The Claims-Free Architect

Relying on Consultants

• Pro-Demnity Insurance Company • Season 2 • Episode 1

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It sometimes happens that architects take on projects that require the skill and experience that only a specialist consultant can provide. It’s easy to fall into the trap of taking responsibility in areas where your knowledge, and your ability to control events, are limited. As these two stories show, when things go wrong, it may be the Architects who are held accountable.

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Thank you for listening.

Welcome to Claims Stories – actual accounts of professional liability claims against Ontario-licensed architects, chosen from the 6,000-or-so cases, defended by Pro-Demnity Insurance Company.

The Pro-Demnity Claims Stories were originally written by David Croft.

The Stories are factual, but some elements have been altered to protect the identity of all parties involved – the guilty as well as the innocent.

Architectural practice, it seems, can be far more exciting than most people imagine.

… But in architecture, as in life, the wrong kind of excitement can be perilous.

•••••

Relying on Consultants - Episode 2, Season 2

Under the various pressures of contract administration, architects can sometimes exercise too little care when issuing certificates. As the two stories in this episode show, inaccurate, false or misleading certificates can sometimes spiral into a cumulative catastrophe.

 •••••

In this first story, an Owner-Developer prevails on an architect to issue a certificate of completion for a building that is far from complete. After 45 days, the lender releases the funds … and the client absconds with the money, leaving the architect and the lender holding the bag. For dramatic effect, we are pleased to present this story as a three-act play, entitled “No Good Deed Goes Unpunished.”

 •••••

The characters who appear in this real-life tragi-comedy include:

• Centre Savings and Loan Inc., as The Plaintiff

• Architect Albert Green and the Owner’s Legal Counsel, Manny Paradiso, as The Defendants

Making cameo appearances, are the Owner-Developer, Ernest Wender, and the Centre Savings Loans Officer, Werner Banks.

 •••••

ACT I – THE CERTIFICATES 

During construction, the Architect provides his client, the Owner-Developer with monthly progress certificates, which are then forwarded to the client’s lawyer for review, and finally to the Lender, who issues construction loan advances.

 The Architect’s certificates are based on a schedule of values prepared by the Owner-Developer and accepted by the Lender. Each certificate refers to “the contract,” and indicates the line-item percentages, dollar values, statutory holdbacks, etc.

The monthly certificates are duly processed, and the money flows.

When the building is approximately 60% complete, the Owner-Developer asks the Architect to issue a Substantial Completion Certificate. He knows his request is “unusual,” since such a certificate would require 97% completion, but he needs the money.

Albert Green is not about to risk his license by falling into this dishonest scheme – anyone can see that the building is not substantially complete – but the Owner-Developer has an ingenious solution for this. What if the architect were to issue a Certificate of Substantial Completion for the “base building”? After all, the structure is complete, and the roof is on; only interior work remains.

This plan will give the Owner-Developer just over half of the mortgage loan amount … and who would be harmed?

 The Architect is sympathetic. The plan makes sense. And the Owner-Developer, who is a decent individual, is having money problems. So, Green issues and publishes a “base building” Certificate of Substantial Completion.

 Possibly, the Centre Savings loan officer doesn’t notice the phrase “base building” or doesn’t recognize its significance. But, more importantly, Centre Savings is anxious to get the money out and the interest payments coming in. When the 45-day waiting period is up, Centre Savings releases the entirebalance of their mortgage loan to the Owner.

 Stunned and delighted by this windfall, the Owner-Developer cashes the cheque and promptly absconds. There are places in the world where a few million dollars will go a long way. Shortly afterwards, the loan officer also resigns and disappears.

 •••••

 ACT II – THE LIENS

With the disappearance of the Owner-Developer, construction comes to a halt. The many trades and suppliers who have contributed to the building now file liens. It seems that they are owed a lot of money, in addition to the retained lien holdbacks.

Centre Savings is caught off-guard. The loan has been paid out, with only half a building to show for it. They turn to the Architect and their lawyer for an explanation.

“Not to worry,” the two professionals assure them. “The Substantial Completion Certificate will protect you.”

At the lien trial, the Architect states that his certificates refer to an Owner-

Contractor Construction Contract which he has, in fact, never seen. He can’t explain why he ever assumed that there was “a contract,” since a Contractor-as-Owner doesn’t require a general contract with itself. So what or where, exactly, isthe “general contract” on which the schedule of values depends?

Regarding “base building,” the Architect thinks he is on firmer ground, and happily expounds on his version of what that term means.

