Court Holds Design Professional Liable for Approving Payment Absent a Bond
June 2001
The Oklahoma Supreme Court recently held a
design firm liable for damages, plus punitive damages, incurred by subcontractors
due to the general contractor's failure to secure the required payment bond.
See the court's rationale and what steps design firms should take to avoid this
scenario.
by Kenneth
A. Slavens
Brown & James,
P.C.
A decision by the Oklahoma Supreme Court should serve as a warning to design
professionals on public projects. If you are a design professional who certifies
payments to the general contractor, you are best advised to verify that the
bonds required from the general contractor are in place. The Oklahoma Supreme
Court has held recently that a design firm retained to administer the construction,
and to certify payment, could be held liable to subcontractors who suffered
losses because the general contractor failed to secure the required payment
bond. Boren, et al. v Thompson & Associates, et al.,
999 P2d 438 (Okla 2000).
If having the design professional being found to be obligated to pay the
subcontractors did not get your attention yet, does the fact that the jury awarded
punitive damages against the design firm do it? This article examines this case
and its possible ramifications.
The Facts
The lawsuit giving rise to the holding in Boren started with the construction
of a library for a school district in Oklahoma. As is the common practice on
public projects, in Oklahoma there is a statutory requirement that the general
contractor selected for the project must post certain bonds. The contractor
in this case was required to post a performance bond to protect the owner by
assuring completion of the project in the event of default, and a payment bond
to guarantee payment to subcontractors in the event of default.
In 1993 the school district, which decided to have a library constructed,
retained an architectural firm. The architectural firm had the customary responsibilities
on a project of this sort: design the building, advertise the project, initiate
the bidding process, etc. Under the contract the design firm had with the school
district, the design firm was to certify payments to the contractor as the construction
proceeded.
The specifications prepared by the design firm required the successful bidder
to provide both a performance bond and a payment bond in compliance with the
statutory requirements. Both bonds were to be delivered to the school board
within 3 days of the execution of the contract.
After the initial bids exceeded the budget, new bids were taken, and in June
of 1994, a general contractor was selected. Each of the plaintiffs in the Boren
lawsuit was a subcontractor to the general contractor. Each subcontractor was
to provide materials, labor, or both for construction of the library. The contractor
supplied the required performance bond; however, a payment bond was not secured.
Construction began in August 1994.
Under the General Conditions of the Contract for Construction, the design
firm had the authority to withhold certification of payment. The design professional,
however, certified payment to the general contractor without verification that
the payment bond was secured. To exacerbate the situation, the design firm sent
a reminder to the contractor in early August 1994 reminding the contractor of
the required performance and payment bonds. The design professional received
only a copy of the required performance bond. The design firm never followed
up with the general contractor.
In December of 1994, a lawyer for one of the subcontractors contacted the
design firm and advised it of a payment dispute with the contractor. The subcontractor's
lawyer requested a copy of the payment bond. The architect contended that it
was at juncture that it first discovered that a copy of the payment bond was
not in the design firm's file. As a result, until the dispute with this particular
subcontractor was resolved, the design firm did withhold payments to the contractor.
On January 27, 1995, the design firm resumed certifying payments to the general
contractor with the knowledge that the payment bond did not exist. The design
firm became aware of the other subcontractor's payment disputes with the general
contractor when claims were received in May and June of 1995.
Claims, Defenses, and Trial
In November of 1995, various subcontractors instituted suit against the design
firm, alleging that the firm was negligent in certifying payments to the contractor
in absence of the statutorily required payment bond. The claim was that the
design firm should pay the subcontractors since the general contractor did not
pay them, and there was no payment bond. In other words, had the design firm
confirmed the existence of the payment bond, in the event that the general contractor
did not pay the subcontractors, the subcontractors could look to the payment
bond. However, since the payment bond did not exist, the subcontractors should
be allowed to look to the design firm that certified the payments to the general
contractor.
