After Beacon: Use of Indemnity Provision in Conjunction With Limitation of Liability Clause

By on July 11, 2014

Design professionals in California have often used limitation of liability clauses as an effective risk transfer technique.  Given that a third-party plaintiff’s recovery is not capped by the limitation clause in a contract between the design professional and the developer, we have made it a practice to recommend to our clients that, in addition to the limitation, they attempt to negotiate an indemnity provision in which the owner indemnifies the design professional for any judgment in excess of the limitation of liability.

Even where developers are willing to agree to a limitation of liability provision, they often resist also including indemnification for any judgment in excess of the limitation of liability.   However, the July 3 Supreme Court of California ruling in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP highlights the purpose of an indemnity provision.

For the limitation to be truly effective, the indemnification agreement is necessary.  In the residential context, the developer is strictly liable for design errors.  Therefore an indemnification agreement only confirms that the developer will be responsible for the design exposure above the limitation of liability.

Design professionals should use the Beacon case as an opportunity to explore the risk transfer inherent in a limitation of liability with their clients and hopefully convince them of the appropriateness of using an indemnity provision in conjunction with a limitation of liability.

Filed under Architects, Design Professionals, Duty of Care, Future Homeowners, Uncategorized

Court Focuses on Biakanja Factors in Deciding Homeowner Can Sue Principal Architect for Negligence

By on July 7, 2014

The Supreme Court of California issued its ruling in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP on July 3.  Gordon & Rees’s Greg Hanson discussed the Supreme Court hearing on this case in his June 5 blog post.  Greg’s prediction as to the court’s decision turned out to be true.  Certain architects can be sued by a homeowner for defects in a residence.

The court focused on the Biakanja factors in determining that a “principal architect” can be sued in negligence by a homeowner despite the absence of privity.  Interestingly, the court preserved the ruling in the Weseloh matter, which held that a retaining wall designer retained by a second-tier subcontractor could not be sued by the homeowner for a collapse of a retaining wall.

In his blog post, Greg observed that the court suggested it was foreseeable that a defective design would affect eventual purchasers of units; that the Beacon architects were intimately involved with the project; and that the payment of $5 million to the Beacon architects in comparison to the $2,000 payment to the designers in the Weseloh case was significant.  In its ruling, the court used these factors as a major part of its analysis in finding that the Biakanja factors support a finding that the Beacon architects could be sued by the homeowners association in negligence without a contractual relationship.

The following is the court’s summary of its analysis of the Biakanja factors:

  1. The defendants’ work was intended to benefit the homeowners living in the residential units that the defendants designed and helped construct.
  2. It was foreseeable that these homeowners would be among the limited class of persons harmed by the negligently designed units.
  3. The plaintiff‘s members suffered injury; the design defects made their homes unsafe and uninhabitable during certain periods.
  4. In light of the nature and extent of the defendants’ role as the sole architects on the project, there is a close connection between the defendants’ conduct and the injury suffered.
  5. Because of the defendants’ unique and well-compensated role in the project as well as their awareness that future homeowners would rely on their specialized expertise in designing safe and habitable homes, significant moral blame attaches to the defendants’ conduct.
  6. The policy of preventing future harm to homeowners reliant on architects’ specialized skills supports recognition of a duty of care. Options for private ordering often are unrealistic for typical homeowners, and no reason appears to favor homeowners as opposed to architects as efficient distributors of loss resulting from negligent design.

While the ruling itself is not surprising to most observers, an in-depth reading of the opinion creates an open question as to when a designer’s connection to the project is enough to create liability in negligence.  Where does the line ultimately get drawn between the architects in Beacon and the designers in Weseloh?

It should also be noted that we can expect to hear more from the appellate court regarding Beacon as the court is presently deciding whether the HOA has standing to bring a class action on behalf of the unit owners.

For a more detailed discussion of the case, click here.

Filed under Architects, Duty of Care, Future Homeowners