Recent Legal Developments Affecting the Design and Construction Professional
You and your firm are not the same person . . . . or are you?
If you practice a design profession, chances are you have formed a corporation or a limited liability company to protect your personal assets from business debts. Indeed, that is common and sound approach, but it isn’t enough to simply form a business entity – one must operate that entity properly in order to reap the benefits. Where one fails to follow that general rule, the results can expose personal assets to business debts.
A corporation under the law is a person, separate and distinct from its owner(s) (the “shareholders”). If a corporation enters into a contract and then breaches that contract, the corporation’s assets can be seized to secure any judgement or debt. The shareholder’s assets are exempt for a simple legal reason – they belong to a different person than the person who breached the contract.
While that is great benefit, it comes at a price. After forming a corporation, one must treat the “person” it represents as separate, distinct and independent from the shareholder(s). In addition to following the corporate formalities such as holding annual meetings and filing annual reports, that also means the corporation must have finances and an existence separate from its shareholders. If the corporation is operated as a separate entity then it will provide the protection intended. If not, then there is a substantial risk that a court will disregard the corporation and treat it as an extension of the shareholders.
In sum, the corporate shield isn’t bulletproof. If a corporation is operated as a separate being it will provide the separation and protection intended. However, if the shareholder(s) don’t treat it as a separate being, they can’t expect courts to do so either.
This principle was most recently illustrated in Sanford Green, et. al. v.. Norman H. Ziegelman, et. al., Michigan Court of Appeals, Opinion Number 318989, May 7, 2015, where the court disregarded a corporation through which an architect practiced and found the individual architect personally liable for corporate debts. An understanding of how that can happen is essential to its prevention. As such, that case is illustrative.
The architect in Green had formed a corporation for his practice and, as is often the case, corporation shared his name (Norman H. Ziegelman Architects, Inc.). The Green plaintiffs were a group of investors who were seeking to develop property in Scio Township, Michigan, and who had formed “Libwag LLC” for that purpose. The plaintiff(s) engaged Norman H. Ziegelman Architects, Inc. as the architect for the project, and Norman Ziegelman the individual became in investor and part owner in the LLC.
Although the facts thereafter are disputed, the court found that Mr. Ziegelman attempted met individually with one of the original three investors who comprised Libwag LLC in an effort to persuade him to join with Ziegelman and seize control of the project. When that effort failed, he stopped meeting the investment obligations incumbent on the members of Libwag, LLC and caused Norman H. Ziegelman Architects, Inc. to stop performing design work.
That led to several disputes and lawsuits, which the participants eventually agreed should be decided in arbitration. The arbitrators rejected Ziegelman’s claims, concluded that Norman H. Ziegelman, Inc. breached the design services contract, and entered an award in the amount of $156,313.00 against Norman H. Ziegelman Architects, Inc., in favor of the other investors. The court later rendered judgment on that award paving the way for collection efforts.
When efforts to collect from Norman H. Ziegelman Architects, Inc. failed, the investors then approached the court and argued the court should disregard the distinction between Norman Ziegelman and Norman H. Ziegelman, Inc. and find Ziegelman individually liable for the $156,313.00 corporate debt. The evidence, derived mostly from a creditors’ exam (when the investors had an opportunity to question Ziegelman under oath) included;
1. Ziegelman Architects had no assets and only $400 in accounts receivable
2. Ziegelman even stated that with the exception of a small project for a relative, Ziegelman Architects had not done any architectural work in so many years that he could not remember how long it had been (the investors argued that during contract negotiations Norman Ziegelman had represented that “Ziegelman Architects was a "successful architectural firm that had undertaken numerous large-scale office and apartment projects" and was "an ongoing, successful enterprise" . . . . had they known the truth, they would never have engaged the firm for the project).
3. Ziegelman testified that he was Ziegelman Architects' sole shareholder, director, and officer.
4. The last project that Ziegelman Architects successfully performed was completed more than 25 years earlier in 1989.
5. Ziegelman Architects had been a tenant in a building owned by another entity Robert Ziegelman controlled for at least 20 years, but had no written lease and had never paid rent.