 The court however is unswayed, pointing out that there is no generally understood definition of the term “base building” in the construction industry. Furthermore, none of the individual contracts with the Trades and Suppliers contains any reference to a “base building,” so how could the Architect claim that the individual Contractors should be deprived of their protection under the Lien Act, simply because he has found the term useful?

The Judge finds in favour of the lienholders. The Trades and Suppliers, he says, have every right to disregard the published certificate. It doesn’t apply to their contracts. The Judge orders that the building be sold unless payment is forthcoming. He shows no sympathy for the Architect, whose performance he calls “incompetent,” and his certificates “misleading.”

 Centre Savings pays up … a very large sum.

 •••••

 ACT III – THE LAWSUIT

To recover their loss, Centre Savings sues the Architect and the Owner-Developer’s legal counsel. In their pleading, they state: not knowing that “base building” has a special meaning, known only to the Architect and the Owner-Developer, they have relied on the Architect’s Certificate, and paid out the full amount of their loan, in return for which, they are left with a building that is only 60% complete. Furthermore, since the money has vanished along with the Owner-Developer, the holdback of 10%, is still owed to the subcontractors.

To their detriment, Centre Savings has relied on the certificate issued by a duly licensed Architect who has undertaken to be the payment certifier, as provided by the Construction Lien Act. Furthermore, they have relied upon a local lawyer, who is a friend of both the Owner-Developer and the Architect, and who has failed to protect the lender, by not examining a non-existent “contract,” and by not noticing – or questioning – the phrase “base building,” when it appeared in the Certificate.

Centre Savings is demanding payment in full for their losses.

 The Architect Green views the whole thing as grossly unfair. He has only tried to keep everyone happy, and look where it has gotten him. And he is stunned that his client has returned his kindness by leaving him holding the bag.

He believed all along that the Centre Savings lending officer, who knew the Owner-Developer as a client – and a friend – was just going with the flow. Certificates, after all, are really just “paperwork,” a necessary nuisance of no great importance.

He finds it hard to accept that, where there is no general contractor, individual “Substantial Completion Certificates” – possibly dozens of them – are required. He is also surprised that “base building” is not an accepted concept. If he understands it, why doesn’t everyone else? It isn’t his job to protect the Trades and Suppliers by explaining everything to them.

Although Green has acted as a payment certifier, in accordance with the Construction Lien Act, he has no real grasp on what that actually entails. He has, for example, never read the Act nor anything pertaining to the payment certifier’s duties; and when the claims manager shows him a copy of the Lien Act “official” blue booklet, it draws a blank stare.

He promises to study the Act to avoid mistakes in the future. 

 Where the Architect has relied on the Loan Officer, the lawyer has relied on the Architect. This is his sole explanation. Otherwise, he has little to say. He now relies on his Insurer to present his defence.

Pro-Demnity recognizes that there is no hope of a favourable outcome at any trial of the matter. The verdict of the judge at the lien action has settled that, calling the Architect’s actions “misleading and incompetent.” There is no point in having the Architect examined by the plaintiff. We have to find other defences.

First, we take the position that Centre Savings and Loan has serious “contributory negligence” to answer for. How could the loan officer not have known that the building was far from complete, having no kitchens or bathrooms installed, no painting, no elevator etc.? Surely a prudent, competent lender would have inspected the project.

Second, why has the phrase “base building” not tipped them off to some sort of strangeness? In what context could a building be referred to as both “basic” and “complete” at the same time?

Third, Centre Savings is also suing their legal counsel, who is a local professional suggested by the Owner-Developer. This person has processed all the certificates and should have been protecting the lender against liens. He should have asked to see the non-existent “contract,” and he should have noticed and questioned the phrase “base building” in the Certificate.

In the end, the matter is settled for a contribution from each party of 1/3 of the proven loss. The local lawyer’s indemnity matches our amount and Centre Savings swallows their third for contributory negligence. Legal fees, fortunately, are minimal.

 EPILOG

It’s true that in architectural practice, missteps are sometimes made. The word “practice” implies that we improve by learning from such errors. The Architect in this story made mistakes that no professional should make. The need for education is obvious.

•••••

Let’s begin with the following lessons:

Lesson No. 1: Certifying payment under the Act is possibly the most onerous professional service an architect performs. Download theConstruction Lien Act, R.S.O. 1990. It’s free. Read the Act and be familiar with it – especially Section 32, “Rules governing certification or declaration of substantial performance.”

