Improper or Incomplete Construction Observation Services Can Give Rise to Fraud Claims
Sarah A. Johnson, Esq.
Most design professionals do their best to avoid professional liability claims as a matter of course. However, even the most careful design professional may find themself a defendant in civil litigation where the quality of their work is being questioned. The most common claims pursued against design professionals are for breach of contract and negligence/professional negligence.
Under certain circumstances, however, a design professional may find themself the subject of a fraud claim. When a design professional is faced with a fraud claim, it is often easy to identify certain missteps that led to prosecution of the fraud claim. Often, these missteps could have been remedied and thus the fraud claim could have been avoided.
In most jurisdictions, the elements of a fraud claim are as follows: (1) the defendant made a false statement to the plaintiff; (2) the defendant knew the statement was false (or was at least recklessly indifferent as to its truth); (3) the defendant intended for the plaintiff to rely on the false statement; (4) the plaintiff had a right to and relied on the false statement; and (5) the plaintiff suffered damages due to said reliance.1
A couple of cases illustrate the typical circumstances in which a design professional may be subject to a fraud claim. In Holy Cross Parish v. Huether, the Supreme Court of South Dakota found that facts pled against an architect suggested that the architect knowingly misrepresented the actual condition of fill upon which an auditorium was built when it signed the final certificate of completion for the building.2 The case involved a claim of fraud by the plaintiff church against the architect hired to design an auditorium.3
During construction, the architect’s progress reports indicated that the fill procedure and materials were improper and inadequate.4 The architect requested that the contractor repair the problems.5 The problems were never remediated.6 The architect issued a final certificate, stating that the work was acceptable.7 Thereafter, the concrete floor of the auditorium began heaving and became uneven.8 The court found these facts sufficient to state a claim against the architect for fraud despite the fact that the church was aware of the architect’s reports finding the fill to be improper and inadequate and given the architect’s later certification.9
In Diamond Beach Condo. Association v. Restoration Engineering, Inc., the United States District Court for the District of Maryland found that an architect’s failure to disclose window defects and the architect’s representations that the contractor had substantially completed its work while defects were ongoing could be the basis of a fraud claim against the architect.10 The case involved a fraud claim by a condominium association against the architect hired to do the design work for a façade restoration.11 The condominium association claimed that it relied on the architect’s written observations and representations in paying the contractor.12 The court found that the condominium association sufficiently alleged fraud against the architect. 13
As these cases illustrate, fraud claims typically arise out of the design professional’s construction observation, inspection, or certification services. Accordingly, the design professional should approach these services with the utmost care and precision. Obviously, the design professional should not certify that projects are substantially complete or that work was done in a manner that suggests conformance with the plans and specifications if the design professional is aware of defects in the construction. Less obvious is the fact the design professional should not make such certifications when it has not had the opportunity to actually view the construction work in accordance with its contractual duties to do so.
Most design professionals avoid the perils of making certifications with actual knowledge of defects. However, design professionals can sometimes be convinced to make such certifications in the latter instance where they have not had the opportunity to view the necessary components and thus lack the knowledge to do so.
Apart from the embarrassment and liability involved with fraud claims, design professionals should be aware that the fraud claims can lead to uninsured exposure. Most professional liability policies contain exclusions for at least indemnity arising from fraud by the insured. Further, fraud can lead to punitive damages, which are often excluded from professional liability policies or uninsurable under the law. Accordingly, design professionals should eliminate any fraud exposure whenever possible. Such can be accomplished when the design professionals follow their contractual obligations and complete any construction observation, inspection, and certification services with full transparency about the conditions that they observed and the conditions that they did not observe.
1 See e.g., Hirsch v. Optima, Inc., 920 N.E.2d 547, 560 (Ill. App. Ct. 2009).
2 Holy Cross Parish v. Huether, 308 N.W.2d 575, 577 (S.D. 1981).
3 Id. at 576.
4 Id.
5 Id.
6 Id.
7 Id. at 577.
8 Id. at 576.
9 Id. at 576-77.
10 Diamond Beach Condo. Ass’n v. Restoration Eng’g, Inc., No. WDQ-05-3212, 2007 U.S. Dist. LEXIS 115976, *10, 12 at (D. Md. Jan. 11, 2007).
11 Id. at *1-2.
12 Id. at *12.
13 Id. at *9-12
