THE RIGHTS, LIABILITIES AND POSITIONS OF

CONSTRUCTION MANAGERS - A CASE FOR CLARITY

IN THE CONTRACTING PROCESS

By: Brian S. Case

Although centuries ago the construction and design of buildings was typically managed by a single person known as the "master builder," traditional construction projects as we know them have followed a management approach which divides the various duties between the traditional actors such as owners, architects, and contractors.⁽¹⁾ As design and construction projects have become more and more complex and with the great proliferation of claims and litigation between the traditional players (none of whom would admit to the overall responsibility of managing a project), there has been a trend over the last decade or two to introduce to the traditional setting a new actor for management purposes. This actor, commonly referred to as the Construction Manager ("CM"), has brought with it both hope and confusion to the former traditional construction process.

Since the duties of the CM as well as the public's understanding of those duties vary widely and since many general contracting and engineering firms in California are offering CM services, it is important to be familiar with the various positions, rights and responsibilities of the Construction Manager in order to adequately address the potential disputes between the players. Like most attempts to reduce to writing the agreements of the parties, it is very important in this setting to clearly address all areas of performance to the fullest extent possible. Although the case law in California directly on point (CMs) is sparse at best, the following discussion will attempt to outline the areas of dispute as well as delineate the legal implications, in most cases by analogy, the parties can expect to see if faced with such questions.

1.0 WHY BRING THE CM TO THE TEAM?

Because the owner's decision to utilize the services of a CM for its project is somewhat of a break from the traditional past, it is important to explore the various reasons for a particular owner's decision. Although the experience level of many large, private and public owners has increased over the last few years, probably the largest motive of an owner behind its decision to employ the services of a CM has been its relative lack of professional experience and support staff in carrying out a construction project as compared to the general contractor's experience and resources. According to Stein's Construction Law:

"Owners seldom have the capacity or experience required to manage a project, so they usually delegate the management function to others."

By placing an experienced player such as a CM on the owner's side, the owner may hope that it can avoid or fend off any problems which will come to rest in the owner's hands as a result of the traditional players' experience advantage.

A second motive by the owner to utilize the services of a CM may be the attempt to provide continuity to the project's management through a "single-entity" to manage the entire construction process from beginning to end. Among the phases of the construction process that owners must necessarily be concerned with are:

1. The design-development or the "concept" phase where the owner attempts to clarify the general type of project he or she hopes to ultimately design and build;

2. The preliminary design and budgetary phase where more specific design choices are selected along with the accompanying costs associated with that design in terms of the selection of materials and construction processes, as well as an encumbering of the financial resources to meet that budget;

3. The final design stage where (hopefully) complete and accurate design documents are generated for the purposes of bidding by general and trade contractors; and finally,

4. The actual construction phase where the physical construction is undertaken and completed. (To this list some would also add for modern contracts, a final phase, including the contract close-out, claims negotiation, and settlement).

In the traditional approach, some of these phases would be conducted independently by the owner's forces and others performed by members of the design-team (architects and engineers) or other independent contractors. Of course the particular practices and decisions of an owner of when, and to what extent the hand-off would take place has varied tremendously from project to project and therefore had frequently led to a fractionalized process. By utilizing a single entity to perform most, if not all, of the actual "management" of these phases, the owner hopes that such a continuity in management will provide both efficiency and economy to the entire process.

2.0 CONTRASTING OWNER'S EXPECTATIONS AND CM LIABILITIES - A TRAP FOR THE UNWARY

Despite which particular or other motive the owner may have for choosing to utilize the services of a CM, many owners may feel that they have, in making their decision, brought a counter-balance to their side of the field when it comes to negotiating with the other players or in sharing in the liability for a problem project. In fact, some owners may even feel that they have established an immunity from liability or replacement for liability by utilizing the services of a Construction Manager. However, as will be demonstrated below, owners may frequently be disappointed when it comes to a final determination of their expectations in the setting of a court of law sitting to interpret the relative liabilities of the players. This is due in large part to wide differences in the contracting practices of the parties, as well as how a court will look at the respective rights and liabilities of Construction Managers in relation to the other players. What follows is a look at these divergent practices and the potential outcome in a California setting.

