Expert Commentary

Court Holds Design Professional Liable for Approving Payment Absent a Bond

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.


Design Liability
June 2001

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:

  1. It owed no legal duty to protect the subcontractors' economic well-being;
  2. 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
  3. 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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