The Missouri Court of Appeals issued its opinion in Penzel Constr. Co. v. Jackson R-2 Sch. Dist., No. ED103878 (Mo. Ct. App. Feb. 14, 2017). The holding was fairly sweeping, but for design professionals and owners, the important aspect is that the court adopted the Spearin doctrine, which is a matter of first impression for Missouri.
The Penzel case involved additions to the Jackson (Missouri) High School. The school district hired an architect. The architect retained an electrical engineering subconsultant. When the project went to bid, the school district furnished the plans and specification prepared by the architect or prepared and delivered under the architect's contract. Penzel Construction Co. was bidding as the general contractor and received a set of the plans and specifications.
Penzel's electrical subcontractor was Total Electric. Total's bid was $1,040,444. Neither Penzel nor Total "noticed" any errors, omissions, or other problems with the plans and specifications, specifically the electrical design, during the bidding process.
The district awarded the project to Penzel as the general contractor. Over the course of the project, the electrical subcontractor, Total, was delayed 16 months. Total attributed the delay to "defects and inadequacies" in the electrical design. Under a liquidating agreement between Penzel and Total, Penzel sued the district. Penzel alleged the district impliedly warranted the design it provided. Penzel claimed the design was not adequate for completing the project and listed a litany of alleged material problems.
The Missouri Court of Appeals considered whether the Spearin doctrine constitutes an actionable theory of liability in Missouri. Until this appeal, the Spearin doctrine had not been specifically accepted or rejected by Missouri courts. The court concluded that, when a governmental entity includes detailed plans and specifications in the contract, it impliedly warrants the design. As a result, any delays due to the defective or erroneous design are "per se unreasonable" and, therefore, "compensable."
The court explained its reasoning by saying that the Spearin doctrine places the risk of loss stemming from defective plans and specifications on the owner who provides the plans to the contractor. The court concluded that, "This is equitable. The owner … is in a better position to assess the accuracy … and … prevent the loss from ever occurring."
No Need for an Expert
The court rejected the district's argument that Penzel was required to produce "expert testimony" to establish the design was defective. The court held that the warranty under Spearin is that the design is "free from significant defects" and not that the design failed to meet the acceptable standard of care for architects and engineers as you would have in a professional liability claim against the design team.
The conclusion of the court was that Penzel did not need to show the district's design fell below a reasonable standard to prevail. As a result, an expert witness was not needed on the standard of care, according to the opinion. The court in Penzel opined that, although electrical engineering is "highly technical and complicated," most problems referenced by Penzel were "simple enough for a layman to understand." Some complaints were that critical components were omitted. The design called for outdated or nonexistent products, and the design violated the building code.
Is There a Liability Gap, and Who Fills It?
Design professionals and owners need to take notice. For the design professions, this will almost certainly mean more claims will be brought by their clients.
For the owners, the question is: where does this leave them in terms of liability? Design services are very rarely delivered with a warranty to the owner. The elements of a Spearin warranty claim, which is the owner's exposure, are significantly different from a professional negligence or breach of contract claim, which is what the design team would face. The owner may have trouble bridging that gap.
In other words, if you are an owner, this decision should cause some significant consternation. On its face, it suggests that lay employees and consultants working for the contractor can establish that the implied warranty of Spearin has been breached without expert testimony.
However, when you, as an owner, look to your design professional for a remedy, as a general rule in virtually all states, you need to show that the design professional failed to comply with an acceptable standard of care, and you need to do that with expert testimony. Owners are facing a greater and more difficult burden than proving a breach of warranty, such as Spearin imposes.
As an owner, your liability (and damages) may fall in that gap between a warranty claim and a professional negligence (breach of the standard of care) claim. Design professionals loathe providing warranties. Absent proof on the standard of care, it is unlikely that there will be professional liability coverage.
Indemnity agreements are probably of little value because of professional liability insurance concerns. Even if the indemnity agreement is enforceable and it tracks the professional negligence claim requirements, it still leaves a gap for the owner between its warranty liability and the design professional's liability to the owner.
We are living in interesting times, and they just became a bit more interesting.
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