December 05, 2018

Are CMs Now "At Risk"?

By Michael Lane, Riess LeMieux, LLC, New Orleans, LA, Division 1 (Litigation and Dispute Resolution)

Construction managers (CM) often serve a vital role representing the interests of an owner and overseeing work on a project.  Does the performance of advisory or administrative duties give rise to liability to a third party with whom a CM does not have a contract?  This question has been the subject of legal battles for decades.  The courts confronting this issue have almost universally ruled that a CM Agent or Advisor (CMA) -- not to be confused with a construction manager “at risk” or CMAR[1] -- does not owe a professional duty to anyone other than the owner.  But one Louisiana court recently ruled that a CMA does owe a general contractor a duty to perform its services to a professional standard.  Does this decision signal a new trend on the horizon? 

The Lathan Decision

In one of the first decisions of its kind, a Louisiana appellate court ruled that a CMA owed a professional duty to a general contractor akin to the duty typically owed by architects and engineers, despite the lack of privity between the CMA and the contractor.  In Lathan Co., Inc. v. State, Department of Education,[2] the general contractor on a New Orleans school renovation project, Lathan Company, Inc. (Lathan), sued the project owner, the Recovery School District (RSD), as well as the architect and Jacobs Project Management Company/CSRS Consortium (Jacobs).  As with many RSD projects in post-Katrina New Orleans, Jacobs served as CMA and owner representative for the project.  Lathan sued Jacobs for damages under a theory of negligence and the Louisiana Unfair Trade Practices Act.

The premise of Lathan’s negligence claim was that Jacobs had extensive management responsibilities and supervisory authority over the project and that Jacobs owed Lathan a duty to exercise this authority to a professional standard.  Lathan alleged in its petition that Jacobs negligently performed its duties and caused harm to Lathan by delaying the project.  In particular, Lathan claimed that Jacobs owed a duty to Lathan to conduct constructability reviews and to oversee and administer the project according to the standard of care of similar professionals in the industry.  Lathan contended that Jacobs breached these duties in the following ways: (1) its unreasonable refusal to approve Lathan’s payment applications and schedules; (2) its delayed responses to Lathan’s RFIs and submittals; (3) its refusal to give needed responses to reasonable questions; (4) its refusal to recommend substantial completion; (5) its refusal to properly manage the project; and (6) its overall interference with the progress and completion of the work. 

Jacobs filed a motion for summary judgment seeking to dismiss Lathan’s claims, inter alia, for lack of privity.  Jacobs argued that it owed no duty to the general contractor under Louisiana law because Lathan was not a party to the contract between Jacobs and the RSD.  Jacobs cited several provisions in its contract with the owner stating that Jacobs was not responsible for any design acts or omissions or any construction defects.  Critically, Jacobs emphasized that it did not provide any architectural or engineering services on the project, it exercised no control over the contractor, and any decisions affecting the contractor were solely within the authority of the owner.  The district court agreed with Jacobs and granted its motion, finding that Jacobs only owed a duty to the owner.  The district court focused on the fact that Jacobs was hired to make recommendations to the owner and it did not have the authority to take certain actions, such as signing payment applications, stop work notices, or certificates of substantial completion.

On December 6, 2017, a 2-1-2 plurality of a five-judge panel on the Louisiana First Circuit Court of Appeals reversed the summary judgment and ruled that Jacobs owed Lathan a professional duty despite the lack of privity.  The Lathan plurality cited several state and federal court decisions in Louisiana that recognize a cause of action for negligent professional undertaking in favor of general contractors against architects and engineers.  The court reasoned that the legal principles in these earlier decisions “support the proposition that a duty to third parties, even absent direct contractual privity, should not be confined to only those construction professionals holding the title of ‘architect’ or ‘engineer.’”[3]

The Lathan court treated the contractor’s claim like any negligence action by adopting a duty-risk analysis to determine if the scope of services provided by Jacobs gave rise to a duty to Lathan, including: (1) the extent to which the services were intended to affect the contractor; (2) the foreseeability of harm to the contractor; (3) the degree of certainty that the contractor would suffer injury; (4) the nexus between Jacobs’ conduct and the alleged injury; (5) the moral blame attached to Jacobs’ alleged conduct; and (6) the policy of preventing future harm.  After reviewing the evidence in the record, the Lathan plurality concluded that it was reasonably foreseeable that Lathan would suffer economic harm if it failed to perform, or negligently performed, its professional duties.  The court also observed that there was a close connection between Jacobs’ alleged failure to act according to industry standards and the alleged economic harm suffered by Lathan. 