Also, be aware that when there is no general contract, the Lien Act requires that the certifier provide a copy of the Substantial Performance Certificate to every … individual … contractor – no matter how many there are. In this instance, each of the Trades should have been given a certificate. Section 32 (4) of the Lien Act makes the certifier liable for any loss to anyone who suffers as a result of their failure to inform.

Lesson No. 2: Don’t bend the rules to accommodate a client’s wishes, especially where professional obligations are involved. When the going gets tough, your client may get going – showing that they are not nearly as considerate towards you. Remember your duty of care, and if you need support, reach out to the Ontario Association of Architects Practice Advisory Group or Pro-Demnity’s Risk Services team.

Lesson No. 3: If you are acting as payment certifier, you are to be governed by the requirements of the Lien Act. Grave risks are involved in straying from the path. 

Lesson No. 4: Never administer a “contract” that you haven’t seen and which may not even exist. This is done surprisingly often. It is never a good idea. 1701 words/

•••••

As we know, mathematics plays an important part in architecture. But it sometimes does so in unexpected ways. In this story, certificates and lenders play leading roles, and this time, it’s the numbers that trip them up.

An Architect certifies a project as 95% complete when it is barely 50% built. A lender extends a loan at a crippling interest rate, with no chance of being repaid. It’s just simple arithmetic. We call this story “Do the Math!”

•••••

Things were going really well for Sponduli Building Corp. They had built and leased a string of office buildings and had hired the Architect Jane Onley to design the last in the series. It was to be their crowning achievement.

But somehow, while the building was still under construction, escalating costs and chronic mismanagement caught up with them. Pals Finance Corporation had loaned the builder a third mortgage of, $5 million, which they advanced pursuant to the Architect’s certificates, duly processed by their legal counsel, Doe & Buck. But somehow, the money ran out. And with insufficient funds to complete the project, or to honour their debts, Sponduli found itself insolvent. Work ceased, the site was abandoned, and Pals, seized the property.

The certificates had indicated that the work was virtually complete. In fact, the last certificate – issued a few days before the job shut down, but not paid – showed 95% completion. The previous certificate, which had been paid, had shown 86% completion. As it was later revealed, the building was less than 50% complete.

Not only that, but much of the construction was deemed substandard and unacceptable, necessitating large-scale demolition and reconstruction. Not surprisingly, in taking over the building and completing it, Pals faced costs that were greatly in excess of the original valuation.

 Pals was now claiming against the Architect, their lawyers, the Structural Engineers and Sponduli. The amount of their claim was greater than the original mortgage amount – an extremely unusual circumstance, given that this was a third mortgage, at a high rate of interest, and larger than the two that preceded it. For this odd situation, Pro-Demnity received no satisfactory explanation.

 •••••

In his defence, the Architect stated that he had certified properly, perhaps a tad generously, but within “acceptable” norms. How could he be held responsible for knowing the value of the work, when he relied entirely on the schedule of values that the builder gave him? And he naturally assumed that, because this schedule was attached to each application to the lender, it had been accepted by the lender as the basis of the loan.

As construction proceeded, the Architect had made lengthy lists and had pointed out many of the defects, but she could not force the builder to do good work. The builder was, after all, her client. As insolvency approached, it was clear that the builder had started cutting corners. Meanwhile, his unpaid trades, covered up defects and sabotaged the work. The lists of deficiencies were growing.

Onley also believed that, after the departure of the builder’s forces, there had been a lot of de-construction, theft of materials and vandalism. A few subtrades, had ripped out their work and hauled it away. Through the following summer, fall and winter, the building had remained unprotected, so insulation panels decomposed, and stacked drywall dissolved into mush.

The Engineer Ben Waller had retired and was living abroad. Neither he nor his insurers showed any interest in the affair, and offered no real defence, which in any case, would probably have been similar to that of the Architect.

The lawyers Doe and Buck were in no position to defend. They were up to their eyeballs as defendants in other litigation, as well as in their own professional disciplinary process. They were represented by their insurer’s counsel, who never appeared with anything that could be called a defence.

Boris Sponduli, the Builder-Developer, was also absent from the proceedings. He was bankrupt and had nothing to offer. Only the Architect, loyal to “her client” to the bitter end, had a good word for him – despite all that had happened.

 •••••

 In an attempt to settle the matter, the plaintiff requested a meeting with the defendant’s counsel and insurers.

The meeting, held in a prestigious high-rise office building with an expensive panoramic view, turned out to be well attended. The plaintiff had experts of every stripe, who sat at a long table with their reports stacked in front of them.

