The Massachusetts Supreme Judicial Court issued a very significant ruling yesterday regarding the use of the CM-At Risk delivery method, particularly on public jobs.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, the Court held that a construction manager who performed preconstruction services to assist in the development of plans and specifications did not waive the owner’s implied warranty as to the sufficiency of the plans and specifications. In addition, the Court held that the contract’s language requiring the construction manager to indemnify the owner from any subcontractor claims did not bar the construction manager from suing the owner – even to pass along a subcontractor’s claim – for a claim based upon errors in the plans and specifications.

The Massachusetts Division of Capital Asset Management and Maintenance (“DCAM”) entered into a contract with Ellenzweig Associates to prepare designs to build a psychiatric facility at the site of the Worcester State Hospital (“Project”).

When the designs were partially completed, DCAM entered into a contract with Gilbane Building Company (“Gilbane”) as the CMAR. Gilbane then entered into a subcontract with Coghlin Electrical Contractors, Inc. (“Coghlin”), to perform electrical work. The subcontract incorporated by reference the terms of the contract between DCAM and Gilbane. A dispute arose between Coghlin and Gilbane regarding additional costs that Coghlin alleged resulted from various scheduling, coordination, management, and design errors. After Coghlin filed suit against Gilbane, Gilbane filed a third-party complaint against DCAM, asserting that, "in the event that Coghlin proves its claims against Gilbane," DCAM committed a breach of its contract with Gilbane by refusing to pay Gilbane the amounts claimed by Coghlin. DCAM filed a motion to dismiss the third party complaint claiming that Gilbane could not obtain indemnification for design defects when Gilbane had participated in the development of plans and specifications for the Project.

The Massachusetts Superior Court had originally held that a Construction Manager who provides design assist services could not make a claim against the owner when later problems arise on the job due to defects in the plans and specs. That lower court held that although Massachusetts recognizes the “Spearin Doctrine,” in which the project owner gives an implied warranty regarding the feasibility of the designer’s plans and specs, the CM could not raise that warranty, given their role in developing the plans and specs. The Court also held that the contract’s indemnification language (which required the construction manager to indemnify the owner from subcontractor claims) constituted a further waiver in this case, since the dispute originated with a subcontractor’s complaint regarding the plans and specs.

The Massachusetts Supreme Judicial Court reversed the lower court’s decision, holding:

“(1) under our common law, a public owner of a construction management at risk project gives an implied warranty regarding the designer's plans and specifications, but the scope of liability arising from that implied warranty is more limited than in a design-bid-build project; (2) the construction management at risk contract in this case did not disclaim the implied warranty; and (3) the indemnification provision in the contract did not prohibit the CMAR from filing a third-party complaint against the owner that sought reimbursement under the implied warranty for damages claimed by the subcontractor arising from the insufficiency of or defects in the design.”

The SJC reached its decision in part based on the fact that “t]he possibility that the CMAR may consult regarding the building design does not suggest that the CMAR should be the guarantor against all design defects, even those that a reasonable CMAR would not have been able to detect.” The SJC found that the scope of the implied warranty will depend upon whether the CMAR “acted in good faith reliance on the design and acted reasonably in light of the CMAR's own design responsibilities.” In making such determinations, courts will need to consider 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.” The SJC signaled that “[t]he 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 is a significant decision because the lower court’s ruling, if upheld, would have a chilling effect on construction using the CM-At Risk method as builders would be far more hesitant to provide design assist services, if they thought that doing so would make them responsible for the entire design.

For further information, please contact Ken Rubinstein at 617.226.3868 / [email protected]; or Nathan Fennessy at 603.410.1528 / [email protected].