In Beacon Residential Community Association v. Skidmore, Owings and Merrill LLP (December 14, 2012), the trial court sustained the demurrer (a response in a court proceeding in which the defendant does not dispute the truth of the allegation but claims it is not sufficient grounds to justify legal action) of the design professionals on the grounds that “liability could not be premised on negligent design, and that [the Association] was required to show that the design professionals had ‘control’ in the construction process, assuming a role beyond that of providing design recommendations to the owner.” The Court of Appeal reversed, finding a common law and statutory basis for a duty of care.

The Beacon Residential Condominiums project, one of the largest residential projects developed in San Francisco within the past 15 years, consists of 595 residential condominium units on 16 floors. The condominium owners’ association and some of the purchasers (collectively, the Association) sued approximately 40 defendants, including the developers, the design professionals, the general contractor and subcontractors. The complaint alleged multiple defects affecting the health and safety of the occupants, including excessive solar heat gain, making the units uninhabitable because of the negligent approval of cheaper windows and inadequate ventilation within the residential units. The complaint also alleged structural cracks and water intrusion.

Skidmore, Owings and Merrill LLP (SOM) and HKS Architects, Inc (HKS) provided architectural and engineering services, construction administration and construction contract management for the project. Their project fees were in excess of $5 million. SOM and HKS demurred to the third amended complaint, arguing they owed no duty of care to the Association or its members.

The trial court agreed, holding that liability could not be premised on negligent design. The plaintiffs were required to show that “the design professionals had ‘control’ in the construction process, assuming a role beyond that of providing design recommendations to the owner.”

Common Law Factors in Determining Whether to Extend a Duty of Care

The Court of Appeal found that under the common law a duty of care would run to all foreseeable persons and is not dependent on a finding of privity. Relying on several older cases, the court noted: “In considering liability of design professionals to third party purchasers of residential construction, we do not chart unexplored territory or view this case as truly a matter of first impression. The issue, as we view it, is not whether a design professional owes a duty of care to these purchasers, but the scope of that duty.”

The question of duty is essentially one of public policy. “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, and the policy of preventing future harm.” (Citing Biakanja v. Irving (1958) 49 Cal.2d 647, 650–651.)

The court analyzed each of these factors and found that extending a duty of care to design professionals was consistent with public policy. “A design professional providing plans and specifications for residential construction cannot be unaware of the fact that his or her work will have a direct bearing on the integrity, safety and habitability of property intended for residential occupancy.” The court found that the contracts among the developers, design professionals and contractors could affect the relationships among those parties, but would not limit the tort duty owed to the purchasers. “While a duty of care arising from contract may perhaps be contractually limited, a duty of care imposed by law cannot simply be disclaimed.”

The court also relied on Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, where the California Supreme Court held that an accounting professional's duty of care in preparing an independent audit of a client's financial statements did not extend to third parties. “The Bily court again emphasized the important role of policy factors in determining negligence, observing that ‘mere presence of a foreseeable risk of injury to third persons [is not] sufficient, standing alone, to impose liability for negligent conduct’ and that ‘[p]olicy considerations may dictate a cause of action should not be sanctioned no matter how foreseeable the risk … for the sound reason that the consequences of a negligent act must be limited in order to avoid an intolerable burden on society.’”

In Bily, the court set forth additional factors to be considered in determining whether a duty exists: “Those considerations are: (1) potential imposition of liability out of proportion to fault; (2) the possibility of private ordering of the risk; and (3) the effect on the defendants of third party liability.” The court analyzed each of these factors and found that extending a duty of care for design professionals was not inconsistent with public policy. The exposure was not unlimited as in Bily, as potential plaintiffs were limited to the purchasers. Moreover, the developers, design professionals and contractors are able to spread the risk of loss among themselves through contractual indemnity and insurance. “While the individuals and entities participating in the development process may have the ability to privately order allocation of liability among themselves by contract or through structuring of insurance coverage, the buyer does not. Thus, in contrast to Bily, it is the alleged tortfeasors, and not the home buyers who are capable of being more ‘effective distributors of loss.’”

The court in reaching its conclusion that a duty had been properly alleged, distinguished the decision in Weseloh Family Ltd. Partnership v. K.L. Wessell Construction Co., Inc. (2004) 125 Cal App. 4th 152 (Weseloh), which was relied on by the trial court by emphasizing that the Fourth District Court of Appeal viewed the issue as one of first impression and its decision was “premised on the evidentiary record before the court.” In Weseloh, the design professional was hired by the subcontractor to design a retaining wall that ultimately failed. Both the property owner and general contractor sued the design engineer, and the court in applying the Biakanja and Bily factors determined that no duty existed. We anticipate that the design professionals may argue that a conflict exists within the circuits in seeking review before the Supreme Court.

Statutory Basis for Duty: Senate Bill 800

The California legislature passed Senate Bill 800, which became effective January 1, 2003, as Civil Code sections 895, et seq. The bill, commonly known as the “Right to Repair Law,” established mandatory procedures regarding construction defect litigation for new residential construction. The law also defines “defects” by functions or components of a structure (e.g., with respect to water issues, roofs, windows, doors, decks, foundation systems and slabs, hardscape, exterior walls, retaining walls, etc.).

In reviewing SB800, the court opined that “it is clear in the legislative history that the Legislature assumed that existing law imposed third party liability upon the design professionals” and “[t]he plain language of Senate Bill No. 800 provides that a design professional who ‘as the result of a negligent act or omission’ causes, in whole or in part, a violation of the standards set forth in section 896 for residential housing may be liable to the ultimate purchasers for damages.”

The Court concluded: “To the extent that a Biakanja/Bily policy analysis is not otherwise dispositive of the scope of duty owed by a design professional to a homeowner/buyer, SB 800 is.” We note that Senate Bill 800 only applies to new residential construction.

Despite the extensive analysis by the court, there remain open questions regarding the extent of the duty of care of design professionals to ultimate purchasers. We will provide further analysis if this important issue is taken up by the California Supreme Court.