EXERCISE: The Fiduciary Duties of the Architect. Introduction

Transcription

1 3-6 / 1 EXERCISE: The Fiduciary Duties of the Architect Introduction Your instructors agree that an architect has fiduciary duties to his or her client, a sometimes supervening obligation to the public, and an obligation to the art and craft of architecture including a collegial obligation to fellow architects. Each of us may give different weight to these obligations, depending on the angle of vision and predisposition each of us brings to the subject. But none of us doubts that all three obligations exist and need to be explored in a proper practice course. A position has been developed in recent years, one which challenges the proposition that an architect has a fiduciary duty to the client. That position was developed in the context of a lawsuit between a client, who asserted the existence of the architect s fiduciary duty, and an architect, who denied it. Lawsuits are not the path to pursue scholastic truth. You don't engage lawyers to pursue the truth; you engage them to make a convincing case. To succeed, the lawyer emphasizes those aspects of the matter that support his argument. He also will, to the extent he is allowed to do so without committing misrepresentation, suppress those other aspects which might undermine his argument. This case study explores both the question of an architect s fiduciary duties, and the ways in which such duties can be confirmed or altered by lawyers and judges.

2 3-6 / 2 PART 1: What is a Fiduciary? The American Heritage Dictionary defines the noun "fiduciary" as a "person who stands in a special relation of trust, confidence, or responsibility in his obligations to others, as a company director or an agent of a principal." The quintessential fiduciary is a trustee who accepts money to manage and disburse for the benefit of a beneficiary (the person to whom the fiduciary assumes the obligation). The trustee is expected to manage the trust funds as if they were his own and to devote his utmost skill and care to achieve the purposes of the trust. For example, a fiduciary may not have interests in conflict with his loyalty to his beneficiary; he cannot at the same time invest his beneficiary's trust fund while making a commission on the sale of securities to the fund. In his treatise, Legal Aspects of Architecture, Engineering and the Construction Process (West Publishing, l994), Professor Justin Sweet recognized that "the retention of a professional designer by a client... creates a fiduciary relationship. The core of a fiduciary relationship is trust and confidence. To achieve these, the person to be protected by the relationship must believe in the undivided loyalty of its fiduciary... The client should be able to trust its professional adviser and receive honest professional advice." (pp ) In the litigation discussed below, the court instructed the jury that a fiduciary is bound to a standard of a high degree of honesty, loyalty, and integrity in dealing with a beneficiary and that a fiduciary has the duty to disclose, fully and fairly, all facts which materially affect the beneficiary's rights and interests regarding the transaction [as to which the fiduciary has assumed his obligation] known to or reasonably obtainable by the fiduciary. A fiduciary's duties are often contrasted with a merchant's duties in the marketplace; there "buyer beware" is a customary warning and the parties deal "at arm's length." In the marketplace, a buyer has no fiduciary and should assume a seller is acting in his own interest. 1.1 What are the obligations that arise from a fiduciary relationship? 1.2 Which of the fiduciary obligations matter to the architect s client? 1.3 Do the fiduciary obligations trump your own self-interest?

3 3-6 / 3 PART 2: The Lawsuit: Lake Merritt Plaza v. Hellmuth, Obata & Kassabaum, Inc. HOK was engaged to design a 27-story office building in Oakland, California. The building's curtain wall began to leak not long after substantial completion. After several unsuccessful attempts by the architect and the contractor to solve the problem, extending over a period of several years, the owner, estimating the repair would cost over $7 million, brought suit. The owner settled with the contractor for $700,000, but continued to pursue HOK. At the trial, there was convincing evidence that HOK was aware of failures in the curtain wall design when a mock-up of the wall had been tested in Florida. However, HOK failed to disclose those failures to the Owner. Instead of reporting to the Owner the mock-up test lab report, HOK had written the Owner that the test demonstrated that the curtain wall was satisfactory. In this country we have statutes of limitations which fix the time within which a lawsuit must be brought. The policy behind these statutes is that a claim must be brought when it is ripe; the injured party may not wait until critical evidence has disappeared or critical witnesses become unavailable. Typically such statutes allow three years for negligence actions. A claim brought after the period has run is barred and will be dismissed. But when does the time period begin? This was the critical question in the HOK case. Under California law, the statute of limitations begins to run from the moment the injured party is aware of the injury AND had knowledge of facts that would have made a reasonable person suspicious that the person to be sued was negligent or had made a negligent misrepresentation. If the beginning date were the date on which the owner knew of the leak, the passage of time would have barred the owner's claim against HOK. Of course, the owner knew it was injured because water was pouring through the curtain wall. The focus was therefore on whether and when the owner should have suspected HOK of misfeasance. Now comes the crucial effect of the fiduciary relationship; if that relationship existed, the owner was entitled to assume that HOK was acting in its behalf and was disclosing all material information to the owner concerning the curtain wall. In that case, the statute of limitations would not bar the owner's suit against HOK, and the architect could be liable to the owner for over $7 million in damages. 2.1 Why do we allow statutes of limitation to bar legitimate claims? 2.2 Which of the fiduciary obligations discussed under Part 1 are relevant here? 2.3 How does the architect s fiduciary duty affect the statute of limitations cutoff date?