6. Other entities that Ziegelman controlled lent approximately $242,000 to Ziegelman Architects over the years. There were, however, no loan agreements, repayment schedules, or notes to evidence these loans and Ziegelman Architects never made any effort to pay the loans.
7. Ziegelman personally lent an additional $391,000 to Ziegelman Architects, which also was not evidenced by a promissory note and was never repaid.
8. Ziegelman Architects paid Ziegelman’s automobile leases, auto insurance premiums, and his cell phone and travel expenses.
9. Ziegelman testified that he filed losses on his personal income for the expenses incurred by Ziegelman Architects; in a three-year span he deducted $151,000.
10. Ziegelman formed a new architectural entity only ten days after the judgment was entered against against Ziegelman Architects.
11. Ziegelman admitted that, shortly before the creditor's examination, he purchased all of the assets of Ziegelman Architects—filing cabinets, drafting boards, tables and other officer equipment—for $3,900. The equipment, he stated, was properly valued despite the fact that it was listed as worth $89,690 on a tax return two years earlier.
12. Ziegelman admitted that one of the reasons he formed the new entity was to "get out from under this judgment."
13. The new entity leases the same space that Ziegelman Architects leased, but again without a lease agreement and without paying rent. Because the new entity also has no business, it too survives on loans that he makes to it. The new entity pays Ziegelman’s car lease, his insurance, his travel, and cell phone expenses as well.
14. Ziegelman used Ziegelman Architects to purchase thousands of dollars of supplies for his sculpting hobby. Although he testified he intended to sell the sculptures on behalf of the architectural firm, he admitted that he had not sold any sculptures and that he didn’t know if we would or could.
The investors argued that the evidence established that Ziegelman Architects was not a legitimate business, but was instead merely a sham corporation which existed solely to meet Norman Ziegelman's personal needs and shield him from liability. As such, they argued the court should “pierce the corporate veil”, disregard the corporate entity, and treat the corporation as Norman Ziegelman treated it – not as a separate entity, but as an extension of himself.
Using a well-established legal test, the court examined the totality of the evidence surrounding the owner's use of an artificial entity and, in particular, the manner that the entity was employed in the dealings at issue. From that evidence the trial court must determine whether the owner operated the entity as his or her alter ego—that is, as a sham or mere agent or instrumentality of his or her will, Gottlieb v Arrow Door Co, 364 Mich 450, 452; 110 NW2d 767 (1961).
In this instance, the trial court concluded that the Ziegelman Architects corporation was a mere sham and not a legitimate effort to conduct a business. The Court of Appeal affirmed that ruling, noting “The lack of formality in Norman Ziegelman’s dealings with Ziegelman Architects suggests that Ziegelman himself disregarded Ziegelman Architects' separate existence whenever it was convenient or suited his needs, and only asserted its separate existence when it benefited him personally, such as for tax purposes.” That result is consistent with long standing law
The lesson is plain. As a practicing professional one should set up a corporation or an LLC as both do afford a degree of liability protection. However, once the entity is established, one must follow the statutory requirements and must treat that entity as the separate and distinct person it is intended to represent. It is serious business, and cimply put, if the business operator doesn’t treat the entity as separate and distinct from himself or herself, the law won’t either.
For assistance setting up and operating a corporation or an LLC you should consult with an attorney familiar with those requirements in your state.
 While there are a few legal distinctions, for purposes of this article a “corporation” and a “limited liability company” are treated in the same manner.
The Architect's Duty to Third Parties . . . . . What does an Architect owe the Contractor?
Cedroni Associates v. Tomblinson Harburn Associates, Architects and Planners
The Court Limits the Architect’s Duty
Competitive bidding remains a primary project delivery system, and one often, indeed, almost universally employed by the public owner. In that context, Architects are routinely called upon by their clients to assist in the selection of the lowest responsible, responsive bidder. While that service has become standard, few Architects appreciate the unique risks it may engender.