The design firm responded that the subcontractors had no claim against it
because:
- It owed no legal duty to protect the subcontractors' economic well-being;
- The design firm's contract was not with the subcontractors, but rather
the school district, so it could not be liable to the subcontractors; and
- The subcontractors were constructively charged with the knowledge of
the general contractor's obligation to procure the payment bond, and, therefore,
the losses of the subcontractors resulted from their own negligence in failing
to act on that knowledge.
The case went to trial on these issues, and the subcontractors were awarded
actual damages against the design firm. In addition, the jury found the design
firm's conduct was "willfully and with reckless disregard for the rights of
the subcontractors." This finding allowed the trial court to award punitive
damages against the design firm, which it did in an amount equal to the actual
damages.
The Oklahoma Supreme Court's Rationale
The Oklahoma Supreme Court considered each of the arguments advanced by the
design firm. In doing so, the court agreed with the design firm that under the
law, public officials are not liable to subcontractors for the failure to secure
the statutory bond because the proximate, or legal, cause of the subcontractor's
loss is the subcontractor's negligence in failing to ascertain the existence
of the bonds. The court concluded though that the difference in Boren was that the court was dealing with a private,
for-profit entity, not a public body.
After noting that the bond statutes were enacted to "protect laborers and
materialmen on public construction projects in the event of default" of the
general contractor, the court concluded that the purpose of the statute would
not be served by protecting the design firm from the claims at issue. In reaching
this conclusion, the court said as follows.
The purpose of bonding statutes would not be served by protecting a private,
for-profit company engaged in the business of designing and overseeing public
construction projects from potential liability.... [T]he architectural firm's
argument is that it had no duty, as a matter of law, to see that the contractor
obtained the statutorily required payment bond. We agree that the contractor
has a statutory duty to secure the payment bond. However, the architectural
firm misconceives the issue. Here, the damages arose from the architect's
negligence in failing to ascertain that there was no payment bond and in
making unauthorized payments to the contractor after he discovered that
no payment bond existed. Damages which would not have arisen had the bond
been obtained.
The court then noted that since public works projects are not subject to
liens, as a private project would be, the bonds are there to protect the subcontractors
and serve the purpose of "ensuring" payment to the subcontractors. The court
went on to state that payment bond statutes, which require bonds for public
work projects, are specifically provided for the benefit of subcontractors,
and, concurrent with a contractor's duty to secure a bond, it is the public
entities' duty to withhold payment to a contractor in the absence of a bond.
With respect the architectural firm's obligation, the court concluded.
We recognize that an architect is not a guarantor, nor may architects
ordinarily be responsible for supervising a contractor's disbursements to
subcontractors. Nevertheless, once a public entity has contracted with a
private party to oversee a construction project, subcontractors should be
able to assume that the private party responsible for certifying payments
has verified the existence of the bonds. To do otherwise, would thwart the
purpose and intent of the bond statutes.
Conclusions
The Oklahoma Supreme Court had no problems finding that the architect in
this case "ought to labor under a duty to subcontractors to refrain from paying
the contractor without the required statutory payment bond." This case did seem
to be driven to some extent by the fact that even after the architect was aware—or
should have been aware—that the bond was not secured, the certification of payments
continued. The court clearly found that once the architect has knowledge, steps
must be taken, and inquiries must be made to correct the situation before making
further certification on work performed. However, do not be misled. The court
made clear that its holding would not have changed even if there had not been
payments made after knowledge was acquired that the bond was not in place.
What could this design firm have done differently, and what lesson can be
learned? First and foremost, when the reminder was sent to the contractor emphasizing
the need for the bonds, follow-up would have assured that was accomplished.
Second, when the copy of the performance bond came in, a check of the details
would have disclosed there was no payment bond. Putting the contractor on notice
that no more payments would be made until it could demonstrate compliance with
the bonding requirements imposed on it would have forced a resolution of the
issue before damages accrued.
Do not turn a blind eye to these problems. Be proactive. When you discover
the lack of bond, or other defect in contract performance, make sure the people
who could be affected are aware of the concern. They then can act to protect
their interests. And you, as the design professional, will have made certain
that both you and your client are protected as well.
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