2.1 Contractual Setting

When looking at the various phases of the construction process that a Construction Manager can be utilized to perform on a particular project, the first thing the parties must look at is what particular phases the CM has agreed to perform (or in fact performed) to define the potential liabilities that the CM may be held to. It should be noted initially that the primary source for developing the CM's "standard of care" is the agreement itself.⁽²⁾ Typically, the CM's duties, are therefore set forth in the "Construction Management Agreement" between the CM and the owner. There are many "Construction Management Agreements" within the industry, including forms by the American Institute of Architects, the Associated General Contractors, as well as other industry group and private agreement forms.⁽³⁾ It is imperative that if an owner's expectations of the consequence of its contracting with a Construction Manager are to be even closely met, the owner must utilize and customize a Construction Management Agreement which realistically suits its interests. As experience would have it, there is a wide variance between projects and owners concerning the types of duties and responsibilities the Construction Manager has undertaken in its agreement with the owner.

For example, some Construction Manager Agreements provide for the Construction Manager to be an agent of the owner, whereas others provide that it is an independent contractor. The consequences of being determined an agent versus an independent contractor has significant legal impact both upon the parties themselves, as well as upon third parties seeking redress for acts of either the principal or its agent.

Typically, an "agent", as opposed to an "independent contractor", owes its principal a duty of loyalty, confidence and trust. (California Civil Code Section 2322(c); Restatement 2d Agency Section 13; Webb vs. Saunders (1947) 79 C.A.2d. 863, 870.) A Construction Manager who is designated a true independent contractor would owe no such fiduciary duties. Similarly, the CM, as an agent of the owner, normally will not be liable under a written contract made in the name of its principal, Restatement 2d Agency, Sections 320, 328, although an agent will almost always be liable for its own torts. (Perkins vs. Blauth (1912) 163 C. 782, 787; Bayuk vs. Edson, 236 C.A.2d 309, 320 (1965). Conversely, a CM who is designated as an independent contractor may almost always be sued in its own name whether in contract or tort for acts of its own, notwithstanding the fact that they are in discharge of the duties the CM owes to the owner. It is possible that in some situations the CM may actually be an agent for some services while an independent contractor for others. Where this is the case, the ramifications and legal duties between the owner, CM, and the other traditional players will also vary. This has been the finding in analyzing architect liabilities in California. Huber, Hunt & Nichols, Inc. vs. Moore (1977) 67 C.A.3d 278.

Under California law, there may also be instances where although the CM is designated an independent contractor and the owner believes that it has therefore established insulation from liability, a court of law will still impute liability against the owner. Where the harm arises out of the breach of a duty owed by the owner which is determined to be a "non-delegable" duty, the owner will still be held liable notwithstanding its delegation to an independent contractor. Cordet vs. Robert Christopher Co. (1985) 164 C.A.3d 384; La Count vs. Hensel Phelps Construction Co., 79 C.A.3d 754 (1978).

In addition to the legal label or "hat" a CM is given, other "contracting decisions" will also impact the rights and liabilities of the CM and the expectations of the owner. For example, while some Construction Management Agreements specifically attempt to either delineate the limited duties and liabilities of the Construction Manager, others attempt to pass on all responsibilities by general descriptions. These different styles will have obvious impact upon the parties' respective positions. Similarly, some CM contracts even attempt to require the owner to indemnify the Construction Manager from liability arising out of the performance of its services.⁽⁴⁾ Because of these divergent contracting practices, the owner must, if he wants to truly protect its limited liability expectations, carefully scrutinize the contractual agreement it is undertaking when utilizing the services of a Construction Manager. Similarly, the prudent CM who wants to be fully cognizant of its duties and the limits thereof has an interest in clarifying to its benefit the contract documents.