In addressing the lack of privity, the court held that “although Jacobs was not in direct contractual privity with Lathan, [Jacobs] must be deemed and held to know that its services were not only for the protection or interests of the owner but also third parties.”  In conclusion, the Lathan plurality stated that “we are unable to find any reason why the courts’ rationale in such prior jurisprudence, extending the liability of architects and engineers, should not likewise apply to a project management professional, under the facts of this case.”  It should be noted that the court did not address the potential application or preclusive effect of the economic-loss rule.

As the dissenting opinion noted, no other Louisiana court had previously extended third party liability beyond architects and engineers to CMAs.  The dissent sharply criticized the plurality opinion on the grounds that it cited no Louisiana case where such a duty has been imputed to a CMA.  In support of its position, the dissent cited cases from across the country (including California,[4] Indiana,[5] and Mississippi[6]), which rejected the imposition of liability against a CMA under similar circumstances.   The dissent stressed that “merely because Jacobs could potentially cause economic harm to Lathan is insufficient to create a duty giving rise to tort liability.”  

On March 9, 2018, the Louisiana Supreme Court denied the writ application filed by Jacobs without comment, making the decision final.  Two of the seven justices would have granted the writ, suggesting a lack of consensus among the members of the court. 

Is There Any Precedent?

The author has only been able to locate one earlier decision in which a contractor’s professional negligence claim against a CMA was upheld.  In Hughes-Bechtol, Inc. v. Ohio,[7] a bankruptcy court ruled that the debtor-contractor could pursue a negligence claim against a “project manager” that served as the contractor’s sole contact with the project owner and, importantly, had the “power of economic life or death over the contractor.”  Under that scenario, the Hughes-Bechtol court ruled that the debtor-contractor alleged a sufficient nexus with the CMA to constitute a cause of action.  This is reminiscent of the Lathan finding of a close connection between Jacobs’ alleged negligence and the economic harm suffered by the contractor.  Even so, it is doubtful that the Hughes-Bechtol court would have reached the same conclusion under the facts in the Lathan matter given the lack of authority Jacobs had over the project.   

So Is Lathan an Outlier or a Trend?

They say once is an accident, twice is coincidence, and three times is a trend.  Given the dearth of precedent for such a ruling, it would seem Lathan is not indicative of a trend.  At least not yet.  There is no question that contractors will cite the Lathan ruling in future negligence cases against CMAs, but it remains to be seen if courts, in Louisiana or elsewhere, will follow suit.  Unless and until other courts begin to adopt its rationale, the Lathan decision should be viewed as an exception to the rule that CMAs generally do not owe a professional duty to third parties.[8]

Endnotes

1. Industry professionals generally recognized two different types of CMs.  Whereas a CMAR is a project-delivery method whereby a contractor is responsible to perform the work, a CMA serves in an advisory or managerial role for the benefit of the owner.  A CMAR makes money by completing the project on time and within budget, often within a GMP.  A CMA earns a fee for providing services to the owner, similar to an architect or engineer.

2. 2016-0913 (La. App. 1 Cir. 12/6/17); 237 So.3d 1, writ denied, 2018-006 (La. 3/9/18); 237 So.3d 1911.

3. Addressing Jacobs’ contention that it did not provide architectural or engineering services on the project, the plurality noted that its contract with the owner required Jacobs to employ a licensed architect or engineer, as well as a licensed contractor or certified project management professional.  The court, however, did not explain how significant this fact may have been in reaching its conclusion.

4. Stelko Elec., Inc. v. Taylor Cmty. Sch. Bldg. Corp., 826 N.E.2d 152 (Ind. Ct. App. 2005) (affirming summary judgment in favor of CM against subcontractor, finding the CM’s services were rendered for the benefit of the project owner).

5. Ratcliff Architects v. Vanir Constr. Mgmt., 88 Cal. App. 4th 595 (Cal. Ct. App. 2001) (holding CM did not owe duty to project architect, as imposition of such a duty “would represent a potential conflict of loyalty” for the CM).

6. Kappa Dev. & Gen. Contracting, Inc. v. City of Biloxi, 2014-CA-00176 (Miss. Ct. App. 2016) (unpublished) (granting summary judgment in favor of a program manager against a contractor because the program manager did not owe the general contractor a duty).

7. 124 B.R. 1007 (Bankr. S.D. Ohio 1991).

8. For the sake of clarity, CMs of all stripes owe a general duty to third parties not to cause harm, such as personal injury. The author excluded a discussion of personal injury cases from this article to focus on contractor claims.