GRSM Boston Team Secures Complete Defense Victory for Architecture Firm in Arbitration of $1 Million Design Defect Claim

April 2024

Gordon Rees Scully Mansukahni Boston Partner Jay S. Gregory and Associate Shaun D. Loughlin recently obtained a favorable decision from the American Arbitration Association on behalf of GRSM’s client, an architecture firm facing claims of design defects on a multi-family housing project in Boston. Following eight days of witness testimony and pre- and post-hearing briefing, the arbitration panel issued a decision awarding the claimants $0.00, dismissing all three causes of action brought against GRSM’s client.

The dispute arose from the design and construction of a 211-unit apartment building and an adjacent 38-unit condominium building in the City of Boston. GRSM’s client served as the architect of record for the original owners, who subsequently sold the properties to the claimants mid-project. At the time of sale, the project’s general contractor was obtaining all necessary building permits, and GRSM’s client expressly informed the claimants’ representatives that further design services would be required to complete the project.

After the project achieved substantial completion, the claimants filed a demand for arbitration against GRSM’s client, seeking over $1 million in damages incurred in paying change orders on increased construction costs because of GRSM’s client’s allegedly negligent design. The claimants argued that GRSM’s client represented that its design was complete when they purchased the properties and that no further changes would be required during construction.

In their pre-hearing brief, Gregory and Loughlin argued that both the economic loss doctrine and the parties’ waiver of consequential damages barred the claimants’ claims because the claimants only incurred damages in the form of lost potential profits when they sold the completed project to its now-current owners. Specifically, the claimants earned approximately $80 million in profit from the sale but argued they should have received $81 million but for the change orders at issue.

The project’s general contractor and mechanical engineer each testified in favor of GRSM’s client at the arbitration hearing, establishing that the change orders did not arise out of negligence but rather because of design revisions requested by the claimants themselves or from directives issued by the City’s building agencies and utility companies who held ultimate approval over the completion and opening of the two residential buildings.

Through rigorous cross-examination of the claimants’ chief witness, Gregory and Loughlin elicited testimony suggesting that the claimants carried contingency funds in their construction budget to cover change orders on the project and obtained a mid-hearing order compelling the claimants to produce documents evidencing the claimants’ contingency budget. Gregory and Loughlin then recalled the claimants’ chief witness for a second day of testimony, during which he admitted the claimants utilized contingency to fund a majority of the change orders at issue without ever increasing their construction budget.

Gregory and Loughlin also obtained testimony from the claimants’ expert witness that a majority of the change orders at issue did not amount to recoverable damage, as they either provided added value or “betterment” to the finished project and/or were caused by owner-requested and City-requested changes. The claimants’ expert also conceded that the total cost of change orders only amounted to 1.5 percent of the project’s construction costs and that such a rate of change would be expected within the architectural industry.

Following the post-hearing briefing, the arbitration panel issued a written decision dismissing the claimants’ claims for negligence and gross negligence. The economic loss doctrine limited the claimants to their breach of contract claim, absent any claim for personal injury or property damage. The panel found in favor of GRSM’s client on the breach of contract claim, holding that GRSM’s client did not breach the parties’ contract in rendering design services nor the standard of care set forth within the contract. The panel further noted that the frequency of change orders on the project, which only increased the project’s construction cost by 1.5 percent, fell well within the industry-recognized rate of change on a project of this magnitude, demonstrating that GRSM’s client performed adequately, and delivered a project well within the anticipated budget.

The decision highlights a case in which Gregory and Loughlin were able to employ a somewhat unique and oft-debated legal issue regarding the application of a “global” standard of care defense by successfully arguing that GRSM’s client’s design elicited change orders fell below a given, industry-recognized threshold of expected change on a construction project, thereby evidencing adherence to the design professional standard of care.

This decision also highlights the strength of GRSM’s Construction practice group in Boston, which is equipped to handle disputes in nearly any venue. The Construction practice group is able to navigate complex legal terrain, offering comprehensive support and effective dispute resolution for construction clients, including architects, engineers, design professionals, design joint ventures, owners, developers, property managers, general contractors, subcontractors, material suppliers, product manufacturers, lenders, investors, state agencies, municipalities, and other affiliated consultants and service providers.