Many owners in attempting to address the assignment of particular duties to the Construction Manager, have attempted to "have their cake and eat it too." In this respect, they hope to pass on as much liability for the project's management to the Construction Manager, while at the same time attempting to retain possession of various rights to make decisions on its own concerning issues surrounding the project. Of course, the reservation of any such rights carries with it responsibilities and duties and the owner must be wary of such a situation. In their article "Measuring the Liability of the Construction Manager and its Impact on the Construction Process", authors David A. Trager, Ira C. Wellen and John A. Rappaport describe the all too familiar scenario as follows:

"On the one hand, the owner wishes to maintain control of the project by reserving the power to make major decisions and to enforce sanctions against contractors for poor work or delays. On the other hand, the owner wishes to shield itself from as much liability as possible. The owner cannot have it both ways. The more power and responsibility the owner retains, the more liability it must be prepared to bear." Construction Business Review, May/June, 1991, page 68.

2.2 Liability Outside the Contract

As can be seen from the above, because the CM's liabilities are, in major part, going to arise from the Construction Management Agreement, an owner wishing to achieve specific ends must carefully choose the contractual vehicle for implementing his decision to utilize the services of a CM. However, while a good case can be made for limiting the potential liabilities of a Construction Manager to the actual "Construction Manager Agreement" itself, in California there may be a separate basis for analyzing the relative liabilities of a CM vis-a-vis its owner. This is because courts, in addition to analyzing the underlying agreement, may also look to the particular types of conduct the Construction Manager agrees to perform or actually performs in determining basis for liability. In Gagne vs. Bertran, 43 C.2d 481 (1954), the court held:

"The services of experts are sought because of their special skill. They have a duty to exercise ordinary skill and competence of members of their profession, and a failure to discharge that duty will subject them to liability for negligence." Id. at 484.

Therefore, where it can be established that in the absence of limited liability language in the Construction Management Agreement, the owner has sought, and the Construction Manager has represented itself as an expert, the Construction Manager can be subjected to liability for negligence. This has long been the case with respect to architects and engineers, and to the extent the Construction Manager is performing within areas of the construction process which require expertise beyond the normal layman or tradesman level, a Construction Manager may be subjected to claims arising in tort.

For example, architects and engineers have long been held responsible to owners for faulty estimates. Baron Estate Company vs. Woodruff Co. (1912) 163 C. 561. To the extent that Construction Managers assume some responsibility for preparing and coordinating construction estimates, the CM may receive claims arising either in contract or tort for faulty estimating. In the case of Goldberg vs. Underhill, 95 C.A.2d 700 (1950), the court analyzed the claims of an owner against a contractor/architect who undertook responsibilities and duties in a dual function. In ruling in favor of the plaintiffs on three counts, including defective plans, defective construction, and misrepresentation in the cost of the proposed building, the court relied heavily upon the fact that defendant had acted as both an architect and a contractor and as such, should have been familiar with all of the costs and variances in construction under the design criteria provided by the defendant. Id. at page 701. The court in Goldberg specifically dispensed with the defendant contractor/architect's contention that there should be no liability because the plans were changed by the owners during construction. Again, the court relied upon the dual position of the architect and contractor. Id. at 701.

Since the CM, who has become the "manager" of the entire construction process, may at times be viewed as both filling the shoes of the architect as it relates to estimates and design decisions, as well as the contractor in relation to construction issues, the Goldberg ruling at first glance would seem to have severe impact upon the CM's liabilities. Again, the particular contractual setting of the parties will probably significantly alter the type of conclusion reached in the Goldberg holding since the CM may not have been given complete responsibility for design/budgetary decisions or construction decisions. The owner who has reserved for itself the right to make specific decisions and changes to any phase of the construction management process, or who fails to deliver timely information or decisions will find great difficulty in laying the blame at the footsteps of the Construction Manager. Some have even suggested that "because the Construction Manager's design duties are generally limited to advising and recommending, he lacks sufficient control over the project to be held liable for design . . . errors."⁽⁵⁾ In Stein's Construction Law, the author cautions, for example, the owner's reliance upon general descriptions of budgeting or cost estimating descriptions of the CM's services in a Construction Management Agreement as follows.

"In many circumstances, such a general description of cost estimating services will not adequately protect the owner. Because of the importance of the services, a fully detailed owner-CM contract should define the process by which cost information is gathered, the methods by which it is analyzed (including pertinent computer software and hardware), the format in which it is presented, and the frequency with which it is furnished and updated. These subjects are often referred to as the CM's proposal and promotional materials, and there is no reason why they should not be included in the CM's contractual obligations." (Stein, Construction Law, Section 5.03(3)(b)(ii), page 5-88).