 The plaintiff’s lawyer explained that they were only there to outline the allegations and, with the help of their experts’ opinions, to prove them beyond any doubt. There could be little defence, since the case against the defendants was overwhelming … and so on.

 After a few minutes of this legal nonsense, Pro-Demnity’s counsel stood up and clarified that he had no intention of listening to a litany of negative professional opinions quoted from reports which, anyway, should have been made available prior to the meeting.

Furthermore, Pro-Demnity had two basic, irrefutable defences.

First, the disaster was not created by the defendant Architect but by the plaintiffs themselves. They had taken a third mortgage, and must have known, or should have known, that a third position on a construction loan carried a very high risk. Their security was the building, on which they had foreclosed and now owned. With third mortgage interest rates verging on astronomic, they were owed no sympathy. The financial burden was far too high for any construction loan to have a chance of successful workout. In short, they got what they deserved.

Second, as regards the alleged errors and omissions – and construction defects generally – the plaintiff should educate its “experts” about the very limited role of the Consultants, as compared with that of a General Contractor. The Architect in this instance had observed and listed many defects, and had given the list to her client, the builder. The Architect had no authority to see that the defects were corrected, or to force her client to perform good workmanship in general. 

These statements were not well received by the plaintiffs. And so, the meeting drew to a desultory conclusion.

 •••••

 Further negotiations followed very slowly. The aggressive nature of the plaintiff’s initial position was replaced by a sensible exchange of opinion, based more realistically on the likely outcome that the facts of the case might produce in a court proceeding.

It seemed that total victory would not be possible for either side. The plaintiffs were painting themselves into a corner. If they were to prove that the Architect had produced a certificate indicating 95% completion for a building that was, by actual assessment, 42% complete, Pro-Demnity would have to view this as a coverage issue. A disparity this large could be considered not merely negligent, but possibly reckless, and perhaps, intentionally misleading. Dishonest, reckless or misleading practices are not covered by the policy. So insurance funds might not be available. 

In addition, the plaintiff’s case rested on the proof that Doe and Buck had relied on the Architect’s certification, and had in fact based the advances on them. But this was very difficult to prove, since some of the documentation appeared to have been produced “after the fact.” This strongly suggested that the builder Sponduli had decided on the amounts, after direct discussion with Doe or Buck, so the Architect’s only function was to produce the back-up.

These doubts, combined with the discovery by the plaintiff that Onley had no excess coverage, further dampened their enthusiasm for the action.

Unfortunately, the second part of the claim, that of architectural error, had some basis in fact. Beyond the glaring inadequacies of the construction, there were many defects that the Architect had failed to notice – and include with the reports given to the builder for attachment to the progress applications. Some of these omissions were significant Code violations.

After a great deal of discussion, a settlement was reached for a “strategic” amount, which is to say, half what a full trial would likely have cost, with some modest damages thrown in.

This project was a disaster with no redeeming features: We did not seek an explanation for the disparity between the certified and the actual percentage completion of the work upon its abandonment by the builder. Sometimes it’s better not to know.

 •••••

One important key message and take-away emerges: Be honest, well informed and professional when issuing certificates – and base them on written agreements, not on the intermittent opinions of your client and your builder – especially when those two entities are one and the same.

Two further, universal lessons also emerge.

Lesson No. 1: The plaintiff’s expectation of a “full inspection” is frequently alleged, whereas the architect’s role may, in fact, be very limited. This is a serious problem for which the answers are: clear contract wordings, like those in standard Ontario Association of Architects contracts; client education; and communication as to the architect’s role; and as a last resort, a vigorous legal defence.

Lesson No. 2: Lenders are entitled to rely on the architect’s certificates, but they should be made aware, in writing, that the architect’s opinion as to the completion is not based on accounting. Architects might consider including this proviso on their certificates. 1508 words/

 •••••

Thanks for listening to this edition of Claims Stories. We hope it was instructive and entertaining … as well as cautionary.

 Remember that every jurisdiction and ever case is different. Always refer to the laws, and regulations governing your local jurisdiction and consult a legal, architectural and insurance professional about the unique circumstances of your own case.

 • The Pro-Demnity Claims Stories were originally written by David Croft.

• The audio episodes are read by Liam Gadsby and produced by Revelateur Studio, Toronto.

• The publisher and the executive producer of the written stories and audio episodes is Pro-Demnity Insurance Company, Toronto. For more information, including the full legal disclaimer, visit prodemnity.com.