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Construction Manager At-Risk Can Seek Indemnification For Design Errors

By on September 29, 2015

Earlier this month, the Massachusetts Supreme Judicial Court (“SJC”) held that a construction manager at-risk can seek indemnification for design errors.  The recent decision, Coghlin Electrical Contractors, Inc. v. Gilbane Building Company (SJC-11778), involved the construction of a facility for the Massachusetts Division of Capital Asset Management and Maintenance (“DCAM”).  DCAM, as the owner, contracted with Ellenzweig Associates to prepare the project designs.  When the project designs were partially completed, DCAM entered into a contract with Gilbane Building Company as the construction manager at-risk (“CMAR”).  Gilbane then entered into a subcontract with Coghlin Electrical Contractors

CMAR contracts have become very popular in Massachusetts, particularly in public construction projects.  Unlike traditional construction contracts where contractors submit bids based upon a set of design specifications, a CMAR contractor works as a sort of consultant to the construction and assumes the responsibility of cost overruns.  In the instant case, Coghlin submitted a request to Gilbane to cover Coghlin’s cost overruns, which allegedly resulted from faulty project designs.  When Gilbane failed to cover these cost overruns, Coghlin sued Gilbane and then Gilbane sued DCAM for a breach of warranty and to indemnify Gilbane for the cost overruns. 

The case ultimately made its way to the SJC, which ruled that Gilbane could proceed against DCAM for indemnification.  The Court held that when the legislature enacted G.L. 149A, which governs CMAR contracts in public construction, it did not intend to “abolish the owner’s implied warranty and to require the CMAR to bear the entirety of the risk arising from design defects…”  It further held that if “Gilbane is found liable for additional costs to Coghlin, Gilbane may be able to recover, but only to the extent that the additional costs were caused by Gilbane’s reasonable and good faith reliance on the defective plans and specifications…” 

The SJC’s opinion did not provide a blanket protection for CMARs against all design responsibilities.  After all, depending on the particular contract, a CMAR may be intimately involved in the design phase.  The Court clarified by stating:

The general contractor in a design-bid-build project may benefit from the implied warranty where it relied on the plans and specifications in good faith, but the CMAR may benefit from the implied warranty only where it has acted in good faith reliance on the design and acted reasonably in light of the CMAR’s own design responsibilities.  The CMAR’s level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CMAR may affect a fact finder’s determination as to whether the CMAR’s reliance was reasonable.  The greater the CMAR’s design responsibilities in the contract, the greater the CMAR’s burden will be to show, when it seeks to establish the owner’s liability under the implied warranty, that its reliance on the defective design was both reasonable and in good faith.

This ruling will have a significant impact on construction contractors throughout Massachusetts.  Owners, contractors and subcontractors involved in CMAR contracts should contact their Massachusetts construction lawyer to discuss the implications of the SJC’s ruling.