Expert Commentary

Calculating Damages Can Deflate a Design Liability Claim

The severity of a claim against a design professional can frequently be significantly muted by an analysis and attack on damages without regard to whether an error or omission has been committed. In the process of resolving the claim, a convincing analysis that demonstrates to the claimant that, regardless of whether the design professional deviated from the acceptable standard of care, there are no damages or significantly less damages than claimed can move the claim a long way toward resolution.

Design and Professional Liability
September 2012

A recent opinion from the New York appellate court provides some guidance to design professionals who find it necessary to make such an argument. The opinion was handed down in Assouline Ritz1 LLC v. Edward L. Mills & Assocs., Architects, PC, 937 N.Y.S.2d 11, 91 A.D.3d 473 (2012).

Mistaken Advice and the Damage Claim

In Assouline, the owner purchased an existing five-story building with the intent of gutting and rehabbing the existing structure and adding six additional stories to convert the entire structure to luxury condominiums, which would then be offered for sale. The success of the owner's plan hinged on the addition of the proposed six stories. The defendant design professional had been retained prior to the purchase of the property as a zoning consultant. In making the purchase, the owner relied on the design professional's opinion that the applicable zoning laws would permit the additional six floors needed to make the planned project a success.

After the purchase, the actual decision from the zoning authority was that it would not permit the additional stories to be added as planned. The owner's efforts to purchase air rights to accommodate the additional stories to the building also were unsuccessful. As a result, the owner developed an alternative plan to demolish the existing building and replace it with a new structure.

The owner filed suit against the design professional to recover the damages the owner alleged resulted from the mistaken advice on the zoning issues. The owner claimed to be entitled to recover all costs incurred in pursuing the alternative plan once it learned the additional stories necessary to make the original plan a success would not be allowed. The owner claimed more than $14 million in damages, which included all of the cost of acquiring, owning, and obtaining a subsequent alternative redevelopment plan for the property.

The Design Professional Challenge to Damages and the Court's Analysis

The design professional filed a motion with the court that did not contest its responsibility for the mistaken advice, but, rather, attacked the owner's damages claim. In ruling on the design professional's motion, the court concluded that the owner is entitled to recover expenses it can prove it actually incurred as a result of its reliance on the design professional's mistaken advice. The owner had the burden of proving the costs it incurred in purchase and ownership of the property.

However, the court held that the right to recovery is subject to reduction. The court ruled that the burden is on the design professional to prove any reduction.

One element that would have reduced the owner's claimed damages included any amount that would have been realized from resale of the property when the owner discovered the advice was mistaken. In other words, the owner's failure to attempt to sell the property once the mistaken advice was discovered did not bar recovery by the owner; however, it may have reduced the recovery to which the owner was entitled. Had the sale taken place, the owner would not have incurred the ongoing ownership cost and the expense associated with the alternative development plan.

In particular, the court noted that the expenses the owner incurred in an attempt to realize the benefit of the property's purchase through other means was a voluntary expense and could not be deemed the result of the mistaken advice. The court noted:

Stated otherwise, [the design professional]'s malpractice did not render it liable to underwrite the cost of [the owner's] decision to continue redeveloping the property after [the owner] learned that [the design professional]'s zoning advice had been mistaken. In giving that advice, [the design professional] did not render itself an insurer of the project.

The owner's claimed damages arising from continued ownership and the new development plan was a risk that the owner voluntarily chose. Those costs were damages that could have been mitigated by selling the property as soon as reasonably possible. If the damage could have been mitigated, the damages were not recoverable.

The matter was ordered back to the trial level for further handling. However, the court of appeals' decision does comment on the damages. The opinion suggests that, if the design professional is successful in showing that the owner could have mitigated its loss by selling the property as soon as reasonably possible, the owner's damages will likely be around $1.66 million. Though still a significant sum, it is nowhere near the amount claimed of $14 million plus.

Lessons Learned

If you find yourself on the receiving end of claims like this one, you need to be prepared with the appropriate experts to attack the damages. This opinion should bring home the point that you cannot sit back. If you contend that the claimant could have mitigated its damages—such as the owner here could have sold the property—you need to be prepared to prove all necessary elements of that position. This would include the realistic option available to sell the building, the money that the hypothetical sale would have generated, and how that reduces the damage claim.

The conclusion is that you cannot simply rely on your contention that the measure of damages is inappropriate. You must actively structure the facts and arguments to present to the court to show not only that you are correct but also the impact of the mitigation had it been pursued. Once the damages have been reduced, the possibility of a successful resolution increases significantly.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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