Shields Mott Win – Construction Managers can now be liable to Contractors

Shields Mott Win – Construction Managers can now be liable to Contractors
The Lathan Company, Inc. v. State of Louisiana, Dept of Education et al.[1]

On March 9, 2018 the Louisiana Supreme Court denied Jacobs Project Management Co./CRSS Consortium (“Jacobs”) writ of certiorari regarding the Louisiana Court of Appeals, First Circuit December 6, 2017, decision in the case.  In doing so, the Louisiana Supreme Court has arguably blessed the concept that contractors have a right of action against construction/project managers even though no contractual relationship exists between a contractor and a construction/project manager.  And, it is, without any doubt, the law of the land in the First Circuit.[2]  All in all, this is a big win for contractors as it may limit construction/project managers from making decisions that they believed were immune from liability to contractors.

Background

On August 13, 2010, The Lathan Company, Inc. (“Lathan”), entered into a contract with the State of Louisiana, Department of Education, Recovery School District (“State”) to renovate a school in New Orleans. Jacobs, through its contract with the State, served as the construction/project manager.  Disputes arose on the Project and Lathan ended up suing the State and other project participants for damages.  Lathan was represented by Shields | Mott LLP.

Lathan summarized Jacobs’s wrongful acts as: (1.) its unreasonable refusal to approve Lathan’s payment applications and schedules; (2.) its extremely delayed responses to Lathan’s questions and submittals; (3.) its refusal to give needed responses to reasonable questions; (4.) its refusal to properly recommend substantial completion; (5.) its refusal to properly manage the oversight of the project; and (6.) its overall interference with the progress and completion of the project. Lathan alleged that it was entitled to damages under general tort law for Jacobs’s negligent professional undertaking and under the Louisiana Unfair Trade Practices Act (“LUTPA”).

Lathan alleged that Jacobs owed it a duty of conduct in accordance with a standard of care similar to professionals in the industry, such as an architect, and that Jacobs breached its duty of care by failing to: (i) disclose mold conditions and the existence of an underground fuel tank at the outset of the project; (ii) timely respond to Lathan’s 400+ requests for information; (iii) perform inspections consistent with industry standards; and (iv) timely review, certify, and/or approve payments due to Lathan.

In response, Jacobs filed a motion for summary judgment, seeking a dismissal of Lathan’s claims against it.  Jacobs argued that it could not be liable to Lathan because Lathan was not a party to the contract between Jacobs and the Owner and therefore, Jacobs did not owe Lathan a duty of care. Accordingly, Jacobs argued it could not be liable for the tort of negligent professional undertaking or a violation of Louisiana’s Unfair Trade Practices Act and moved for summary judgment on that basis. The trial court agreed and dismissed Lathan’s claims against Jacobs, with prejudice.

The Appeal

Lathan appealed the trial court’s decision arguing that the trial court improperly granted Jacob’s motion because Jacobs, being and acting as a licensed construction professional, and under the facts of the case, owed a duty of care to Lathan as a matter of Louisiana law. The court of appeals agreed with Lathan.

In its opinion, the court of appeals cited legal precedent from Louisiana which held that a third party contractor, that is not in privity with an architect/engineer, may have a cause of action in tort against the architect/engineer because an architect/engineer must be deemed and held to know that his services are not only for the protection of the owner, but also third parties who must rely on the architect/engineer to produce a completed project conforming to the contract plans and specifications.[3]

The court further explained that an architect/engineer’s liability to a third-party contractor will depend on a balancing test which assesses (i) the degree to which the defendant could foresee the harm it could cause to the plaintiff; (ii) the degree of certainty that the plaintiff would suffer an injury as a result of the misconduct of the defendant; (iii) the closeness of the connection between the defendant’s conduct and the injury suffered; (iv) the moral blame attached to the defendant’s conduct; and (v) the policy of preventing future harm.

In their briefs, Lathan and Jacobs clashed on the degree of management responsibility exercised by Jacobs. Lathan contended that Jacobs held extensive management and supervisory responsibilities which it was obligated to exercise commensurate with the standard for construction professionals. Jacobs countered that Calandro, Colbert and Harris all involved architects or engineers, while Jacobs is neither and argued that Jacobs did not prepare design documents (asserting it merely made recommendations), did not sign any change orders or construction change directives, and was not expected to respond to any RFI or change order proposal, as these were the obligations of the architect.

In analyzing the facts, the court noted that the contract between Jacobs and the school district listed over 80 tasks for Jacobs, including the provision of  field inspection services, validating  the design team’s estimate, providing value engineering and constructability reviews, processing  payments, and providing “project construction management services to include: conduct regular jobsite meetings, oversee quality assurance testing and inspection programs, monitor contractor and subcontractor work for deficiencies … expedite communication, processing and documentation of all contractor’s submittals including RFI’s, payments requests and change orders.”  The court of appeals determined that Jacobs’ integrated role in the management of the project made it foreseeable that its negligent performance of that role would cause economic harm to the plaintiff. According to the court of appeals, each of these activities substantially impacted Lathan’s ability to execute the project.

As a result, the court of appeals found no reason why the rationale for extending liability to architects and engineers should not also apply to construction/project managers such as Jacobs and held that, after applying the balancing test above, Jacobs owed Lathan a duty of care giving rise to the possibility of liability to Jacobs should Lathan establish that Jacobs breached its duty of care.

Conclusion

With the Louisiana Supreme Court denying writs in the case, the Lathan decision is now arguably the law of the subject throughout Louisiana.[4]  Now, construction/project managers, just like architects and engineers owe a duty of care to contractors and if construction/project managers breach that duty, they can be held liable to contractors for damages suffered by the contractor on account of the breach of duty.  This new “cause of action” against construction/project managers should hopefully have construction/project managers working more collaboratively with Louisiana contractors going forward.

Adrian A. D’Arcy    and    Andrew G. Vicknair
Partner                                 Partner


[1]           2016-913 La. App. 1 Cir. 12/6/17, 2017 WL 6032333 (La. Ct. App. 1st Cir. 2017) (writ denied March 9, 2018 (2018 WL 1391934)).

[2]           The First Circuit normally has jurisdiction over litigation involving the State of Louisiana.

[3]           See Calandro Development, Inc. v. R. M. Butler Contractors, Inc., 249 So. 2d 254 (La. Ct. App. 1st Cir. 1971) (engineer owed duty to contractor’s surety to adequately supervise work to ensure completion in accord with the design); Colbert v. B.F. Carvin Const. Co., 600 So. 2d 719 (La. Ct. App. 5th Cir. 1992), writ denied, 604 So. 2d 1309 (La. 1992) and writ denied, 604 So. 2d 1311 (La. 1992) (architect owed duty of care to contractor for defects in the design; stating that “[t]he power of the architect to stop the work alone is tantamount to a power of economic life or death over the contractor”); and Harris Builders, L.L.C. v. URS Corp., 861 F. Supp. 2d 746 (E.D. La. 2012), 34 CLR 60 (2013) (contractor may sue for negligence defendant described as an “engineer, consultant, construction manager, and Owner representative”).

[4]           The Louisiana Supreme Court may revisit the issue at a later time if one or more Louisiana appellate courts render decisions counter to Lathan.