{"id":1910,"date":"2016-02-04T15:16:05","date_gmt":"2016-02-04T15:16:05","guid":{"rendered":"http:\/\/fwhtlaw.com\/?post_type=briefing-papers&p=1910"},"modified":"2022-12-12T22:18:02","modified_gmt":"2022-12-12T22:18:02","slug":"do-construction-manager-at-risk-contracts-alter-the-spearin-doctrine","status":"publish","type":"post","link":"https:\/\/www.fwhtlaw.com\/blog\/2016\/02\/04\/do-construction-manager-at-risk-contracts-alter-the-spearin-doctrine\/","title":{"rendered":"Do Construction-Manager-at-Risk Contracts Alter the Spearin Doctrine?"},"content":{"rendered":"

Nathan Sellers is an associate in the firm\u2019s Construction Law Department. Nathan can be reached at 612.359.7606 or nsellers@fwhtlaw.com<\/span><\/p>\n

The implied warranty of design adequacy protects contractors on traditional design-bid-build construction projects. The well-established warranty, known commonly as the Spearin<\/em> doctrine, provides that a contractor who is \u201cbound to construct or build according to plans and specifications prepared by the owner, . . . will not be responsible for the consequences of defects in the plans and specifications.\u201d[1]<\/a><\/span><\/p>\n

Whether the Spearin<\/em> doctrine applies in contexts other than the traditional design-bid-build project, however, remains an unsettled area of law.[2]<\/a> In an issue of first impression, the highest court in Massachusetts recently addressed the applicability of the Spearin<\/em> doctrine in the context of \u201cconstruction-manager-at-risk\u201d contracts.[3]<\/a> This Briefing Paper will discuss the Massachusetts court\u2019s opinion and some of its implications for contractors and construction managers.<\/span><\/p>\n

The Spearin Doctrine<\/span><\/h1>\n

The implied warranty of design adequacy arises out of the traditional design-bid-build (\u201cDBB\u201d) delivery method for construction projects. Under DBB, the owner retains an architect or engineer to design the project. Once the design is complete, the plans and specifications are put out to bid. Typically, the owner then hires the contractor submitting the lowest bid to complete the project for a fixed price.<\/span><\/p>\n

In the DBB context, the Spearin<\/em> doctrine protects the contractor, who must strictly follow the plans and specifications provided by the owner. In 1958, the Supreme Court of Minnesota adopted the Spearin<\/em> doctrine using the following language:<\/span><\/p>\n

This is not the case of an independent workman left to adopt his own method, but of one bound hand and foot to the plan of the [owner]. The [contractor] had no right to alter the specifications . . . . If the plan and specifications were defective, it was not the fault of the [contractor] but of the [owner], for [the owner] caused them to be made and it alone had the power to alter them.[4]<\/a><\/span><\/p>\n

The Minnesota court emphasized that a DBB contractor relies on representations contained in the owner\u2019s plans and specifications regarding the conditions under which the project is to be completed. The court\u2019s two main reasons for adopting the implied warranty of design adequacy in the DBB context were (1) the \u201cexclusive control\u201d enjoyed by an owner in furnishing plans and specifications; and (2) a contractor\u2019s concomitant reliance on the representations contained in such plans and specifications.[5]<\/a><\/span><\/p>\n

Non-traditional Project Delivery Methods<\/span><\/h1>\n

While DBB is still a popular option for public construction projects, other project-delivery methods are gaining wider acceptance. In fact, several states and municipalities have enacted legislation permitting public owners to complete public-works projects through construction-manager-at-risk (\u201cCMR\u201d) contracts.<\/span><\/p>\n

Under CMR, the owner retains an architect to design the project. But shortly after the design process begins, the owner engages a contractor to act as a construction manager. Typically, the construction manager\u2019s work is divided into two phases: design phase and construction phase. During the design phase, the construction manager works with the architect to ensure that the design is constructible and properly coordinated, and to provide value engineering suggestions to stay within budget. Once design development has reached approximately 70% to 80%, the construction manager proposes a \u201cGuaranteed Maximum Price\u201d (\u201cGMP\u201d) that typically includes a contingency to cover what will be required during the final development of the design.[6]<\/a> If the owner accepts the GMP, the construction manager is obligated to complete the project for no more than that cost.<\/span><\/p>\n