To put that in context, one must understand the history of specific case law. For the Michigan Architect, the problematic case is Joba Construction Co, Inc v Burns & Roe, Inc, 121 Mich App 615 (1983), decided by the Michigan Court of Appeals nearly 30 years ago. In Joba, an Engineer working for a public owner had prepared the design work for the expansion of a power generating station, was also required by its contract with the Owner to evaluate the bids and recommend a bidder for the contract award. The plaintiff was an underground specialty contractor who had submitted a general contract bid on one project and had submitted a subcontract bid on another. The Engineer determined the plaintiff was not qualified for the work, and made a recommendation consistent with that conclusion to the Owner. The plaintiff contractor was disqualified from both contracts, and thereafter filed suit alleging intentional interference with a business expectation. The plaintiff prevailed at trial, winning a $272,368 verdict. The Engineer appealed, and the Court of Appeals concluded that once the plaintiff contractor submitted a bid that was numerically low, the question of whether the plaintiff was qualified was a question of fact that the jury must decide. The jury did decide it, and in so doing, concluded that the Engineer’s recommendations were flawed.
The result was somewhat perverse in that the advice a Design Professional renders to his or her client could be the basis for a lawsuit - particularly where the advice might be to engage someone other than the bidder who submitted the numerically low bid. Even if a recommendation that the lowest bidder is not qualified is furnished in good faith, the Design Professional could face a lawsuit. Indeed, even if the suit is defensible, significant resources will be expended in the course of mounting a defense.
No other professionals face that sort of liability, and the threat of that sort of liability literally created a classic “no win” scenario. The Architect was obligated by the contract with the Owner and the prevailing standard of care to render a recommendation as to contract award in a manner consistent with the Architect’s judgment. If the Architect recommended to the Owner that the numerically low bidder submitted a bid that isn’t responsive, or opined that the low bidder wasn’t responsible (i.e.; wasn’t qualified), the Architect could face suit from the low bidder. On the other hand, if the Architect recommended that the low bidder was responsible and had submitted a responsive bid when that recommendation wasn’t consistent with principled professional judgment, the Architect risked engendering an Owner loss due to the fact that the Owner had engaged an under-qualified contractor, on the strength of the Architect’s recommendation, a scenario that would of course engender similar liability.
The Cedroni Case
After prevailing for nearly 30 years, the issue came to a head in Cedroni Assoc, Inc v Tomblinson, Harburn Assoc, Architects & Planners, Inc, 290 Mich App 577 (2010). There, the Architect was engaged by the Davison School District to prepare design work for a construction project. As part of that work, the Architect was required by its contract to make a recommendation to the Owner as to the suitability of the apparent low bidder. Cedroni Associates submitted the lowest numeric bid, but after conducting a reference review and evaluation process, the Architect recommended the Owner award the contract to the second lowest bidder, the total cost of which was nearly $50,000.00 higher. Cedroni Associates filed suit against the Architect alleging, inter alia, intentional interference with valid business expectancy.
The Architect filed a motion in the Trial Court arguing, among other things, that there was no valid business expectancy and that the Architect owed the Contractor (actually bidder) no duty. Since there was no valid expectancy, even if the Architect’s recommendation interfered with or prevented the award of contract to Cedroni, no recourse was available since Cedroni had not been deprived of any right the law recognizes. The trial court agreed, and dismissed the case.
Cerdoni appealed, arguing that the Trial Court’s decision was inconsistent with Joba Construction Co, Inc v Burns & Roe, Inc.Specifically, Cedroni argued that it had proffered sufficient evidence to demonstrate that there were questions of fact on the question of whether the Architect’s recommendations were legitimate or were motivated by a desire for retribution arising out of a dispute on a prior project. Relying on Joba Construction Co., the Michigan Court of Appeals, in a rare 2-1 decision, concluded that a question of fact did exist, and it overruled the Trial Court, reinstating the case. Notably, the dissenting Judge argued that there was no legitimate expectation of business, and that the lack thereof defeated the claims.
The Architect appealed to the Michigan Supreme Court. Rather than take the case outright, the Court set it for oral argument on the question of whether it should take the case, and directed the parties to brief the question of whether there was a legitimate business expectation. The Architect addressed that question directly, while Frederick F. Butters, FAIA, Esq. drafted and filed an amicus brief on behalf of AIA Michigan, arguing simply that Joba Construction Co. was inconsistent with modern views, placed the Architect in an untenable position that no other professional ever faced (where advice to the client could become the basis for a lawsuit by a third party) and that thecase should simply be overturned.
