Engineers - Fiduciary Duty

posted Jun 16, 2018, 6:43 PM by jeffery jim

A fiduciary relationship is traditionally defined as a relationship between parties to a transaction in which one of the parties is duty bound to act with the utmost good faith for the benefit of the other party. Such a relationship ordinarily arises where trust and/or confidence is reposed by one party (owner) on the integrity of another (design-builder), and where that party voluntarily accepts the confidence of the other. In such a case, the party in whom the confidence is reposed can take no advantage from his acts relating to the interest of the other party without the trusting party’s knowledge or consent. Failure to do so exposes the trusted party to breach of fiduciary duty claims.

Some jurisdictions have concluded that the relationship between a client and construction or design professional is fiduciary as a matter of law, but most appear to accept that these commercial arrangements do not warrant the legal presumption of a fiduciary relationship.

Most construction and design professionals know that they owe their clients a professional duty of care—meaning they must perform their services with the level of skill and care of their industry peers. Breach of that duty leads to a claim for negligence. Many professionals may be unaware, however, that under the right circumstances they may incur fiduciary obligations. Held to standards “stricter than the morals of the market place,” the fiduciary owes to its beneficiary the utmost good faith and loyalty. In practical terms, a fiduciary duty is a constraint on the fiduciary’s freedom to act in his own self-interest because he must set the beneficiary’s well-being before his own.

So, how does a national engineering firm find itself deemed the fiduciary of a seemingly ordinary client? The answer may lie in the scattered precedent and judicial uncertainty surrounding when and under what circumstances a construction or design professional becomes a fiduciary. At a basic level, fiduciary relationships are created by fact or law. Certain arrangements, such as that between a trustee and beneficiary or a lawyer and a client, are well recognized as fiduciary relationships. A handful of jurisdictions have concluded that the relationship between a client and construction or design professional is fiduciary as a matter of law, but most appear to accept that these commercial arrangements do not warrant the legal presumption of a fiduciary relationship.

The second path to a fiduciary relationship is marked by specific facts giving rise to a relationship of heightened trust and confidence beyond that typical of an arms length transaction. As one court put it: “[A] fiduciary relationship is characterized by a ‘fiduciary’ who enjoys a superior position in terms of knowledge and authority and in whom the other party places a high level of trust and confidence.” Accordingly, a fiduciary relationship is necessarily one of dependence, where the fiduciary stands in a position superior to that of the beneficiary.  Thus, although ordinary business relationships involving professionals entail “a certain degree of trust and duty of good faith,” a fiduciary “relationship transcends the ordinary business relationship.” While contract language is crucial in determining the parties’ relationship, there are other, less obvious facts that may give rise to a fiduciary relationship. As a general matter, the greater the professional’s discretion and control over the project and the more the relationship resembles one of agency, the more likely the court will find a fiduciary relationship. Likewise, the chance of a court finding a fiduciary relationship grows with the discrepancy in the sophistication and respective knowledge of the parties. And if the parties had a relationship of trust that predates the business arrangement, the court will scrutinize more carefully whether the professional thereby assumed fiduciary obligations when the relationship took a commercial turn.

“It is our opinion that a registered engineer retained to investigate the integrity of a building who determines, based on structural deficiencies in violation of applicable building standards, that there is an imminent risk of serious injury to the occupants therein, and who is advised by the owner that no disclosure or remedial action is intended and that such determinations are to remain confidential, has a duty to warn the identifiable occupants or, if not feasible, to notify the local building officials or other appropriate authority of such determinations.” 68 Ops Atty Gen 250.

A design-build contract necessarily implies that the contractor possesses the necessary architectural and/or engineering skill and ability to perform its duties reasonably and without neglect. A design-builder has a fiduciary duty as the project designer to exercise due care in the performance of its design and supervision functions. Architect assuming supervision duties required to exercise due care in the performance of his supervisory function, and is liable to the owner for negligence on his part. In short, a design-build contract necessarily imposes the fiduciary duty to properly design and prepare plans in accordance with the applicable standard of care and in compliance with building codes.

The all inclusive nature of design-build contracts often triggers public policy concerns that lead courts to impose broad duties on design-builders. For example, design-builders are affirmatively obligated to exercise that level of fiduciary care that would be required of a design professional for the design and supervision of the typical construction project.

 

Protecting against Fiduciary Liability

The line between an everyday business arrangement and a fiduciary relationship is anything but bright. While the specific facts of the case will determine the outcome, the best defense lies in ensuring that your contract does not include language suggesting the creation of a fiduciary relationship. Take care to avoid provisions that speak of a relationship of “trust and confidence,” that create a duty to act only in the client’s interest or as the client’s agent throughout the project, or that suggest you “guarantee” the outcome or cost of the project. Additionally, you might also consider bargaining for a contract provision explicitly disavowing fiduciary duties.

If you do find yourself on the receiving end of a fiduciary duty claim, there are important strategic steps you can take to rebut such liability. For example:

• Scrutinize your contract for any potentially adverse language.

• Marshal facts to demonstrate the relative sophistication of your opponent.

• Gather evidence that you did not exercise the degree of discretion and control over the relationship necessary for the creation of fiduciary obligations and that your retention was an arms-length business transaction.

• Collect evidence demonstrating that you fulfilled any potential fiduciary obligations.

• Research your jurisdiction’s precedent on your profession’s fiduciary obligations.

• Ascertain whether any statutes may impose a fiduciary obligation

• Develop legal defenses to the claim, which may include assertion of the economic loss doctrine or similar defenses barring tort actions in contract disputes.

 

As the Victorville case shows, underestimating the viability of a plaintiff’s fiduciary duty claim can be an extremely costly error. Savvy plaintiffs can use rather typical design and construction contract language to paint the picture of a relationship of unique trust and fidelity. And they can bolster their claim that a fiduciary duty existed by pointing to a defendant’s experience and expertise—accolades that all professionals would like to advertise without fear that such accomplishments later will be used against them. Anticipated risks, however, are the ones most easily defended. With a proper understanding of the legal nuances of fiduciary duty claims, a firm can defeat such claims through the presentation of a compelling narrative demonstrating that the relationship with the aggrieved client was a commercial interaction like any other.

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