In short, under CMR, unlike DBB, the owner and its architect or engineer do not exercise exclusive control over the project\u2019s plans and specifications. Instead, the construction manager assists with the project\u2019s design and is often intimately involved in development of the project\u2019s plans and specifications from nearly inception to the final completion of construction documents.<\/span><\/p>\n

Coughlin Electrical Contractors, Inc. v. Gilbane Building Co.<\/span><\/em><\/h1>\n

At issue in Coughlin<\/em> Electrical Contractors, Inv. v. Gilbane Building Co.<\/em> was whether the Spearin<\/em> doctrine applied in the context of a CMR project.[7]<\/a><\/span><\/p>\n

Background<\/em>. A public owner utilizing a CMR project delivery method hired an architect to prepare designs for construction of a new hospital facility. When the designs were partially completed, the owner engaged a contractor to serve as the project\u2019s construction manager at risk (\u201cCMAR\u201d). The CMAR then entered into a contract with a subcontractor to perform electrical work on the project.<\/span><\/p>\n

About one year into the project, various errors, omissions, and changes to the project\u2019s plans and specifications \u201cseverely affected [the subcontractor\u2019s] performance, causing the subcontractor to incur a 49% increase in labor hours.\u201d[8]<\/a> After completing the project, the subcontractor demanded an equitable adjustment and thereafter sued the CMAR for the additional costs it incurred from the design errors. The CMAR then filed a third-party complaint against the owner asserting that, \u201c \u2018in the event that [the subcontractor] proves its claims against [the CMAR],\u2019 [the owner] committed a breach of its contract with [the CMAR] by refusing to pay the [CMAR] the amounts claimed by the [subcontractor].\u201d[9]<\/a><\/span><\/p>\n

Trial Court Decision<\/em>. The trial court granted the owner\u2019s motion to dismiss the CMAR\u2019s claim for breach of the implied warranty of design adequacy. The court acknowledged that Massachusetts common law \u201ctraditionally has been protective of construction contractors in circumstances where the owner has supplied erroneous or, perhaps, ambiguous plans and specifications.\u201d[10]<\/a> The court concluded, however, that because of the \u201cmaterial changes in the roles and responsibilities voluntarily undertaken by the parties\u201d under CMR contracts, the Spearin <\/em>doctrine does not apply.[11]<\/a><\/span><\/p>\n

Holding<\/em>. On appeal, the Supreme Judicial Court of Massachusetts (that state\u2019s highest court) held, \u201c[I]n the absence of an express disclaimer, the owner\u2019s implied warranty of the designer\u2019s plans and specifications applies.\u201d[12]<\/a> The court, however, narrowed the Spearin <\/em>doctrine in the context of CMR projects as follows: a CMAR may benefit from the implied warranty only<\/em><\/strong> when it has acted in good faith reliance on the design and<\/em><\/strong> acted reasonably in light of its own design responsibilities.[13]<\/a><\/span><\/p>\n

Analysis<\/em>. The court first analyzed CMR projects in general. The court explained that, similar to the DBB method, \u201cthe owner enters into separate contracts, one with the designer and one with the CMAR.\u201d[14]<\/a> \u201cHowever, in the [CMR] method, the owner may contract with the CMAR before the design has been completed.\u201d[15]<\/a> By contracting with the CMAR during the design phase, the owner can involve the CMAR in project planning and design and is able to take advantage of the CMAR\u2019s experience and expertise.<\/span><\/p>\n

The court then turned to the question whether the owner on a CMR project impliedly warrants the sufficiency and adequacy of the designer\u2019s plans and specifications. The court recognized, based on the CMAR\u2019s involvement in the design phase, that the relationship between the owner and a CMAR is different from the traditional relationship on a DBB project between the owner and a general contractor. Nonetheless, the court concluded that \u201cthe owner, through the designer, ultimately controls the design[,] is the final arbiter of it,\u201d and is generally under no obligation to accept the CMAR\u2019s suggestions regarding plans and specifications.[16]<\/a> Because responsibility for defects on a construction project should normally rest on the party who controls that risk, the court concluded that Spearin<\/em> should apply under CMR contracts.[17]<\/a> The court also reasoned that \u201c[t]he possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects\u201d on CMR projects.[18]<\/a><\/span><\/p>\n

Despite its holding regarding Spearin<\/em>\u2019s general applicability, the differences between the DBB and CMR delivery methods convinced the court to narrow the scope of the implied warranty. Specifically, the Court concluded that a CMAR bears the burden of proving that its reliance on the defective plans and specifications was reasonable and in good faith. The court explained,<\/span><\/p>\n