On July 27, 2012, the Michigan Supreme Court issued an opinion in lieu of taking the case for full consideration. In that opinion, by a 4-3 margin, the Court concluded that where the Owner retains broad discretion to award the contract to the low bidder, to any bidder, or to no bidder, it is impossible as a matter of law for any bidder to formulate a valid business expectancy. In the absence of valid business expectancy, it is impossible for the Architect to interfere with business expectancy as a matter of law. While the Court didn’t expressly overrule Joba Construction Co., it did expressly disfavor it in deference to Mago v. Andersen Eckstein & Westrick, a case which the Court found to be more soundly reasoned. Notably, the 3 judge minority adhered to the view the majority in the Court of Appeals had taken to the effect that Joba Construction Co. was vital law and controlled the outcome.
Unfortunately, Joba does remain. although what it may mean is less than copmpletely clear
The net effect is to end interference with business expectancy as a valid cause of action by a contractor, as low bidder, against an Architect who recommends an award of a construction contract to someone other than the apparent low bidder.
While that decision does little to advance the resolution of conflicts in Court of Appeals precedent Michigan Court Rule 7.215(J)(1) was intended to address, and while Jobaremains on the books, its application henceforth is decidedly limited.
While an Architect will likely always face third party claims in the event building users are injured as a consequence of design defects in the finished improvement, an Architect performs those business and consulting services required by his or her contract with the Owner does not fact the threat of liability arising out of that advice. No other professional faces that sort of liability, there was no good reason to subject the Architect to that threat, and while the Michigan courts have embarked upon a circuitous course to reach that end, the result appears finally to be in hand.
 Public owners are required to competitively bid their work for a number of reasons, many unrelated to the drive to find the lowest cost. Additional reasons include the notion that competitive bidding makes it tough to rig bids or collude, and the proposition that all qualified contractors should have an equal right to secure public work
 The first two factors are often overlooked. The process isn’t simply one seeking the low bid. The successful bidder must also be “responsible” (i.e.; capable of performing the work) and the bid must be “responsive” (i.e.; the bid must respond to the requirements of the contract documents)
 The fact that there were prior issues seems beyond dispute. The Architect’s notes from the evaluation process were part of the evidence, and those notes included both good and bad reviews together with notes regarding the Architects’ own prior experience with Cedroni. Some of the notes suggested that Cedroni had been removed from projects in the past due to performance issues. Cedroni countered with an affidavit from its president stating that it had never received a negative review and that it had never been removed from a project. Exactly how Cedroni could know what the substance of conversations the Architect had with references they had contacted was is not entirely clear. As such it was entirely possible that both were accurate – Cedroni had not been removed from a project, and had never received a negative review that it knew of, while contrary indications were provided to the Architect in the context of its evaluation. Regardless, including one’s own negative experiences in detail in the recommendation notes is probably not the best course, particularly where those recommendations can be made orally and never reduced to writing.
 The brief noted that while Keller v. UPEA was an unreported case (where the court concluded an Architect had no duty independent of its contract despite Joba), it was nevertheless illustrative and it had cast severe doubt on Joba’s continued viability.
 Michigan Court Rule 7.215(J)(1) was intended to resolve an increasing number of splits of authority arising in the Court of Appeals. Where there are conflicting cases, the rule directs the Trial Court and the Court of Appeals to follow the most recent precedent. If the Courts follow the most recent precedent despite the belief that the older case is better reasoned, Courts are instructed to include language to that effect in their opinions, after which the Supreme Court would either resolve the question or affirm the later precedent by letting it stand. Despite the fact that the Court followed Mago v. Andersen Eckstein & Westrick (concluding it was better reasoned), it let Joba stand (at least in name). However, while Jobaremains on the books, what vitality it may have is in severe question and where or how it might apply is not at all clear.
