The Assignment of a Design Agreement Must Be Carefully Drafted

By Gail Kelley

When contemplating entering into a design-build agreement for a Project, owners often contract with a design professional to provide various services for the Project before they enter into an agreement with the Design-Builder.   Depending on what these services entail, the documents developed by the design professional may serve as the Basis of Design for the design-build agreement, or the Owner may assign the design professional’s agreement, including the documents prepared under the agreement, to the Design-Builder.   In this second case, failure to carefully draft the assignment provisions can lead to disputes over which party – the Owner or the Design-Builder – is liable for any alleged errors in the documents prepared under the agreement and consequently has the legal right to pursue  professional liability claims against the design professional.  The Connecticut Supreme Court’s opinion in Centerplan Construction v. City of Hartford, 343 Conn. 368, 274 A.3d 51 highlights the problems that can arise when a contract does not clearly state the parties’ intent with respect to the assignment.

The case involved a dispute over who was responsible for delays in construction of the Dunkin Donuts baseball stadium in Hartford, Connecticut.  The dispositive issue in the appeal before the Court was whether the Project’s Developer, DoNo Hartford, LLC (DoNo), and Design-Builder, Centerplan Construction Company, LLC (Centerplan) —”controlled” the architect and were therefore responsible for any errors and omissions in the stadium’s design and thus any consequent delays.    The Court concluded that the various agreements between the Owner (the City of Hartford) and DoNo and Centerplan (the plaintiffs) did not unambiguously establish who had legal control of the Architect during all relevant time periods and therefore remanded the case for a new trial.

The Various Agreements

On August 29, 2014, the City entered into an agreement for the stadium’s design with Pendulum Studios II, LLC,  (the “Architect Agreement”).  In February 2015,  the City contracted with DoNo to serve as the developer for the stadium (the “Developer Agreement”); DoNo, in turn, contracted with Centerplan (the “Builder Agreement”).

The Developer Agreement stated that DoNo would assume the City’s rights and obligations under the Architect Agreement and that it was the parties’ intention that DoNo “have complete control over the design and construction means and methods to be performed at the Project Facilities”, subject to the City’s approval.  Likewise, the Builder Agreement provided that, subject to the City’s rights with respect to direction or approvals of design, Centerplan would have “sole control and discretion over the design of the Project,” including all aspects of management and administration of the design and construction of the Project. 

In May 2015, the parties executed an assignment that assigned the Architect Agreement to the plaintiffs.  It is this assignment that is one of the sources of dispute, as the City argued that the plaintiffs took control over the Architect (and assumed responsibility for any subsequent design errors) upon execution of the Developer Agreement and Builder Agreement in February 2015.  In contrast, the plaintiffs argued that they had no liability for any design errors and the May 2015 assignment was only a partial assignment as the recitals at the beginning of the Assignment noted that the design was complete by May 2015, leaving only construction administration services.  

                The Court’s Ruling

The Court disagreed with both the City and the plaintiffs and held that the assignment unambiguously provided that the plaintiffs had legal control of the Architect and design upon execution of the Assignment, including responsibility for any design errors committed after that time.   The Court noted that while the Architect might have completed certain parts of its design responsibilities, this did not alter the assignment language, which transferred all “representations, obligations, terms, and conditions” of the Architect Agreement —and control of and liability for the Architect—wholly to Centerplan.  However, the Court held that the City retained responsibility for the Architect’s errors and omissions until the execution of the Assignment, despite the language in the Developer and Builder agreements with respect to control over the Architect.  The Court noted that while these two agreements were silent as to whether the parties intended for legal control of the Architect to be automatically assigned to the plaintiffs, the mere existence of the May 2015 assignment indicated that the transfer of control was conditioned on the parties entering into a separate assignment; that is,  the Assignment would have been superfluous if the plaintiffs already had legal control of the Architect.  