The CMAR\u2019s level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CMAR may affect a fact finder\u2019s determination as to whether the CMAR\u2019s reliance was reasonable. The greater the CMAR\u2019s design responsibilities in the contract, the greater the CMAR\u2019s burden will be to show, when it seeks to establish the owner\u2019s liability under the implied warranty that its reliance on the defective design was both reasonable and in good faith.[19]<\/a><\/span><\/p>\n

Implications for Contractors on CMR Projects Outside of Massachusetts<\/span><\/h1>\n

So what does Coughlin<\/em> mean for contractors in jurisdictions outside of Massachusetts? While the decision is not binding on courts in other states, it may guide future courts. Hence, when a contractor is engaged to collaborate with the architect or engineer during the design phase, there are several important considerations that should guide the contractor. In particular, contractors\/CMARs should consider the following questions.<\/span><\/p>\n

First, what does the applicable statute or contract say about ultimate control during the design phase of the project? In Coughlin<\/em>, the court was heavily influenced by the fact that the public owner on that project \u201cultimately control[ed] the design and [wa]s the final arbiter of it.\u201d On any CMR project, contractors should examine statutory or contract language addressing which party has the final say on design decisions. Language that attempts or appears to shift responsibility to the contractor for design-phase decisions should be closely reviewed. For example, if the contractor is responsible for certain design aspects, the contractor may not be able to demonstrate \u201creasonable reliance\u201d on the final plans and specifications (at least with respect to those areas over which the contractor exercised control).<\/span><\/p>\n

Second, what does the applicable statute or contract say about the contractor\u2019s level of participation during the design phase? In Coughlin<\/em>, the court explained that, under the Massachusetts statute authorizing CMR projects, \u201cthe CMAR \u2018may\u2019 provide \u2018consultation\u2019 regarding the design, but is not required to do so.[20]<\/a> The court then looked to the plain meaning of the word \u201cconsult\u201d\u2014which is defined as \u201cdiscuss, give advice, or confer\u201d\u2014and concluded that \u201cthe possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects.\u201d[21]<\/a> The result might be different, however, if the applicable statute or contract calls for a more active level of participation in the design process. For example, if the contractor is charged with \u201cdirecting,\u201d \u201ccontrolling,\u201d or \u201cmanaging\u201d the design phase, a court may be more reluctant than the Massachusetts court to extend the Spearin <\/em>doctrine.<\/span><\/p>\n

Third, at what level of design does the contractor become involved and at what level of design is the GMP set? In Coughlin<\/em>, the statute provided that the GMP may be established under Massachusetts law when only 60% of the design documents have been developed. The court reasoned that a CMAR, by agreeing to a GMP, should not \u201cbear all the risk arising from the design when the CMAR may not have seen as much as forty per cent of the design documents before agreeing upon a GMP.\u201d[22]<\/a> Once again, under different circumstances, the rationale for application of the Spearin<\/em> doctrine may dissipate. Consider, for example, a situation in which the contractor is intimately involved with the design process from the beginning of the project or a situation in which the GMP is set late in the process, after substantial completion of Design Development documents.<\/span><\/p>\n

Conclusion<\/span><\/h1>\n

The Spearin<\/em> doctrine is universally recognized by courts on DBB projects because of the owner\u2019s \u201cexclusive control\u201d of the plans and specifications and a contractor\u2019s reliance on the representations contained in those design documents. On CMR projects, the owner does not enjoy \u201cexclusive\u201d control over design, and the contractor is not required to blindly rely on design plans and specs.<\/span><\/p>\n

Nonetheless, the highest Massachusetts court, in an issue of first impression, concluded that the Spearin <\/em>doctrine applies on CMR projects. The court, however, narrowed the scope of the doctrine, concluding that a contractor\/construction manager may benefit from the implied warranty \u201conly where it has acted in good faith reliance on the design and <\/em>acted reasonably in light of [its] own design responsibilities.\u201d In order to assess risk following the Coughlin <\/em>decision, a contractor on a CMR project must carefully review applicable statutory and contract language to determine the contractor\u2019s level of responsibility for design decisions and how that responsibility might affect the \u201creasonableness\u201d of its reliance on project design documents.<\/span><\/p>\n

 <\/p>\n

Announcements<\/strong><\/span><\/h2>\n

U.S. News Best Lawyers<\/strong>\u00a9<\/em> has honored Fabyanske, Westra, Hart & Thomson with a First Tier ranking in Minnesota in the practice areas of Litigation-Construction, Litigation-Real Estate and Real Estate Law.<\/span><\/p>\n