The Michigan Court of Appeals Expands the reach of Fultz v. Union-Commerce Associates
The Impact of Keller Construction v. U.P. Engineers on the Architect’s Duties
On July 8, 2008 the Michigan Court of Appeals rendered its decision in Keller Construction v. U.P. Engineers, CA No. 275379. While that decision does not set significant new precedent, it does recognize the application of more recent principles to older precedent, and it does consolidate what had previously been scattered concepts into one condensed statement concerning the design professional’s duties in Michigan. As a consequence, it is apparent that any suit against a design professional other than those brought by the client will be difficult to maintain.
A Summary of the Keller Construction Facts
As with any case, an understanding of its effects must begin with an understand of the underlying facts.
Keller Construction was the general contractor on a water treatment and distribution system implemented by the Village of Ontonagon in the Michigan’s Upper Peninsula. The Village engaged UP Engineers & Architects (hereinafter “UPEA”) as the Engineer for the project, and UPEA was responsible for the construction administration.
By the time Keller assumed the role of general contractor for the project in July of 2002, significant difficulties had occurred. Nevertheless, Keller worked through the difficulties and completed the work. At the end of that process, Keller brought claims against the Village and UPEA for additional costs arising out of alleged changes and extra-contractual work. Keller worked out a settlement agreement with the Village and by the end of 2003, Keller and the Village had released all claims against each other. However, any potential Keller claims against UPEA were not released.
In July of 2004, Keller filed suit against UPEA alleging that UPEA committed malpractice in the course of its design and construction administration work on the project, and that it interfered with the business relationship Keller had with the village.
After an extended discovery period, UPEA moved for Summary Disposition on multiple grounds. Although the Court considered several arguments, the Court ultimately focused on the duty element. After extended argument, the Court found that UPEA owed no duty to Keller. As all of Keller’s claims were negligence based, and as duty is an essential element of a negligence based claim, the lack of a duty was fatal to Keller’s case.
Although the Court dismissed Keller’s claims, it also afforded Keller an opportunity to file an amended complaint to better articulate the duties it alleged. Keller filed an amended complaint, and UPEA again moved for Summary Disposition on the same grounds. After a full hearing, the Court concluded that Keller had again failed to articulate any duty UPEA owed to it. Again, the court dismissed Keller’s claims. The Court of Appeals July 8, 2008 opinion is a consequence of an appeal of that decision.
The Appellate Decision
1. Negligence / Malpractice
For its negligence claims, Keller placed its primary reliance on two specific Michigan cases, Bacco Construction v. American Colloid, 148 Mich App 397 (1986) and National Sand v. Nagel Construction, 182 Mich App 327 (1990), arguing that a project engineer had a duty to the general contractor. Since the direct privity of contract requirement had been eliminated for negligence based claims, both cases stood for the proposition that design professionals are liable for foreseeable injuries to foreseeable victims which proximately resulted from the negligent performance of their duties. The Bacco court had specifically found that the engineer’s failure may create a foreseeable risk of harm to the third party contractor who is responsible for applying the engineer’s work to the project.
Rather than simply adopt Bacco, the Court of Appeals continued the analysis by looking to more recent cases. Citing Rinaldo’s Construction Corporation v. Michigan Bell Telephone Company, 454 Mich 65 (1997) the Court noted that any design professional liability must be predicated on a duty that is separate and distinct from the duties set out in the contract the design professional has with the client. If no duty separate from the contract exists, no negligence action based on the performance of the contract can lie on behalf of a third party. Since Keller had not articulated any duty other than those duties UPEA had as a consequence of its contract with the Village, UPEA had no duty to Keller, and as a consequence, no liability to Keller
2. Interference with Business Expectancy
With respect to its business interference claims, Keller relied onJoba Construction v. Burns & Roe, 121 Mich App 615 (1982). In Joba, the plaintiff contractor was the low bidder on a project for the City of Detroit. Rather than recommend an award of the contract to Joba, the project engineer convinced the city to award the contract to another bidder. In addition, the engineer convinced the city to remove the plaintiff as a subcontractor on another unrelated project. The Joba plaintiff’s case for intentional interference with a business expectancy was allowed to proceed to trial, and the plaintiff prevailed.