In addition to liability for faulty estimates, CMs as did their predecessors, architects and engineers, will undoubtedly find themselves defending claims for improper supervision or mismanagement in general. (Pancoast vs. Russell (1957) 148 C.A.2d 909 [Architect held responsible for negligent supervision of construction]). Probably the largest area for potential dispute involves project scheduling services by the CM. Many Construction Management Agreement forms provide very general descriptions of the CM's project scheduling duties, and an owner would be well advised to specify, with as much particularity as possible, the types, extent, and duration of the Construction Manager's scheduling duties. If in the proposal or negotiation stage the CM represents, for example, its ability to perform quality Critical Path Method ("CPM") scheduling services, the owner should make such specific "management services" an expressed responsibility of the CM's tasks. Otherwise, the CM may be able to demonstrate that other types of scheduling techniques were appropriate since a particular type was not "contracted for". The owner will undoubtedly expect from its Construction Manager the CM's ability to identify, procure, and coordinate schedule problem items such as long lead time materials, difficulties in schedules, realistic float areas, and the like. These duties should similarly be particularly identified as a primary role of the CM, as well as the owner's reason for selecting the particular CM chosen. Again, although the contractual documents will, to the most part, frame the primary basis for liability between the owner and the CM, there may be room for tort claims arising out of the supervision and scheduling functions of a CM.

2.3 Limits of Liability

Of course there are limits to the tort liabilities of those who represent themselves to possess expert service qualifications such as CMs. Owners and others should not expect tort recovery where expert standards are not involved, or under expanded theories of recovery such as strict liability:

"Those who hire such persons are not justified in expecting infallibility, but can expect only reasonable care and competence. They purchase services not insurance." Gagne vs. Bertran, supra, at 484.

If a CM is to be found liable in negligence, it will be the owner's burden to establish such negligence and in the absence of a special agreement in the Construction Management Agreement to the contrary, the Construction Manager will not be held to an absolute guarantee that the project will result in a satisfactory result. For example, in Bonadiman-McCain, Inc. vs. Snow (1960) 183 C.A.2d 58, the court held that the owner failed to sustain its burden of proof of negligence by an engineer's misestimation of quantities where testimony showed that it was difficult to secure sufficient data to make calculations necessary to determine with certainty the end product the owners sought. Where the CM is not provided with adequate information or inaccurate information, the owner will be unable to establish negligence, although the project ended in an unsatisfactory result as far as the owner is concerned.

Similarly, once the actual construction phase has begun, although the owner would, in most cases, like to see the responsibility for any cost overruns or delays on the project to be the responsibility of the Construction Manager, the owner may find great difficulty in actually achieving its desires. Most Construction Manager Agreements specifically provide for what particular construction phase services the CM is assuming. The typical managerial and administrative tasks a Construction Manager may assume during the construction services phase are best described by Stein's, Construction Law, as follows: 1) Scheduling and coordination; 2) General administration; 3) Project control duties shared with A/E; 4) Jobsite safety; and 5) General conditions and construction work. (Stein, Construction Law, Performance of Contracts, Section 5.03, pages 5-9, 4-5-100).

The CM, depending upon its contractual instructions, is put in the role of managing and administering the contract, but is not required to necessarily ensure all other contract compliance vis-a-vis the remaining players to the project such as the general contractor and each of the trade contractors. Gagne vs. Bertran, supra, at 484. "The CM owes to the owner the duties set forth in his contract, but these do not usually include such things as direct responsibility for defaulting trade contractors or the general obligation of constructing a project in accordance with the plans and specifications." (Stein, Construction Law -Construction Manager's Duties, page 5-101).⁽⁶⁾

2.4 Overview of Owner's Expectations and CM's Potential Liabilities

It is apparent from a review of California's treatment of other similar actors that the central focus on a CM's potential liability compared with the owner's expectations therefore must be:

1. What are the contractual precepts of the Construction Manager's rights and duties;

2. What rights and responsibilities has the owner reserved for itself or found itself involved with; and if tort recovery is possible,

3. How did the Construction Manager's actions (or omissions) differ from what the reasonably prudent Construction Manager would have done otherwise.