Firms included in the 2016 \u201cBest Law Firms\u201d list are recognized for professional excellence with persistently impressive ratings from clients and peers. Achieving a tiered ranking signals a unique combination of quality law practice and breadth of legal expertise.<\/span><\/p>\n

 <\/span><\/p>\n

2015 Super Lawyers Business Edition<\/strong> listed Fabyanske, Westra, Hart and Thomson as the top medium sized (11-50 attorneys) Construction, Real Estate & Environmental law firm in Minnesota. Top firms were chosen based on the number of attorneys who have been selected to a 2014 or 2015 Super Lawyer list in business practice areas, as well as a combination of metrics indicating the quality of those attorneys. Quality factors that were considered included the number of years selected to the list, inclusion on a top list and average blue ribbon panel score.<\/span><\/p>\n

 <\/p>\n

[1]<\/a>     McCree & Co. v. State<\/em>, 91 N.W.2d 713, 714 (Minn. 1958); see also<\/em> United States v. Spearin<\/em>, 248 U.S. 132, 136-37 (1918).<\/span><\/p>\n

[2]<\/a>     See<\/em> 2 Bruner & O\u2019Connor, Construction Law \u00a7 6.67, at 617 (\u201cBecause construction management is a newer approach and has not been the subject of as many court decisions, there is less certainty as to interpretation of the contract documents, and less uniformity as to the extent and allocation of responsibilities, and it is more difficult to predict liabilities.\u201d).<\/span><\/p>\n

[3]<\/a>     See Coughlin Elec. Contractors, Inc. v. Gilbane Bldg. Co.<\/em>, 36 N.E.3d 505 (Mass. 2015).<\/span><\/p>\n

[4]<\/a>     McCree & Co. v. State<\/em>, 91 N.W.2d 713, 714 (Minn. 1958) (quoting MacKnight Flintic Stone Co. v. City of New York<\/em>, 54 N.E. 661, 664 (N.Y. 1899)).<\/span><\/p>\n

[5]<\/a>     See id. <\/em>at 725 (\u201cThe [owner] was the party in control who dictated the entire contract and retained control from start to finish.\u201d).<\/span><\/p>\n

[6]<\/a>     E.g.<\/em>, D.C. Mun. Regs. tit. 27, \u00a7 4714(b).<\/span><\/p>\n

[7]<\/a>     See<\/em> Mass. G.L. ch. 149A.<\/span><\/p>\n

[8]<\/a>     Coughlin<\/em>, 36 N.E.3d at 508.<\/span><\/p>\n

[9]<\/a>     Id.<\/em> at 507.<\/span><\/p>\n

[10]<\/a>    Id.<\/em> at 508.<\/span><\/p>\n

[11]<\/a>    Id.<\/em> at 509.<\/span><\/p>\n

[12]<\/a>    Id.<\/em> at 515.<\/span><\/p>\n

[13]<\/a>    Id.<\/em> at 514.<\/span><\/p>\n

[14]<\/a>    Id.<\/em> at 510.<\/span><\/p>\n

[15]<\/a>    Id.<\/em><\/span><\/p>\n

[16]<\/a>    Id.<\/em> at 512.<\/span><\/p>\n

[17]<\/a>    See id.<\/em> at 513.<\/span><\/p>\n

[18]<\/a>    Id.<\/em> Although not necessarily applicable in all jurisdictions, the court also explained its belief that \u201cthe legislative intent in providing the [CMR] alternative was to permit the CMAR a greater consultative role regarding the project\u2019s design, not to eliminate the owner\u2019s responsibility for design defects.\u201d Id.<\/em><\/span><\/p>\n

[19]<\/a>    Id.<\/em> at 514.<\/span><\/p>\n

[20]<\/a>    Id.<\/em> at 513.<\/span><\/p>\n

[21]<\/a>    Id.<\/em><\/span><\/p>\n

[22]<\/a>    Id.<\/em><\/span><\/p>\n

 <\/p>\n

This discussion is generalized in nature and should not be considered a substitute for professional advice. \u00a9 2015 FWH&T.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Nathan Sellers is an associate in the firm\u2019s Construction Law Department. Nathan can be reached at 612.359.7606 or nsellers@fwhtlaw.com The implied warranty of design adequacy protects contractors on traditional design-bid-build construction projects. 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