Although the Keller court noted there were similarities between the Keller facts and the Jobacase, the Keller court also noted that the Joba court failed to address the third party duty issues it found dispositive with respect to the negligence / malpractice claims. Since Joba was decided before November 1, 1990, the Keller court concluded it was required to reject Joba and follow the more recent law. Again, since UPEA owed no duty to Keller independent of those duties it had by virtue of its contract with the Village, Keller’s business interferences claims also failed.
While the Keller decision does not establish any new legal principles, it does consolidate prior decisions and it does sharpen the legal thinking relative to the design professional’s duties to anyone other than his or her client. In sum, in the absence of duties independent of those set out in the design professional / owner contract, the design professional has no duties to third parties - specifically contractors. Indeed, it appears that the Michigan the design professional is free to perform the contract for the benefit of the owner without considering the effect of his or her advice on the contractor. While it is impossible to say that the design professional has absolutely no duty running to the contractor, in most traditional instances there are few if any duties independent of the contract. Although there may be some limits to this principle, it is difficult to envision where those limits might be. As a consequence, the ability of a contractor to bring a direct claim against a design professional in Michigan appears to be severely limited as a matter of law.
As the contractor’s ability to lodge a direct claim against the design professional may now be limited, the owner may well represent the exclusive remedy. As owners become the central focus, their emphasis on indemnification and other risk allocation contract provisions relative to their design professional contracts may increase. Although additional litigation on this subject is likely, for now the contractor’s ability to lodge successful third party claims against the design professional in Michigan is narrower and more limited.
In reality, Keller began the project as a guarantor on the surety bonds for a different general contractor (Underground Specialties, Inc.) who was initially engaged on the project. As USI was unable to secure the necessary bonds using its own credit, Keller stepped in and made the necessary guarantee using its credit. When USI defaulted, the underlying surety tendered performance to Keller, leavi9ng Keller a basic choice – either complete the work itself (where it would enjoy a degree of control) or permit the surety to complete the work after which the surety would present Keller with a bill (a process in which Keller would have no control). Keller chose the former option and stepped in to complete the work. Thus, where Keller was initially an intermediate surety, it became the general contractor as a consequence of the USI default.
 Amongst other claims, Keller alleged that UPEA had indicated to local trade contractors that they shouldn’t do business with Keller as it organized its efforts to complete the work. UPEA denied that it had done so and the question remains unanswered since the litigation never progressed to a point where the claim would have been proven either way at trial. For whatever reason, Keller did have difficulty securing local trade contractors, and it was forced to bring in its own equipment and labor at costs significantly higher than would have been the case had local trades been secured.
 In sum, the Court concluded that Bacco and National Sandhad been implicitly overruled to the extent they were inconsistent with the subsequent Rinaldo’s Construction Co. andFlutz v. Union-Commerce Associates, 4470 Mich. 460 (2004) cases.
 On November 1, 1990, in an effort to contain a growing number of conflicts with Court of Appeals case law, the Michigan Supreme Court issued an order directing the Court of Appeals to follow the most recent precedent in the event of conflict. That principle later became Michigan Court Rule 7.215(J)(1). The Keller court concluded the Joba court’s failure to address the more recent cases regarding rights third parties have relative to the design professional / client relationship put Joba in conflict with those later cases. Because of that conflict, MCR 7.215(J)(1) required the court to disregard Joba. Although the Keller court didn’t expressly note that Joba had been implicitly overruled, the effect is the same.
AIA Documents . . . . Not Always What they Appear to be
Are AIA Documents are Always what they Appear to be?
If you listen to your insurance company you know they tell you to make your contract with your owner / client non-assignable. Most insurance advice is drawn from experience, and that is no exception. Making the contract assignable allows the owner to transfer the obligations you owe to that owner to another party. Thereafter, that party can sue to enforce the obligations set out in the contract. An assignment effectively places the ability to bring suit in the hands of a party that wasn’t privy to the design process and the design decisions.