Only after each of these three elements have been addressed can the relative expectations of the owner, compared to the liabilities of the CM, be determined. Likewise, any effort to reduce to writing a CM Agreement should consider each of these areas and attempt to treat with as much specificity as possible all areas of potential dispute.

3.0 THE CONSTRUCTION MANAGER'S LIABILITIES TO OTHERS

Beyond the duties and ultimate liabilities of a Construction Manager to the owner, the Construction Manager as a player to the construction field may also find itself subjected to claims by outsiders such as general contractors, subcontractors, engineers, and others. As was discussed above, the determination of whether the CM is ultimately found to be an agent vs. an independent contractor of the owner will have primary effects upon the types of liabilities the CM can expect from outsiders to its contract with the owner. Even where the Construction Manager is able to extend only limited liability to outsiders, the discussion which follows is at least partially significant since it may still impact the relative liabilities between the CM and the owner. Additionally, many of the claims by outsiders against the CM will not fall within that purview of limited liability. Accordingly, the CM will be confronted with battling many claims arising from the following circumstances:

3.1 Claims Against CMs by Contractors Arising in Negligence for Improper Supervision and Management

Although the law of CM's liability to outsiders, such as tort claims by contractors for improper management and supervision, is a developing area of law, there are several cases which have been reported in outside jurisdictions which establish a duty by the Construction Manager to avoid negligent harm to trade contractors. (J. McKinney & Son vs. Lake Placid 1980 Olympic Games, Inc., 92 Appellate Division 2nd 991, 461 N.Y.S. 2d 483 (1983), modified 61 N.Y.2d 836, 462 N.E.2d 137 (1984)).⁽⁷⁾ The court in Lake Placid found that although there was no contractual relationship between the CM and the plaintiff, the CM's responsibilities, as they appear in the contract in general, establish a duty of care to contractors, including subcontractors.

California law has long held that contractors may pursue claims against engineers even though they are not in contractual privity. (COAC, Inc. vs. Kennedy Engineers (1977) 67 C.A.3d 916). The CM's role may, in these circumstances, be analogous to an engineer or architect. In the COAC case, the Appellate Court's decision rested upon a theory that the contractor was a third party beneficiary of the underlying contract between a Water District and its engineers employed to prepare environmental impact reports. Whether the contractor's claim is based in tort or implied contractual rights, such as third party beneficiary theories, the CM must still be wary of its potential liabilities to outsiders as a consequence of its actions or inactions at the project.

3.2 Other Claims by Contractors

In addition to negligence and third party beneficiary claims by outsiders against CMs, a CM may sustain claims by outsiders for theories arising in negligent misrepresentation or intentional interference with contractual relations between a contractor and the owner. In the case of Lundgren vs. Freeman, 307 F.2d 104 (9th Cir. 1962), an architect was sued for interference with the performance of a construction contract after the contractor was terminated upon the architect's advice. Although the court found the architect was privileged when acting (without malice) as an "arbiter" between the contractor and owner, the case is recognized for the concept that absent a judicial immunity, an architect can be held liable for interference. To the extent a CM is similarly situated, it can expect the same judicial treatment. Such was the outcome in a CM case outside of California in John E. Green Plumbing & Heating Co., Inc. vs. Tusner Construction Co., 500 F.Supp. 910 (E.D. Mich. - 1980). Similarly, where the CM is in a position of "superior knowledge" such that it can be seen to have been under a duty to disclose facts of superior knowledge, contractors have been subjected to fraud liability for their failure to disclose information that would have affected the price a reasonable contractor would have contracted for such work. Architects & Contractors Estimating Service, Inc. vs. Smith, 164 C.A.3d 1001 (1985). Obviously, the CM should endeavor to disclose all such relevant information to all other "players" to the project.

