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Does a Construction Manager Owe a Duty to Third Parties for Economic Loss on a Project Based on a Negligence Cause of Action?

Introduction

“An action in negligence requires a showing that the defendant owed the plaintiff a legal duty, that the defendant breached the duty, and that the breach was a proximate or legal cause of injuries suffered by the plaintiff.” (Ann M. v. Pacific Plaza Shopping Center (1993) 6 Cal.4th 666, 673.) Duty, however, is a legal issue and must be determined by the court. (Isaacs v. Huntington Memorial Hospital (1985) 38 Cal.3d 112, 124.)

A duty of care may arise through statute, contract, the general character of the activity, or the relationship between the parties. (J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, 803).

Typically, a construction manager is hired by a public entity or owner of property to manage and oversee the construction of a particular project. A construction manager typically owes a duty of care to the party they contracted with (pursuant to the contract), but the question arises if they owe a duty of care to other parties working on the same project not in privity of contract.

A Construction Manager’s Duty Is To the Owner of the Project, Not Third Parties For Economic Loss

This issue was addressed by the California Court of Appeals in the matter of The Ratcliff Architects v. Vanir Construction Management, Inc., (2001) 88 Cal.App.4th 595.

By way of background, a school district retained an architect (Ratcliff) and construction manager (Vanir) for a school construction project. The architect and construction manager did not have a contract between them.

A dispute arose between the parties and Ratcliff filed a cross-complaint against Vanir on causes of action related to breach of contract and negligence. The trial court sustained Vanir’s demurrer as to all causes of action and the Court of Appeals affirmed.

The contract related claims failed because there clearly was no contract between Ratcliff and Vanir, and the contract between
Vanir and the District did not have Ratcliff named as a third-party beneficiary.
In regards to the negligence claim, Ratcliff alleged Vanir mismanaged the school renovation project, causing Ratcliff to incur additional uncompensated costs, and therefore breached a duty of care to Ratcliff.
Vanir argued, “Recognition of a duty to manage business affairs so as to prevent purely economic loss to third parties in their financial transactions is the exception, not the rule, in negligence law.” (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 58). Courts are reluctant to impose duties to prevent economic harm to third parties because “[a]s a matter of economic and social policy, third parties should be encouraged to rely on their own prudence, diligence and contracting power, as well as other informational tools.” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 403).

The Court agreed with Vanir and noted Courts have refused to impose a duty to protect third parties to a contract for professional services from economic loss where such a duty would subject the professional service provider to a conflict in loyalties. (E.g., Bily, supra, 3 Cal.4th at pp. 398-407).

The manager’s duty was to the district and any duty to the architect would have created a potential conflict of loyalty for the manager.

Conclusion

The Ratcliff case strongly suggests a construction manager does not owe a duty of care to third parties such as an architect for purely economic loss. It would follow the same rationale would apply to subcontractors claiming economic loss based on a negligence cause of action. There were other factors involved in the Court’s decision and other potential causes of action were not discussed such as intentional interference with economic prospective. Nevertheless, the rationale of the Court provides a strong argument a construction manager’s duty is to the owner of a project, and public policy is opposed to creating a duty of care when such duty would create a conflict in loyalties.

ABOUT THE AUTHOR: Mr. Reisner specializes in civil litigation in the areas of personal injury, professional liability, general liability, and employment litigation. Contact Aaron at 859.263.4078 or areisner@tysonmendes.com.