Condominiums are the classic example. The developer secures financing to construct the common areas, and begins to sell units. As the units are constructed, the developer pays off the financing for the common area construction with the proceeds of the sales, and forms a condominium association for purposes of administering the deed restrictions, the condo agreements, and for purposes of owning and maintaining the common areas. When a requisite number of units are sold, the developer deeds the common areas to the association and relinquishes control to the association. The developer also assigns the Architects’ contract to the association, placing it in a position where it can then sue to enforce the agreement.
The problem of course is that the association leadership (elected from the ranks of the condo owners) were not privy to the design process and the decisions that led up to the design solutions. They instead look at the finished result from a different perspective – one that generally doesn’t take into account the financial component. They expect a level of perfection that simply wasn’t a primary goal of the process, and they sue when they realize they are now required to pay for the maintenance made necessary as a consequence of those decisions.1
The AIA Document Response
Reading the AIA contracts, it would appear that the AIA documents committee has recognized and addressed this problem. In that regard, AIA B101, 2007, Standard for of Agreement between Owner and Architect provides;
B101 – 2007 Standard for of Agreement between Owner and Architect
10.3 The Owner and the Architect, respectively, bind themselves, their agents, successors, assigns and legal representatives to this agreement. Neither the Owner nor the Architect shall assign this Agreement without the written consent of the other, except that the Owner may assign this Agreement to a lender providing financing for the Project if the lender agrees to assume the Owner’s rights and obligations under this Agreement.2
So the AIA documents solve the problem by prohibiting and assignment by the Owner without the written consent of the Architect, right? All an Architect need do to avoid this issue is use the AIA documents, after which the Architect can rest assured that he or she will never face a situation where the contract (and the rights and obligations attendant to it) can be assigned unless the Architect agrees they can be, right? Problem solved, right?
Well . . . not exactly
The Michigan Court of Appeals addressed this question in Oliver / Hatcher Construction and Development, Inc. v. Shain Park Associates, No. 275500 (Mich. App. 5/22/2008) (Mich. App., 2008). The contract clause at issue there was Section 13.2.1 of the 1997 version of A201 (which contains the same language as section 10.3 of B101 – 2007 as recited above). The project at issue coincidentally was a condominium project, and the contractor, Oliver Hatcher, had entered into a contract with 250 Martin Investments, LLC, as the original Owner. The Owner defaulted, and the lender foreclosed, after which it sold the project to Shain Park Associates. The sale from the lender included an assignment of all contract rights, including contract rights held by the lender and by 250 Martin Investments in the Oliver / Hatcher contract. Thereafter, Shain Park sent notice of a claim to Oliver / Hatcher alleging approximately $2,000,000.00 in damages for shoddy masonry work. Oliver / Hatcher filed an action for declaratory judgment seeing a judicial determination that it wasn’t liable to Shain Park due to the fact that it had never agreed in writing to the assignment of the rights in its contract to Shain Park as required by Section 13.2.1 of A201 – 1997.
The trial court concluded that the lender and 250 Martin Associates had breached the AIA contract by assigning rights without the prior written consent of Oliver / Hatcher, and that as a consequence the assignment was void. Shain Park appealed. The Michigan Court of Appeals recited the legal axiom that where contract language is clear, the intent of the parties must be ascertained by looking only at the contract language itself.3 Applying that principle to the language at issue, the court noted that the language does not expressly exclude the possibility of an assignment. Indeed, it contemplates an assignment in that it precludes the assignor from escaping its contract obligations in the event an assignment is made. The court specifically noted;
The AIA made a classic mistake in A201-1997, subparagraph 13.2.1, of not precluding assignability, but simply stating that neither party `shall assign.'This language is a promise not to assign. Breach of the promise would expose the assignor to a claim for breach, even though damages are almost impossible to show, but any assignment would still be valid.
In sum, the language is merely a promise not to assign, and while it does subject a party who violates that promise to damages (the same as would be the case where a party breaches any other contract obligation), it does not invalidate an assignment made in contravention of that clause. As a result, Oliver / Hatcher could sue the lender and 205 Martin Associates for breach of the promise not to assign (although the court noted a breach of that promise carried no real damage), but the assignment to Shain Park was itself valid.4
A summary review of the law in other states reveals that this proposition is well settled across the nation.
