General Contractors - Gale Warning

This is a gale warning of a Sea Change in construction law.

In the absence of a contractual provision, who bears the risk of loss if the building, structure or part of the building or structure cannot be built in accordance with the plans and specifications?  Stated in other words, who runs the risk of defective plans and specifications?  The Owner?  The Contractor? or the Architect?  This issue has plagued Texas jurisprudence since 1907 when the Texas Supreme Court decided Lonergan v. San Antonio Loan & Trust Co., 104 SW 1061 (Tex. 1907).  Under Lonergan, in order for an owner to be liable to a contractor for breach of contract based on faulty plans, the contract had to contain “express” or “implied” language that justifies finding the owner liable.  Otherwise, the contractor was liable for failing to complete the project due to faulty plans.  Since architects have no direct contractual relationship with the contractor, architects do not owe any direct contractual duty to the contractor and, therefore, if the contractor is found liable it cannot pass that risk back to the architect.

Over the last 98 years, the lower appellate courts in Texas have been attacking the Lonergan doctrine from many sides.  But it was never directly overruled by the Texas Supreme Court.

In a judgment entered April 22, 2005, the Fifth Circuit Court of Appeals, in ruling on a case from the Northern District of Texas, based its decision upon the Lonergan case stating “We conclude the Texas Supreme Court would require contractual language indicating an intent to shift the burden of risk to the owner in order to find an owner breached a contract by providing defective plans.  The contrary rule is simply not well reasoned.  ...  Accordingly, we apply the Lonergan rule to determine whether the City [the owner] breached its contract with ICC [the contractor].”

For the contractors in Texas, this Lonergan case is now a hidden reef against which your business ship may be wrecked.  You must become proactive in the contract negotiating stage to insist that your contract with the owner expressly provides that the Owner “warrants the sufficiency of the plans and specifications” in order for you to avoid the risk of having to pay and bear the costs arising from defective plans.  You should consider using “design/build” project formats so that the architect is directly responsible to you financially for defects in plans and specifications.  Alternatively, you will need to have professional assistance in reviewing plans and specifications to make sure that the architects have not made any costly errors in the plans and specifications.  Contractors, beware!