Is CM Liable When Prime Contractor Sues?

By John S. Mrowiec

Sometimes a construction project is organized with "multiple prime" contractors. The owner first engages an "agency construction manager" or, in the terminology of the American Institute of Architects family of construction documents, B801/CMa, a construction manager "where the construction manager is not a constructor."

That kind of agency construction manager typically is compensated by a fee, often measured by a percentage of total construction costs.

One of the roles of the agency construction manager is to assist the owner in selection of the various multiple prime trade contractors who will construct portions of the work. Frequently, especially in public work, those multiple trade contractors are competitively bid.

The owner, not the agency construction manager, then contracts with the various multiple trade contractors by one of two signature methods: a trade contract for each multiple prime contractor signed either (a) by the owner or (b) by the construction manager "not personally but as agent for the owner."

Normally, in the pre-construction phase, the agency construction manager prepares a "project construction schedule" usually to be provided to potential multiple prime trade contractors with each set of bidding documents. (See AIA B801/CMa, Subparagraph 2.2.11.)

During the construction phase, the construction manager is to provide "administration" of the multiple trade contracts. (See AIA B801/CMa, Subparagraph 2.3.2, 1992 ed.).

That administration usually requires the construction manager to "coordinate scheduled activities and responsibilities" of the multiple prime contractors, "to coordinate meetings to discuss such matters as procedures, progress and scheduling", "update the project construction schedule incorporating the activities" of the multiple prime contractors, then further to "update and reissue the Project construction schedule as required to show current conditions" and, if delays are projected to "recommend corrective action." (See AIA B801/CMa, Subparagraphs 2.3.3, 2.3.4, 2.3.5, 1992 ed.).

When delays or acceleration occur, one or more of the multiple trade contractors might assert claims for additional compensation. Even though the multiple prime trade contracts are with the owner or signed by the construction manager only "as agent for the owner," some trade contractors try to sue both the owner and the construction manager.

Such was the case in the recent decision of Stelko Electric, Inc. v. Taylor Community Schools Building Corp., 2005 Ind. App. LEXIS 721 (2d Dist., April 29, 2005).

School Project Illustrates Issue

Electrical Contractor Sues

Four months after completing, the electrical contractor submitted its claim for more than $1 million. The owner refused to pay. The electrical contractor filed suit against both the owner and the construction manager.

The electrical contractor had no contract with the construction manager so could not sue for contract breach. Instead, the electrical contractor contended the construction manager was liable under the tort theory of negligence.

The construction manager moved for summary judgment under the "economic loss" doctrine. In the absence of a contractual relationship, a person generally is not liable for the economic loss of another except in limited circumstances.

In Indiana, one such circumstance is where a "professional," who has contracted with someone other than the claimant, actually knew that what he was contractually providing would be relied upon by the claimant.

The electrical contractor argued that the exception to the rule prohibiting recovery applied. The electrical contractor contended that the construction manager actually knew that the electrical contractor was relying on the construction manager's actions. After all, the electrical contractor was required to follow the construction manager's schedules.

Trial, Appellate Court Rulings

The trial court disagreed with the electrical contractor, instead finding the construction manager owed no duty to the electrical contractor. The electrical contractor appealed.

The Stelko Electric appellate court reviewed the owner-electrical contractor contract's General Conditions. The General Conditions quoted on this issue by Stelko Electric are identical to the American Institute of Architects, A201/CMa General Conditions.

One provision of the General Conditions of the owner-electrical contract "made clear that there was no privity between" the electrical contractor and the construction manager: "The Contract Documents shall not be construed to create a contractual relationship of any kind . . . between the Construction Manager and [Trade] Contractor" Stelko Electric, 2005 Ind. App. LEXIS 721, *20 n. 6 quoting AIA General Conditions A201/CMa, Subparagraph 1.1.2 (1992 ed.).

The key provision relied on by the Stelko Electric court, though, was the following:

"The Construction Manager, except to the extent [it can schedule and coordinate], and Architect will not have control over or charge of and will not be responsible for construction means, methods, techniques, sequences or procedure, or for safety precautions and programs in connection with the Work, since these are solely the Contractor's responsibility . . . and neither [the Construction Manager or Architect] will be responsible for the Contractor's failure to carry out the Work in accordance with the Contract Documents. Neither the Construction Manager nor the Architect will have control over or charge of or be responsible for acts or omissions of the Contractor, Subcontractors, or their agents or employees, or of any other person performing portions of the Work," Stelko Electric, 2005 Ind. App. LEXIS 721, *21, quoting AIA General Conditions, A201/CMa, Subparagraph 4.6.6 (1992 ed.).

Based on the above provision, the Stelko Electric court reasoned that the electrical contractor "should have known that [construction manager's] services were not provided to benefit [electrical contractor], but, instead, were intended to keep the Project organized for [owner]" Stelko Electric, 2005 Ind. App. LEXIS 721, *22.

Because the electrical contractor designated no evidence that the construction manager "had, or should have had, actual knowledge that [electrical contractor] was relying on [construction manager's] actions", electrical contractor could not recover against the construction manager, Stelko Electric, 2005 Ind. App. LEXIS 721, *23.