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Too Much, Too Little: Exposures From Certification of Payments
By Steven G.M. Stein, Esq.
Joel J. Rhiner, Esq.


INTRODUCTION

Design professionals have become increasingly subject to claims arising out of their design and construction administration services. The obligation of the design professional to issue payment certificates has long been a tedious and dreaded task and one that often creates numerous liability problems. Although the only real purpose of issuing payment certificates is to inform the owner or lender that the contractor is entitled to payment, these certificates are often used by potential claimants as a basis for many types of legal actions. This article will explore 1 the potential liability exposures faced by design professionals from issuing payment certificates; 2 the status of case law involving design professionals and their obligation to issue payment certificates; and 3 what design professionals can do to minimize their liability exposure while participating in the payment process.

POTENTIAL LIABILITY EXPOSURES

By issuing payment certificates, the design professional makes a potential claimant out of everyone involved in the construction process. Those people from whom the design professional can expect claims include prime contractors, owners, subcontractors, sureties and construction workers who have suffered personal injuries.

Claims by Subcontractors.

Subcontractors often expect the design professional to act as watchdog to make sure that the prime contractors are paying them with the proceeds received from the owner. If the design professional fails to monitor the payments made by the prime contractor to the subcontractor, the subcontractor may argue that the design professional was negligent and caused a diversion of funds. By failing to monitor such payments, the design professional could be said to have denied the subcontractor of needed resources to complete its work, which could possibly lead to a default.

Claims by Sureties.

Sureties may have claims against design professionals for both overcertification and undercertification. If the design professional undercertifies payment and causes a contractor default, the surety may be forced to complete the contractor's work. Similarly, if the design professional overcertifies payment, thereby reducing the amount of retainage needed to adequately complete the job, the surety may be forced to complete the contractor's work, upon default, with insufficient funds.

Claims by the Owner.

Claims brought by owners against design professionals represent the greatest variety of potential claims. The owner may allege that the design professional negligently overcertified payments or may allege that the design professional was negligent for failure to adequately supervise the work. Most owners rely upon the issuance of a payment certificate by the design professional to determine whether the contractor is entitled to payment. If the design professional overcertifies payment, thereby recommending that payment be made for work that is not yet done or for patently defective work, the owner may be injured. When the design professional overcertifies payment, the amount of retainage held by the owner as security for default or defective work is reduced. This, of course, could leave the owner with insufficient funds to complete the project.

Claims by Construction Workers.

Claims brought by construction workers against design professionals, whether for negligence, may be brought based upon the design professional's duty to issue payment certificates. A construction worker who is injured on the job site may allege, by inference, that the duty of the design professional to issue payment certificates necessarily requires that the design professional visit the site to check on the progress of the work, and that while checking on the progress of the work, the design professional has a duty to protect people on the job from any unsafe construction practices or defective conditions.

LEGAL ANALYSIS

The few cases which have addressed the duty of the design professional to issue payment certificates have analyzed that duty based upon responsibilities similar to those set forth in the standard form AIA Agreements. Despite the use of the typical disclaimer clauses used by the AIA, which protect the design professional from liability for issuing payment certificates, the design professional is often the subject of litigation.

Negligence.

The liability exposure of design professionals for negligence, based upon issuing payment certificates, can be greatly reduced provided that design professionals take particular care when negotiating their contracts with owners. The potential liability exposure of a design professional for negligence, whether brought by owners or personal injury claimants, typically depends upon whether the design professional has any responsibility for site inspection or review of the contractor's work for compliance with the Contract Documents.

In Corbetta Construction v. Lake County Bldg.Commission, 64 Ill. App.3d 313, 21 Ill. Dec. 431, 381 N.E.2d 758 (2nd Dist 1978), the Court held that the architect was negligent and liable to the owner for the contractor's defective work because the architect, who had agreed to supervise the construction, should have discovered the contractor's defective work. In Busick v. Streator Township High School, 234 Ill. App. 3d 647, 175 Ill. Dec. 423, 600 N.E.2d 46 (3rd Dist. 1992), the Court held that the architect was not liable to an injured construction worker for job related injuries because the architect had no duty to supervise the work, nor was he responsible for worker safety. In reaching its decision, the Court noted that the legal duty of a design professional to third persons, such as construction workers and other personal injury claimants, is based upon the scope of the design professional's agreement with the owner (whether the design professional has agreed to inspect and supervise the work).

