Last month, the Massachusetts Supreme Judicial Court issued an important ruling about liability for design defects in construction manager-at-risk ("CM") contracts. The ruling clarifies the role of the CM and limits CM exposure for design liability. The Court's decision directly impacts public projects in Massachusetts under the control of the Commonwealth's Division of Capital Maintenance and Management ("DCAM"). The decision will likely influence how courts and arbitrators throughout the country view and interpret CM-at-risk contracts generally and how owners, design professionals and contractors attempt to allocate risk associated with design defects in new CM projects. Everyone involved in CM projects should understand the implications of this decision for both design and CM contracts.

The case, Coughlin Electrical Co. v. Gilbane Building Company, et al., involved a public project in Worcester, Massachusetts, awarded by DCAM to Gilbane under a CM-at-risk contract under Mass. G.L. c. 149A. The electrical subcontractor on the project sued Gilbane for increased labor costs stemming from alleged out of sequence work. It alleged poor coordination of trade contractors by Gilbane and defects in the plans and specifications. Gilbane brought the project owner, DCAM, into the suit in an effort to pass-through to DCAM the amount, if any, it was adjudged to owe the subcontractor. DCAM sought dismissal of the claims on grounds that, as project owner, it could not be held liable to a CM-at-risk for damages stemming from design defects. The Superior Court agreed with DCAM and rejected Gilbane’s claims.

On appeal, the Massachusetts Supreme Judicial Court reversed the lower court's ruling. The court noted that in Massachusetts, like many jurisdictions, an owner on a design-bid-build construction project impliedly warranties the accuracy and sufficiency of plans and specifications for their intended purpose. In design-bid-build projects, “[i]t is well established that where one party furnishes plans and specifications for a contractor to follow in a construction job, and the contractor in good faith relies thereon, the party furnishing such plans impliedly warrants their sufficiency for the purpose intended.” [Citations omitted.] The Court noted that the rationale for this implied warranty derives from the principle that “responsibility for a defect rests on the party to the construction contract who essentially controls and represents that it possesses skill in that phase of the overall construction process that substantially caused the defect.”

In evaluating whether this implied warranty should extend to a CM, the Court considered the differences under Massachusetts public procurement statutes of a CM and a general contractor in a conventional contract. “Unlike design-bid-build projects where the designer designs and the contractor builds, the CM may provide consultation regarding the design of the project and, therefore, may influence the project’s final plans and specifications.”

Ultimately, the Court determined that the CM's consultative role in regard to design, was not so substantial as to warrant elimination of the owner's implied warranty of the plans and specifications in the CM context. Specifically, the Court declared that a CM at risk may benefit from the implied warranty only where it has acted in good faith reliance on the design and acted reasonably in light of the CM’s own design responsibilities.

Another key aspect of the Court's ruling is its determination that an owner can disclaim its implied warranty of the plans and specifications. The disclaimers in the contract at issue required the CM to carefully study the plans and specifications, take field measurements, verify field conditions compared with the design documents and report any errors, inconsistencies, or omissions. The Court declared that this language was not adequate to abrogate the owner's implied warranty of the design.

Finally, the Court also determined that the CM's indemnification obligations in the contract did not require it to reimburse the owner for claims the CM might bring against the owner for claims arising from faulty design documents. Accordingly, Gilbane could seek recovery from the owner for liability it might face from subcontractors related to design flaws.

This decision may prompt owners to re-assess the risk allocation provisions they typically use in CM contracts and design contracts to attempt to disclaim the implied warranty of design documents. Participants in the CM contracting process need to be alert to these types of changes.