This did not completely resolve the parties’ dispute with respect to control over the Architect, however.  In December 2015, DoNo sent a notice of claim to the City, requesting a budget increase and time extension because of changes that the City and the baseball team had made to the design.  To resolve DoNo’s claim, DoNo and the City executed a term sheet that extended the substantial completion deadline, prevented any changes to the stadium’s design without the City’s consent, modified the liquidated damages provision in the Developer Agreement, and increased the contract amount.  The extended substantial completion deadline was not attained,  and on June 6, 2016, the City terminated both the Developer Agreement and the Builder Agreement.

In arguing over who was liable for design errors after execution of the term sheet, the plaintiffs claimed that the term sheet clearly and unambiguously gave the City exclusive control of the design. They pointed to the term sheet’s provision that any new design changes to the Ballpark required the express written consent of the City and that such consent could be withheld in the City’s sole and absolute discretion.  The City, in turn, argued that the term sheet did not cede design control to the City as it did not allow the City to make changes to the design, it only allowed the City to withhold consent to changes sought by others. The City further argued that there was no reason for the plaintiffs to cede design control to the City, in light of the new substantial completion deadline in the term sheet.

The Court held that it was not unambiguous as a matter of law as to which party had legal responsibility for the Architect and the design under the term sheet.  The Court noted that the language of the term sheet lent support to the City’s interpretation that the plaintiffs retained control of the Architect and the design, as nothing in the term sheet explicitly provided that the plaintiffs ceded control back to the City, or that the City gained or received control. The Court also noted that the plaintiffs’ December 2015 notices of claim complained that the City’s delay in assigning the Architect Agreement meant the plaintiffs would be unable to finish the stadium on time, so it would be incongruous for the plaintiffs to transfer control back to the City.

However, the Court found that the plaintiffs’ interpretation that the term sheet ceded legal control of the Architect and the design to the City was also reasonable.  Specifically, the Court noted that under the Developer Agreement, change orders requested by the Developer were subject to the approval of the City and could be granted or denied in the City’s sole discretion, but only if the change was a Material Change to the In Progress Project Plans.  The term sheet, however, provided that the City must consent to any design changes, not just material changes.  The use of this more expansive language suggests that, after the term sheet, the City gained additional control over the Architect and design.  Given the circumstances leading to the term sheet—including the City’s desire to achieve substantial completion by the revised deadline— the Court found that it is at least plausible, and perhaps logical, for the City to want greater control over the Architect and the design.

Finding that both parties’ interpretations were reasonable, the Court remanded the case so that the trial court could determine who had legal responsibility for the Architect and the design from January 2016 (when the term sheet was executed) to June 2016 (when the Developer and Builder agreements were terminated).

                Final Thoughts

While Centerplan dealt only with which party – the Owner or the Design-Builder – was liable for alleged errors and omissions in the Architect’s design, transfer of a Design Agreement can also raise liability issues for the Design Professional.  One such issue is exposure to professional liability claims from multiple claimants – e.g. Owner and Design-Builder – having divergent interests.  During the period of time that its agreement is with the Owner, a Design Professional’s duty of care is to the Owner.  However, once the agreement is transferred to the Design-Builder, its duty of care is to the Design-Builder.    The interests of the Owner and the Design-Builder may not be aligned and in providing services to the Design-Builder, the Design Professional may be required to find fault with services that it provided to the Owner.  Furthermore, as the design process typically involves successive refinements to previous work, the   Design Professional may be faced with potential liability to both the Owner and the Design-Builder for the same alleged errors or omissions.  

In situations like this, the Design Professional should ensure that there is a properly drafted design transfer agreement that is signed by all relevant parties.   The specific wording of the design transfer agreement will vary somewhat, depending on the project, but at a minimum, the Owner should assign all of its rights in the Design Agreement to the Design-Builder and the Design-Builder should agree to accept the assignment.  The Owner should also agree to waive any claims it might have against the   Design Professional relating to the Design Agreement.  For its part, the Design Professional would need to waive any claims it might have against the Owner, including any claims for payment, other than those specifically listed.  The   Design Professional should also acknowledge that it is responsible to the Design-Builder for any negligent errors or omissions in its services, retroactive to the date its services commenced under the Design Agreement.