By Michael C. Loulakis and Lauren P. McLaughlin
Design professionals face myriad potential liability in their contracts with clients and, as a result, seek to avoid risk-shifting provisions in their contracts wherever feasible. Another area of concern for architects and engineers, however, concerns legal liability to third parties with whom they have no contracts. For example, design professionals at times must contend with third-party claims for negligence or, perhaps even worse, tortious interference with contractual relations.
Tortious interference with a contract occurs when one party improperly induces a breach of contract between two other parties.
While most claims for negligence against architects/engineers are barred by the economic loss rule (i.e., you can’t sue a party with whom you don’t have a contract for purely money damages), tortious interference claims create some unique issues. How valid are these claims generally, and what can those in the engineering community do to avoid these kinds of claims? Before tackling those two questions, we first address the legal standard and burden of proof for tortious interference.
Tort laws vary by state. However, most states require that in order to successfully bring an action for tortious interference with contract, the claimant must prove: 1) a valid contract between two parties, 2) a third party knew of the contract between the two parties, 3) the third party intentionally and improperly interfered with the contractual relationship, 4) that interference caused harm to the contracting parties or induced a “breach” between them, and 5) the claimant incurred damages as a result of the interference. As you can see, the first, second, and fourth prongs are rather straightforward. Courts and litigants wrestle with whether an A/E intentionally or improperly interfered with a contract.
Ultimately, courts will take into account a number of factors, including the nature of the conduct, the motivation by the alleged interferer, the interests that were interfered with, the benefits sought by the interfering party, and the business relationship between the two parties.
How often are tortious interference claims against A/Es considered valid?
The most common example of a claim against an A/E for tortious interference involves a scenario in which the A/E allegedly conspires to have the general contractor terminated and takes actions to make that happen. Below are three recent examples where an A/E was sued by the contractor and attempted unsuccessfully to get these claims dismissed. As you read these cases, remember that the standard for early dismissal is narrow; i.e., assuming the contractor’s version of the facts is true, is there a permissible cause of action against the A/E?
These three courts denied motions to dismiss by A/Es, meaning that the cases would then go to trial on the merits or, perhaps more likely, settle before trial.
Example 1: A federal judge in Massachusetts determined that a contractor’s lawsuit against an architect could proceed where the contractor alleged that the architect falsely certified grounds for termination to the project owner. In Barr Inc. v. Studio One Inc., the court held that the contractor had the burden to show that the architect acted with “improper motive or means.” In Barr, one of the contractual grounds cited in the termination was the contractor “repeatedly refusing or failing to supply enough properly skilled workers.” The contractor alleged that the architect knew this statement was not true through purported admissions in the architect’s own correspondence and through meeting minutes. The contractor asserted that the architect stood to gain financially and secure benefits with respect to compensation for post-termination services that would otherwise not have been available.
The architect sought to dismiss the lawsuit, arguing that the contractor did not allege it acted with “actual malice,” which is more stringent than the “improper motive” standard. The court held that a tortious interference claim does not require a showing of actual malice. Instead, the contractor’s allegations that the architect knowingly certified false grounds for termination that the owner relied upon was enough for the suit to survive a motion to dismiss.
Example 2: In another recent case in New York, Tekton Builders LLC v. 1232 Southern Blvd LLC, owner/defendant 1232 Southern Blvd contracted with Tekton Builders to act as a construction manager for the construction of a charter school. While the decision is not clear, it appears that Tekton was an at-risk CM working as a general contractor. TEC Building Consultants, an architecture firm, was engaged as the owner’s representative on the project to, among other things, review payment requisitions, monitor the performance of all contractors on the project, and advise the owner as to all aspects of the project. Tekton was ultimately terminated by the owner before the completion of the project.
After being terminated, Tekton sued TEC for tortious interference with its contract with the owner by purportedly causing the owner to breach the CM agreement by terminating Tekton. With scant factual discussion in the written opinion, Tekton’s allegations generally stated that: a) TEC knew Tekton from an earlier and unrelated project, b) TEC made false statements about Tekton to the owner, and c) TEC’s conduct was motivated by a “vendetta” that it had against Tekton. Tekton alleged that TEC intentionally procured Tekton’s breach of its downstream subcontractors by causing the owner to fail to promptly pay invoices and approve change orders, which in turn, allegedly caused Tekton to miss its contract deadlines with its subcontractors.
TEC unsuccessfully asserted an “adviser privilege” defense. This basically means that an agent (i.e., an A/E) cannot be held liable for inducing its client (i.e., the owner) to breach a contract where it is acting on behalf of its client and acting within the scope of its authority. The court rejected that defense in this case, as it noted that Tekton alleged that TEC’s conduct was motivated by a vendetta that resulted from a dispute on another project. This means that potentially, assuming all the allegations were true, TEC was not acting within the scope of its duties when it made these statements. As such, the claims were allowed to proceed.
Example 3: A very recent case involved a terminated subcontractor who sued the project engineer’s subconsultant for interference with contract and negligence. While the negligence count was dismissed at an early phase, the tortious interference count stuck and was allowed to proceed. In Petric & Associates Inc. v. Travelers Casualty and Surety Co., a general contractor was hired by the New York City Department of Transportation on a ferry building project. The NYCDOT separately hired an engineering firm (HAKS), who in turn hired the defendant (KTA-Tator) to inspect the plaintiff-subcontractor’s work (Petric). Petric was ultimately terminated by the general contractor.
Without much factual discussion, the court’s written opinion outlines the subcontractor allegations as follows: KTA-Tator was negligent in performing its inspection of the plaintiff’s work, leading to delays and increased costs. The trial court dismissed the negligence claim but allowed the tortious interference claim to proceed because a “question of fact” existed as to whether KTA-Tator’s actions rendered the subcontractor’s performance impossible and whether KTA-Tator’s actions caused the plaintiff to breach its subcontract with the general contractor.
Note that in this case the court found that KTA-Tator could not rely on the adviser privilege defense because it was not an adviser to the general contractor, which is the party that terminated the subcontractor. A different result might have occurred if the general contractor had hired KTA-Tator to do the inspections.
How can the engineering community limit its liability to these tort claims?
An A/E can seek to limit its exposure to these kind of tort claims by carefully negotiating its contracts to include provisions that it owes no duty to third parties (included in most industry standard contracts). It might further have contract language that the A/E’s actions in performing its contractual duties in reviewing payment requisitions and making recommendations to the owner on terminations is expressly considered within the scope of its professional duties (to help establish the adviser privilege defense).
A/Es can also seek to require indemnity by the owner to defend and indemnify the design professional from third-party claims for tortious interference with contract. Finally, A/Es can clearly document the substantive, factual, and objective merit supporting the termination decision and recommendation made to owners. All of these will serve as useful tools in the event of a tortious interference claim against an A/E.
While the three recent examples demonstrate claims that were allowed to proceed (and all involve terminations), A/Es can take heart that not all claims for tortious interference get the proverbial green light. In a recent case against an architect for tortious interference with contract, the low bidder on a school contract alleged that its prospective contract was interfered with when the architect recommended the school district award the contract to the second-lowest bidder. The court determined the suit should be dismissed because an unsuccessful bidder does not have a valid business expectation of being awarded a contract on a public construction project.