4.0 THE RIGHTS OF CONSTRUCTION MANAGERS

Throughout the preceding sections which discuss the potential liabilities of the CM to the owner and outsiders there have been brief discussions of possible "defenses" of CMs to the claims of the other players to the construction process. In addition to those defenses, the CM possesses many other "rights" arising both in contract, as well as in tort, which may be trespassed upon by the owner, contractor, design team, or others.

Setting aside normal rights to payment for services rendered, these rights include, but are not limited to, (1) the right to preserve the CM's "efficiencies" in the manner of its management and administration of the project in an orderly fashion, (2) its right to receive timely and pertinent information from the owner and contractors, and (3) its right to be free from hinderance in the performance of its contractual duties by either the owner, contractor, design professional or others.

Since the underlying purpose of designating the CM as the ultimate manager of the construction process is to streamline, through decisions by one, rather than many, any abridgment of that process will undoubtedly infringe upon the rights of the Construction Manager. The law books are full of case law support for liability of owners to traditional players for such events such as the failure to provide adequate design information, Souza & McQue Construction Company vs. Superior Court (1962) 57 C.2d 508; damages due to delay State vs. Guy F. Atkinson Company (1986) 187 Cal.App.3d 25; and the failure to cooperate or refrain from hindering performance, Gray vs. Bekins 186 Cal. 389; Shea vs. City of Los Angeles 6 C.A.2d 534; Hensler vs. City of Los Angeles 124 C.A.2d 71. These undoubtedly are analogous to the owner-CM relationship and should be judicially treated alike.

Similarly, although probably seldomly invoked, the CM would also possess rights against general contractors or trade contractors for their interference with the construction management of the project where the contractor has performed poorly or contributed to substantial delays or cost overruns. More often, the CM may invoke indemnity claims against claims by the owner against it. Of course, many of these disputes could also be avoided if the parties have carefully and fully addressed their respective rights, obligations and responsibilities in their agreement. There is, in most instances, no better measure of the player's rights and liabilities than the contractual instrument between them even as it relates to "outsiders" to the contract. J.C. McKinney & Son, supra.

5.0 CONCLUSION

It is hoped that from the above analysis, the reader has gotten an idea of the many areas of potential dispute between the CM and the other traditional players in the construction arena. A significant case can be made for the important task of defining, as clearly as possible, the contractual rights and responsibilities of each of the parties to the Construction Management Agreement in order to both limit the areas of dispute, as well as obtain the ultimate expectations of the parties in choosing to insert the use of the CM into the traditional construction process. The greater the clarity in the contracting process, the less likely will any one particular player's expectations be unfulfilled. This is especially true where as in the case of CMs, the intent is to reduce complications in the management of the construction process (and ultimately litigation) and increase the hope for efficiency and economy.

1. ¹ Stein, "Construction Law," Section 3.01(1)(d)(i), Page 3-21.

2. ² See May/June 1991 issue of Construction Business Review: "Measuring the Liability of the Construction Manager and its Impact on the Construction Process".

3. ³ Attached as Appendix 1 is a copy of the AGC form "Construction Manager Agreement."

4. ⁴ Of course any contractual indemnity provision must comport to the precepts and limitations of California Civil Code, Section 2782 et seq. Construction Managers in California who have the ability to truly negotiate their agreement terms would be well advised to seek such protections.

5. ⁵ Foster, et al. "Construction and Design Law," Chapter 5, Page 71.

6. ⁶ A significant caveat to such limited review of potential liabilities of CMs must be pointed out. There is a growing trend to require CMs to enter into Guaranteed Maximum Price contracts ("GMPs"). Under GMP situations, the CM is providing assurances of costs of the intended project and therefore may open the CM to substantially larger liability traps. Although the issues surrounding GMP contracts is too extensive for treatment in this paper, the reader should be cautioned that in those situations the disputes surrounding the owner's expectations versus the CM's rights and liabilities will only be increased and highlighted. Of course, this would call for even greater clarity in the contracting processes of the parties.

7. ⁷ In some instances, the CM is expressly directed to contract directly with the general contractor or trade contractors at a particular project site. In these cases, it is necessary to add to the list of potential theories of recovery against CM's direct contract actions by these contractors. In these circumstances, normal breach of contract claims will be prevalent and might form the basis of extraordinary tort claims.