A Beacon for Homeowners and HOAs. Not So Much for Design Professionals

Earlier we wrote about a case that made architects none too happy – Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, Case No. A134542 (December 13, 2012) – in which the California Court of Appeals for the First District held that architects could be sued by a homeowner’s associations (“HOA”) and, by implication, individual homeowners as well, even though the architect did not perform its design services under contract with either the homeowners or the HOA.

At its crux, the case was about the tension between two competing policies – placing limits on the liability of those involved in but too far removed from the ultimate user of a product (in this case, residential projects), on one hand, and holding those involved in such projects liable to those ultimate users (in this case, homeowners), on the other.

This past year, on review by the California Supreme Court, the Supreme Court held that architects owe a duty of care to future homeowners in the design of residential buildings if they are the “principal architect” on the project even if the design services they performed were not pursuant to a direct contract with homeowners or HOA and even though they did not actually build the project or exercise ultimate control over its construction.

The Beacon Case

In Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, Case No. S208173 (July 3, 2014), Beacon Residential Community Association (“Beacon”), an HOA, sued various parties including Skidmore, Owings & Merrill LLP (“SOM”), the project architect, alleging construction and design defects in a condominium project which resulted in and included water intrusion, inadequate fire separations, structural cracks and “solar heat gain” due to substandard windows and a building design that lacked adequate ventilation.

Typically in such cases, the HOA or homeowner files suit against the developer and if there are allegations involving design defects, the developer files a cross-complaint against the architect who it hired to design the project.  In this sense, Beacon is a somewhat unusual case, albeit with real life implications, as it allows homeowners and HOAs to sue architects directly, which may be significant if the developer is bankrupt, judgment proof, or without significant assets.

In holding that architects can be sued by homeowners and HOAs, the Supreme Court noted while “liability for the supply of goods and services historically required [a] contract between the supplier and the injured party . . . [it] has been greatly eroded over the past century” and that “[t]he declining significance [that there be a contract between two parties for one to be found liable] has found its way into construction law.” Rather, explained the Supreme Court, whether a party owes a duty of care to another in the absence of a contractual relationship depends on several factors including:

• The extent to which the transaction was intended to affect the plaintiff;
• The foreseeability of harm to him;
• The degree of certainty that the plaintiff suffered injury;
• The closeness of connection between the defendant’s conduct and the injury suffered;
• The moral blame attached to the defendant’s conduct; and
• The policy of preventing future harm.

Known as the Biakanja factors, after a California Supreme Court decision by the same name, the Supreme Court focused on three factors which it described as “driv[ing] [its] analysis”:

1. SOM was the only architect on the project and played a direct and significant role related to the some of the claims by the HOA including reviewing and approving actions changing the specifications of the exterior windows and recommending a reduction in the number of ventilation ducts.  As such, there was a “closeness of connection” between SOM’s conduct and the injury allegedly suffered;
2. While SOM may not have known who the condominiums would ultimately be sold to, SOM was aware that the project was to be sold as condominiums, and that its work was “intended to affect” the ultimate homeowners; and
3. Because the chief interest of a prospective homeowner is to avoid purchasing a defective home, a rule holding architects “directly accountable to third party homeowners is most likely to vindicate that interest.”

The Supreme Court also distinguished an earlier case, Weseloh Family Limited Partnership v. K.L. Wessel Construction, 125 Cal.App.4th (2004), in which the Court of Appeals held that a design professional (an engineer) who made recommendations but not final decisions relating to construction, owed no duty of care to future homeowners which whom it was not in contract. According to the Supreme Court, unlike the engineer in Weseloh who was hired by a subcontractor rather than an owner or developer, was paid a nominal fee of $1,500 and did not supervise construction on the project, SOM was the sole entity providing architectural services on the project. “Weseloh,” explained the Supreme Court, “merely suggests that an architect’s role in a project can be so minor and so subordinate to the role or judgment of other design professionals as to foreclose the architect’s liability in negligence to third parties.”

Conclusion

Unless the California Supreme Court changes its mind, which is unlikely, Beacon is now the law of the land, at least, in that land known as “California.” For design professionals and others there are a few take-aways and lingering questions:

• The Supreme Court’s discussion of the Weseloh case strongly signals that, while Beacon involved an architectural not an engineering firm, the Supreme Court’s decision applies equally to engineers, as well perhaps, to other design professionals such as landscape architects and land surveyors.
• For design professionals and their insurers, the increased exposure of design professionals to suits directly from homeowners and HOAs, may prompt increases in the cost and availability of professional liability insurance.
• Even if design professionals are not sued directly by homeowners and HOAs, the case strengthens equitable indemnity and contribution claims against design professionals by builders, developers and contractors, even in the absence of an express contractual indemnity provision or the lack of a contractual relationship with the design professional.

Although the Supreme Court limited its holding to the “design of [ ] residential building[s],” the Supreme Court’s rationale could be extended by lower courts to other types of projects such as commercial or tenant improvement projects and possibly, although it’s not entirely clear based on the Supreme Court’s holding, to claims by subsequent purchasers from an original homeowner.