As a consequence, despite what the AIA documents say, they are freely assignable without the written consent of the Architect. I was approached recently regarding a case where this principle had surfaced again with the request that AIA Michigan consider submitting an amicus brief in support of the position that the assignment was itself invalid. Before taking any position, the wise course was to query the AIA documents committee to determine their intent. After some delay, the response from counsel for the documents committee was that they had intended the contracts to be freely assignable and that the language was not a mistake . . . yes – you heard that right – the documents committee position is that they intended the contracts to be freely assignable and that their intent is consistent with the position taken by the courts. Of course if the documents didn’t contain a clause addressing assignability at all, they would be freely assignable. Why they would contain a clause that appears to be contrary to that intent isn’t at all clear.
Irrespective of what on the surface appears to be a nonsensical documents committee position (which one could surmise is simply an unwillingness to confess an obvious mistake), one might venture a guess that virtually every Architect who reads these contracts concludes that they may not be assigned unless he or she affords written permission for the assignment. That obviously isn’t the case.
So can an Architect actually prevent his or her contract from being assigned without his or her written permission? The answer is yes . . . and fortunately the remedy is exceedingly simple. Where language is added that voids an assignment made in contravention of the prior written permission requirement, that result is easily achieved. For example, consider making a simple change to add one sentence and write the clause like this;
B101 – 2007 Standard for of Agreement between Owner and Architect
10.3 The Owner and the Architect, respectively, bind themselves, their agents, successors, assigns and legal representatives to this agreement. Neither the Owner nor the Architect shall assign this Agreement without the written consent of the other, except that the Owner may assign this Agreement to a lender providing financing for the Project if the lender agrees to assume the Owner’s rights and obligations under this Agreement. Any assignment made in contravention of the requirement of written consent of the other party shall be absolutely void
Where contract clauses specifically say that assignments without the required consent are void, they are routinely upheld as written.5
While it is generally well settled, contract law remains a tricky subject for the uninitiated (and indeed, at times for the initiated). This is a relatively routine issue on which the AIA documents fail to produce the result they suggest they will produce. This is but one example. Fortunately this one can be easily remedied. Unfortunately, some we will discuss in the future not so much so. In any case, taking the advice of someone at face value without a thorough understanding of the underlying law can work unexpected results, and is often wrought with peril.
As always, this information is informational only and does not constitute legal advice. You should always consult an Attorney knowledgeable in the area of law from which your question derives in your particular state or locale.
1 Condominiums drive a sufficiently large segment of claims against Architects such that many insurers place limits on the quantum of condominium projects they will insure across their entire policy portfolio. In reality, the problem isn’t so much condominiums per se as contracts that can be enforced by those who weren’t privy to the design process, and don’t appreciate (or don’t care) that a decision to limit quality to lower initial costs will necessarily increase long term costs.
2 The same clauseappears in every AIA contractform document.
3 See generally Forge v Smith, 458 Mich 198; 580 NW2d876 (1998)
4 The court also noted that Restatement Contracts,2d, § 317, which states: (2) A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested, . . . (b) gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective is in accord.
5See Hy King Assoc, Inc v Verstatech Manufacturing Industries, Inc,826 F Supp 231, (E Dist Mich, 1993): (the contract language provided "Any attempt at assignment without such written consent shall be deemed null and void and of no effect."); Employers Mut Liability Ins Co of Wisconsin v Michigan Mut Auto Ins Co,101 Mich App 697, 701-702; 300 NW2d682 (1981) (wherethe contract language provided "This insurance shall be void in case this Policy or the interest insured thereby shall be sole, assigned, transferredor pledged without the previous consent in writing of the Company."). A survey review reveals that the law in other states is in accord.
Copyright 2013, Frederick F. Butters
No claim to Public Works
Please contact us if you wish to discuss how any of these developments impact your practice or if you wish to discuss any of these issues, or other legal issues in further specific regard.
Frederick F. Butters, PLLC Attorney at Law 26677 West 12 Mile Road, Southfield, Michigan 48034
(248) 357-0831 (248) 357-0832 (fax)
All Rights to Original Work Reserved Copyright, 2013