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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 Prime Contractors.
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- The most common complaint voiced by prime contractors
against design professionals is that of
undercertification. When a design professional
undercertifies a payment request, they are recommending
that too little money be paid out by the owner to the
prime contractor. The prime contractor might claim that
the design professional was negligent and undercertified
the work because the design professional failed to
accurately measure the progress of the work. If the
design professional does undercertify payment, the prime
contractor may be harmed and denied needed resources to
complete its work, possibly resulting in a default. In
the case of defective work, the prime contractor will
undoubtedly point to the payment certificates which are
issued by the design professional as evidence that the
owner and the design professional accepted the work.
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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.
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- In the case of defective work, the payment certificates
issued by the design professional are typically used by
the owner to attempt to hold the design professional
responsible for the contractor's work. The owner may
allege that the design professional was responsible for
inspecting the work prior to issuing payment certificates
to make sure that the work conformed with the Contract
Documents. Owners may also view payment certificates as a
guarantee by the design professional that the work was
properly done.
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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.
- Negligent Overcertification Cases.
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- There have been few reported decisions in Illinois
regarding the potential liability exposure of a design
professional for undercertifying or overcertifying
payment requests. Beginning with the case of City of
Chicago v. Agnew, 106 N.E.2d 252, 264 Ill. 288,
Illinois courts have held that contractors and sureties
have standing to assert claims of "negligent
overcertification" against owners and others with
whom they are in direct contractual privity. The law is
much less clear, however, whether those same contractors
and sureties would have standing to assert claims of
"negligent overcertification" against design
professionals with whom they do not have contractual
privity.
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- The court in Southern American Insurance Co. v. E.W.
Corrigan Construction Co. et. al., 1991 U.S. Dist.
Lexis 10368 (N.D. Ill. 1991) held that the surety of a
subcontractor, who defaulted on the job, could not bring
an action against the architect who allegedly
overcertified the work of the subcontractor, thereby
depriving the surety of its primary source of security to
mitigate the costs of completing the subcontractor's
work. The court reasoned that neither the subcontractor
nor the surety had a contract with the architect and
therefore the architect owed no legally cognizable duty
to the subcontractor or the surety. As support for its
decision, the court cited the well known decision of Moorman
Mfg. Co. v. Nat'l. Tank Co., 91 Ill. 2d 69, 61 Ill.
Dec. 746, 435 N.E.2d 443 (1982), which prohibits the
recovery of economic loss in tort actions.
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- More recently, Judge Jack Hoogasian of the Circuit Court
of Lake County in Montessori School of Lake Forest v.
Aetna Casualty and Surety Company of Illinois, et. al.,
92 L 1027 (1994), held that a surety could bring a claim
for "negligent overcertification" against an
architect with whom the surety had no contractual
privity. In that case, the Montessori School of Lake
Forest, as owner, filed a lawsuit against the General
Contractor who worked on the job and its surety for
defective work. The surety filed a third-party complaint
against the architect alleging that the architect
negligently overcertified payments due the General
Contractor, thereby reducing the amount of funds needed
to complete the work. The architect moved to dismiss the
third-party complaint on the grounds that the surety was
not a third-party beneficiary to the Owner/Architect
Agreement and that the surety could not recover economic
losses against the architect for its alleged negligent
certification of payments.
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- The surety filed a brief in response to the architect's
motion to dismiss and argued that the surety was a
third-party beneficiary to Owner/Architect Agreement
because the surety was explicitly given the right to use
any retainage to complete the job and was to benefit by
the use of this retainage. The surety also argued that
regardless of whether it was a third-party beneficiary to
the Owner/Architect Agreement, the architect owed the
surety an independent duty to correctly estimate the
progress of the work and to only certify and approve
conforming work for payment. The surety stated that the
architect's representations concerning certification of
payments were negligent and because the architect was
allegedly in the business of supplying information, the Moorman
doctrine did not apply and the surety could bring a claim
for negligent overcertification. The court, in an
unpublished opinion, held in favor of the surety.(1)
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.
- The Design Professional Should Only Be Held To A
"Negligence" Standard.