HOW THE DESIGN PROFESSIONAL CAN MINIMIZE LIABILITY EXPOSURE WHILE PARTICIPATING IN THE PAYMENT PROCESS

Unquestionably, the best way for design professionals to protect themselves from liability arising out of the payment process is to avoid issuing payment certificates. Some owners may be willing to relieve the design professional of the duty to issue payment certificates and perform this task themselves, or delegate it to a construction manager, in order to retain greater control over the payment process. If an owner is willing to absolve the design professional from the headaches which typically accompany issuing payment certificates, the design professional should accept the offer. More commonly, the owner will request that the design professional issue payment certificates. The following suggestions are ones that the design professional should consider when an owner has requested that the design professional issue payment certificates.

Demand a Schedule of Values.

Prior to issuing any payment certificates, the design professional should insist on receiving a detailed Schedule of Values from the contractor. The A201 General Conditions (Paragraph 9.2.1) requires that the contractor provide the architect with a detailed Schedule of Values, but does not specifically state whether the design professional's payment certificate is a representation that a certain percentage of the work is completed, or that the amount which the contractor seeks coincides with the actual amount of labor and materials put in place.

Protect Yourself From Negative Inferences.

Most lawsuits against design professionals, based upon their role in the payment process, are founded upon negative inferences typically drawn from payment certificates. It is common for contractors and owners to equate the duty of the design professional to issue payment certificates with that of inspecting the work for compliance with the Contract Documents. To avoid this negative inference, design professionals should include language in all of their contracts to make clear that they are not in charge of the work, nor required to make exhaustive or continuous on-site inspections. Both the B141 and A201 Contracts contain appropriate language like this which should be incorporated into any contract entered into by the design professional. Specifically, Paragraph 2.6.10 of the B141 and Paragraphs 4.2.2 and 4.2.3 of the A201 absolve the design professional from having any control over the work and from making continuous or comprehensive on-site inspections.

CONCLUSION

The duty of the design professional to issue payment certificates exposes the design professional to a variety of potential claims. The design professional may face claims for negligence and for alleged Structural Work Act violations, as well as claims for negligent overcertification and undercertification of payments. In order to minimize the design professional's exposure to such claims, the design professional should, whenever possible, attempt to utilize standard form AIA documents or incorporate the concepts discussed in this Article into any contract entered into by the design professional.

Endnotes

  1. Courts in other jurisdictions have also held that design professionals may be liable for overcertifying payment requests. For example, in State ex rel. National Surety Corp. v. Malavaney, 221 Miss. 190, 72 So. 2d 424 (1954), the court held that an architect was liable to a surety for negligent certification of payments. See also U.R.S. Company Inc. v. Gulport-Biloxi Regional Airport Authority, 544 So. 2d. 824 (Miss. 1989); Aetna Insurance Company v. Hellmuth, Obata & Kassabaum Inc., 392 F.2d 472 (8th Cir. 1968).
  2. Paragraph 2.6.9 of the B141 and Paragraph 4.2.5 of the A201 Agreements similarly provide that "[b]ased upon the Architect's observations and evaluations of the Contractor's Application for Payment, the Architect shall review and certify the amounts due the Contractor."

Attribution

Steven G.M. Stein, Esq. and Joel J. Rhiner, Esq. Stein, Ray & Conway ("SRC") is one of the largest firms in the United States exclusively devoted to construction law. SRC represents many of the country's largest owners, design professionals and contractors in contract formation, risk management and insurance, business counseling, and dispute resolution. SRC has handled some of the country's highest profile design and construction cases.

The information in this and all other RISK Administration and Management Company articles is intended for information and risk management purposes only and does not constitute legal advice. For legal advice and assistance, please contact competent counsel in the jurisdiction of your professional practice.

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