Limiting Third Party Claims

by Dick Crowell and Sheila Dixon

The authors wrote The Contract Guide: XL Design Professional's Risk Management Handbook for Architects and Engineers, from which this article was reprinted.

The legal obligations of architects, engineers and environmental consultants to others are sometimes difficult to interpret. The concept of privity once held that design professionals owed a duty of care only to those with whom they had a contract. However, that duty has been extended by court decisions to all those who predictably could be harmed by the actions of design professionals, even if no contract exists. Certainly, those who suffer bodily injury and/or property damage because of a designer's negligence may be successful in demanding compensation. But what about those who claim an architect's negligence caused them economic loss? Does the law feel that a third party is entitled to damages if an engineer's negligence deprives him or her of a profit? Frankly, the jury is still out. Some states hold that a design professional owes no duty of care to a third party for economic loss, since no contract exists between them. Other jurisdictions have ruled that a contract is not a prerequisite to claiming damages for economic loss because of negligence. In still other states, courts have decided in both directions, further muddying the legal waters.

With so much variance in the courts, it is difficult to know where your responsibilities lie. Virtually anyone -- from the general contractor, to vendors, to future owners -- can claim that you knew or should have known that they could have been economically harmed by your negligence and sue for damages. Their chances of prevailing depend on several factors, including the jurisdiction in which the claim is filed and, perhaps, any preventive steps you and your client may have taken to avoid third party claims. If your contract is silent on the matter, a court may well interpret that silence against you.

You and your client can -- and should -- address the issue of third party claims in your contract. At the very least, such a provision will clearly define your intentions and responsibilities and may help defeat claims in some jurisdictions where the case law is not settled or compelling on this issue. Consider the following clause:

Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the Client or the Design Professional. The Design Professional's services under this Agreement are being performed solely for the Client's benefit, and no other entity shall have any claim against the Design Professional because of this Agreement or the performance or nonperformance of services hereunder. The Client agrees to include a provision in all contracts with contractors and other entities involved in this project to carry out the intent of this paragraph.

This clause is intended as example only and should be reviewed and modified by competent legal counsel to reflect variations in applicable local law and the specific circumstances of your contract.

Your client should have no objection to such a clause, since it does not compromise either party's position and may be of some benefit to both of you.