liability of the same design professional on a single project will be governed by contract principles for certain design services or claimants while liability for other design services or to other claimants will be governed by tort principles. But whether determined under contract law or tort law, almost any service provided by a design professional may give rise to a liability claim.⁵

14.2 Contractual Bases for Professional Liability

The most direct contractual basis for liability of a design professional involves a failure to perform services that the contract requires. In that situation, the client may recover for breach of contract. Thus, an engineering firm that did not deliver plans by the deadline specified in the contract was liable to the project owner for the foreseeable damages incurred by the owner as a result of the delay.⁶

More often than not, however, claims against design professionals arise from allegations of defective performance rather than from an outright failure to perform. In these cases, no clear basis may exist for a breach of contract claim because the contracting parties often do not specify standards of performance or otherwise expressly address the potential liability of the design professional. Agreements for design services range from strikingly casual and informal understandings to comprehensive, formal agreements. The parties sometimes rely exclusively on oral contracts or abbreviated letter agreements. Many others rely on standard forms of agreements promulgated by industry organizations, especially the American Institute of Architects (“AIA”) and the Engineers Joint Contracts Document Committee (“EJCDC”). Even relatively comprehensive agreements often fail to specify the standard of performance the design professional must satisfy or the extent of the design professional’s liability for adverse consequences of the services provided. Indeed, the popular AIA forms of owner-architect agreement did not specify a standard of care for professional services until 2007, and since then the AIA forms have simply incorporated a conventional tort standard of care.⁷

Traditionally, courts were reluctant to imply warranties or other terms into design contracts.⁸ When courts began to impose liability on design professionals for damages caused by their services, they tended to rely on the tort standard of care for professional services.⁹ Although courts can achieve essentially the same result by implying a warranty or covenant of due care into a design services contract, the more common approach has been to recognize a tort duty stemming from the mere existence of the client-professional relationship.¹⁰

Thus, during a period in which implied warranty claims were disfavored, the expanding reach of tort principles encouraged courts to impose a duty of care on design professionals consistent with that already established for other professions, especially medicine and law. This judicial penchant to rely on the tort standard of care means that, absent an express contract term establishing the underlying basis for a claim against the design professional, tort theories rather than contract ones have dominated the caselaw concerning the professional liability of architects and engineers. Section 14.3 provides a more complete overview of the development of tort law as the primary basis for design liability.

Tort dominance notwithstanding, there is an important contractual dimension to the professional liability story. To begin with, project owners sometimes insist on including express standards of care or liability provisions in contracts for design services. If a contract clearly establishes an agreed standard of care that is more demanding than the tort standard or if it requires the design to achieve a specific result, courts will normally enforce that special term in a breach of contract action without regard to whether the designer committed professional malpractice under the tort standard.¹¹ In other instances, design professionals negotiate terms restricting their liability exposure. Contemporary cases commonly defer to agreements that the parties negotiate limiting contractual liability for professional services.¹² In other words, the courts usually enforce contract terms that impose a standard of care or performance that is either more or less demanding than the tort standard. The cases addressing contract-based limits, however, establish some important public policy restrictions on the ability of design professionals to contract around liability.¹³

A leading case illustrating how courts analyze contractual liability for defective or ineffective design is Arkansas Rice Growers Cooperative Association v. Alchemy Industries, Inc., decided by the U.S. Court of Appeals for the Eighth Circuit.¹⁴ The case involved the design of a rice hull processing plant in Stuttgart, Arkansas, pursuant to a contract governed by California law. Under the terms of the contract, one of the defendants was to provide the design of a plant for Arkansas Rice Growers “capable of reducing a minimum of 7 ½ tons of rice hulls per hour to an ash and producing a minimum of 48 million BTU’s per hour of steam at 200 pounds pressure.”¹⁵ At trial, Arkansas Rice Growers prevailed on a breach of contract theory, and the Eighth Circuit affirmed the trial court’s judgment because the evidence established that the plant, as designed, was not capable of meeting the performance standard that the contract required. The case did not turn on an assertion of professional negligence, but only on a breach of the quoted contract term, which the court characterized as a warranty.¹⁶

The Arkansas cases show that the terms of a design services agreement can determine liability either directly by governing what constitutes breach of contract or indirectly by establishing the character of the duty the professional owes under tort law. The case mentioned at the beginning of this section provides two examples of the direct impact of contract terms. First, the Arkansas Supreme Court held in that case that a design professional may be liable for breach of contract due to late performance of services.¹⁷ Second, the case dealt with a contractual limit on the extent of the design professional’s liability, which is another way in which a contract term can directly impact liability. The court held that such a limit is generally enforceable, but subject to the rule that limitation of liability clauses are disfavored and will, therefore, be construed narrowly.¹⁸ Applying these principles, the Court held that a provision limiting the engineer’s liability for professional negligence did not thereby limit the engineer’s liability for breach of contract. A case involving an indirect effect of contract terms shows how a design professional’s duty of care in tort can be defined or circumscribed by the nature and extent of the services covered by the contract. In that case, the Arkansas Supreme Court held that engineers were not liable for the safe removal of sewer pipes because their contract did not charge them with the responsibility of supervising the work, even though the engineers had the authority to stop work that did not comply with contractual requirements.¹⁹

From the authorities discussed in this section, some important practical...