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- Both the B141 and A201 Agreements seek to limit the
liability exposure of the design professional, for
issuing payment certificates, by creating a negligence
standard. These standard forms of agreement carefully
provide that such certificates are based upon the
"knowledge, information and belief" of the
design professional, making it clear that the design
professional shall be held only to the professional
standard of care -- not a guarantee -- in the exercise of
its certification function. Paragraph 2.6.10 of the B141
Agreement sets forth the primary duties of the design
professional to issue payment certificates:(2)
- "The Architect's certification for payment
shall constitute a representation to the Owner,
based on the Architect's observations at the site
as provided in Subparagraph 2.6.5 and on the data
comprising the Contractor's Application for
Payment, that the Work has progressed to the
point indicated and that, to the best of the
Architect's knowledge, information and belief,
quality of the Work is in accordance with the
Contract Documents. The foregoing representations
are subject to an evaluation of the Work for
conformance with the Contract Documents upon
Substantial Completion, to results of subsequent
tests and inspections, to minor deviations from
the Contract Documents correctable prior to
completion and to specific qualifications
expressed by the Architect. The issuance of a
Certificate for Payment shall further constitute
a representation that the Contractor is entitled
to payment in the amount certified. However, the
issuance of a Certificate for Payment shall not
be a representation that the Architect has (1)
made exhaustive or continuous on-site inspections
to check the quality or quantity of the Work, (2)
reviewed construction means, methods, techniques,
sequences or procedures, (3) reviewed copies of
requisitions received from Subcontractors and
material suppliers and other data requested by
the Owner to substantiate the Contractor's right
to payment or (4) ascertained how or for what
purpose the Contractor has used money previously
paid on account of the Contract Sum."
- In addition to limiting the design professional's
certification by a "knowledge, information and
belief" standard, Paragraph 2.6.10 sets forth other
protections for the design professional. As discussed in
Section III (C) of this Article, Paragraph 2.6.10
attempts to absolve the design professional from having
any control over the work and from making continuous or
comprehensive on-site inspections. This language is
important to the design professional because it specifies
that any on-site visits made by the design professional
are for checking the progress of the work, rather than an
"inspection" of the work for compliance with
the contract documents, which can give rise to a
negligence or Structural Work Act claim.
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- Paragraph 2.6.10 also gives the design professional the
right to retract his previous representations that the
Work is in accordance with the Contract Documents,
"subject to an evaluation of the Work for
conformance with the Contract Documents upon Substantial
Completion." This language, once again, illustrates
the narrow purpose of the payment certificates and makes
it very difficult for an owner or surety to argue that a
design professional should be held liable for contractor
deviations at the progress payment stage.
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- The significance of including exculpatory language, like
that used in the AIA standard form agreements, is
underscored by the fact that some owners believe that by
issuing payment certificates, the design professional is
giving his "guarantee" or
"certifying" that the contractor has complied
with the plans and specifications. Of course, if the
design professional actually "certifies" that
something is perfect, he is assuming a level of liability
well beyond the standard of care required by the law.
This is significant for insurance reasons, as well as
potential liability reasons, because certificates for
payment can be construed to be warranties or guarantees,
especially when the certificate contains representations
of fact upon which the Owner will rely, and the design
professional's insurance does not typically cover claims
for breach of warranty:
- "This insurance does not apply to liability
assumed by you under any contract; but that this
exclusion does not apply if you would have been
liable, in the absence of such contract, due to
your own error, omission or negligent act."
- When negotiating an Owner/Architect Agreement, the design
professional should explain to the owner that the
provisions in the B141 and A201 Agreements, which provide
that payment certificates are issued based upon the
design professional's "knowledge, information and
belief," benefit both the design professional and
the owner by triggering the design professional's
insurance coverage. If the owner wants the design
professional to be exposed to liability which is not
covered by insurance, the design professional should
request to be paid for those services and more money
should be allocated for comprehensive site inspections by
the design professional.
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.
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- Typically, the design professional compares the
percentage of work completed against the schedule of
values, rather than attempting to analyze the actual
value of the work. Nonetheless, some owners are now
requiring the design professional to certify that the
original schedule of values submitted by the contractor
accurately allocates the contract sum among the various
trades in order to avoid contractor front loading. An
example of this type of responsibility is as follows:
- Design Professional shall review and approve the
Contractor's schedule of values and certify that
the schedule accurately represents the amounts to
which the Contractor should be entitled for the
Work described in each line item and that the
Contractor's schedule of values is of sufficient
detail to allow the Design Professional to
certify that the Contractor's Applications of
Payment are accurate representations of the value
of the Work put in place.
- If possible, the design professional should avoid taking
on this type of responsibility. The design professional's
duty to issue payment certificates should only be an
indication that the work "has progressed to the
point indicated" (see A201, 9.4.2), and not a
summary of how the money was spent. It should be left up
to the owner/lender to make sure that the money paid to
the contractor is used properly.
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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
- 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. Compnany 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).
- 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 consitute legal
advice. For legal advice and assistance, please contact competent
counsel in the jurisdiction of your professional practice.
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