4 3-6 / 4 PART 3: Was HOK a Fiduciary? The Lawyers' Argument. The owner's lawyers argued that under its AIA B-141 form of Owner/Architect Agreement, HOK had agreed to represent the owner, to review the work of the contractor, and to report to the owner whenever it observed work deviating from the contract documents. Each of these duties reflected the architect's role as the owner's agent during construction. California law defines an "agent" as one who represents another, called the principal, in dealings with third persons. There was no question under California law that an agent has fiduciary obligations to his principal. Moreover, the owner's lawyers had the benefit of an old California case, holding that an architect was the owner's fiduciary and owed the owner a "high duty" to make full disclosures. Finally, the owner's lawyers relied on Justin Sweet and the AIA's Code of Ethics to state: "An architect is a professional upon whom the client relies for advice, consultation, and representation before and during construction." HOK's lawyers undertook a more difficult task. They pointed out that the 1976 version of B- 141 had struck out most of the architect's authority to act on the owner's behalf, citing the elimination of the word "supervision" and of the architect's right unilaterally to stop the work as illustrative of the new role of the architect. HOK's lawyers argued that under this form of contract the architect had been relieved of most construction phase duties. They noted that the owner had retained a project manager to act as the owner's chief representative during construction; this project manager, and not the architect, would review the contractor s invoices, and manage communications between the owner and contractor. Finally, HOK's lawyers noted that nowhere in their contract was the word "fiduciary" or equivalent language to be found. (By contrast, the AIA form of contract between the Owner and the contractor did contain language implying a relationship of faith and trust.) In summary, the lawyers argued that the architect's role had changed: it was no longer the agent of the owner, but rather an independent contractor hired to do specific jobs. But despite these arguments, the court ruled in favor of the owner that HOK was a fiduciary. 3.1 If the proponents of fiduciary status are correct, when does the status fasten on an architect? When she enrolls at GSD? Only after registration? Only when she asks a client to rely on her judgment? 3.2 Should explicit contract language trump a fiduciary relationship? 3.3 How might changing roles in the construction process change the presumption of who is a fiduciary?

5 3-6 / 5 PART 4: Is An Architect a Fiduciary? Other Views. The HOK case has sparked a fierce debate within the architectural profession. On one side, there are those who argue that the architect s fiduciary obligation arises from the nature of its professional undertaking. Like the lawyer and the physician, the architect is a problem-solver. The client's program is the problem; designing a physical plan for her needs is the solution. The skilled architect commands a wide knowledge of the possibilities. He customarily narrows the choices and presents his client with realistic possibilities, taking into account the program, the budget, the aesthetics and the public requirements for the project. There is no "correct" solution, particularly because the factors to be taken into account will vary from client to client. The process involves the architect in the exercise of discretion over a wide range of possibilities. Because the client does not possess a knowledge of those possibilities, she must rely on the architect's expertise. That relationship will not work unless the architect, like the lawyer and the physician, assumes a fiduciary role. One might think that the debaters could turn for enlightenment to the published materials of the American Institute of Architects but that is not the case. The AIA Code of Ethics is now silent on the question of whether the architect owes his clients fiduciary duties. For many years, AIA's Code prohibited any conflict which prevented the architect from serving the best interests of his client or "which might tend to compromise his obligations to his client" (e.g., Rule 2.5 of 1964). But that language describing fiduciary obligations has disappeared from the current AIA Code. The AIA contract forms governing the owner/architect relationship are also silent on whether or not a fiduciary relationship arises. Is this silence significant? Isn't it possible that, as practice changes, the role of the architect may change as well? Charles Thomsen, a student of evolving forms of project delivery, acknowledges that architects have traditionally been at the fiduciary end of a relationship spectrum, while contractors have traditionally been at the vendor end. Architects gave advice and contractors sold a product. But, since the eighties, owners have increasingly bought services and advice from contractors (who often changed their title to "project or construction managers"); meanwhile, architects have shaved their contractual duties and even became employees of contractors. Typically the design/build organization gives the owner a product, the building, while giving the owner little input and less advice respecting the design decisions that gave rise to the building. Implicit in Thomsen's argument is the idea that parties are not bound to play one role forever; they are free to alter their role by changing the terms of their engagement. Eventually even the law will catch up with new ways of doing things. The greatest criticism of the HOK decision has come from companies that provide professional liability insurance to architects. One pamphlet captioned A E Risk Review is headlined "Avoiding Fiduciary Liability. Their advice to their insureds is that they insert the following in their owner/architect agreements: "The Client confirms that the Consultant...has not offered any fiduciary service to the Client and no fiduciary responsibility shall be owed to the Client by the Consultant..."

6 3-6 / 6 The insurer's recommendation follows a longstanding pattern. When faced with a worrisome court case that may affect their business, liability insurers recommend a change to the contract language even when the consequence may have a major and unexamined effect on the practice of architecture. Taking a similar position, the President of Cannon Design, a very large corporate architectural firm, wrote to ArchitectureBoston in the fall of 2002 criticizing a reference to architects as fiduciaries. He obviously had the HOK case in mind when he wrote: "I know of no informed or responsible architect who would view the application of fiduciary responsibility as anything other than an uninsured source of new liability which architects are neither trained nor prepared to shoulder...[f]or the sake of the profession, I hope no architect takes the author's advice to embrace fiduciary responsibility as 'an essential part of any architect's job.'" ArchitectureBoston invited two long-time observers of architectural practice in America to comment. The first wrote: "To the best of my knowledge, the recent demonization of the word [fiduciary] arose out of a California lawsuit in which the trial court judge held that an architect's field representative had a fiduciary duty to inform a client of construction defects of which the field rep had actual knowledge. The architectural firm issued a well-publicized cry of alarm in an attempt to mobilize opposition to this characterization of its duty, but the judge's analysis seemed to me consistent with what generations of architectural students have been taught... [that] good faith, trust, confidence, and candor are hallmarks of the professionalism that clients should expect and to which architects should aspire." The second observer wrote: "To shy away from the role of the client's fiduciary is just another nail in the coffin of the profession, another form of distancing ourselves from the people whom we serve." 4.1 What role do you want when you enter practice -- the vendor of a product or the provider of a fiduciary service? 4.2 HOK's case to one side, what are the ramifications of abandoning the fiduciary role in favor of a vendor role?