On July 3, the state Supreme Court handed down its decision in Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, 2014 DJDAR 878, providing helpful guidance on the circumstances that may render a professional liable in negligence to third persons – i.e., nonclients – and it is a good illustration of how a legal principle may wax and wane in any given area of law over the course of many years.
Professionals obviously owe their clients a duty to use reasonable care in performing their services. In Gagne v. Bertran, 43 Cal. 2d 481 (1954), Justice Roger Traynor observed, “The services of experts are sought because of their special skill. They have a duty to exercise the ordinary skill and competence of members of their profession, and a failure to discharge that duty will subject them to liability for negligence.” But liability to whom?
Waxing
Until 1958, when the state Supreme Court decided Biakanja v. Irving, 49 Cal. 2d 647, a professional could not be held liable in negligence to those with whom he or she was not in privity of contract. In Biakanja, the defendant notary public failed to have a will properly witnessed, resulting in a loss to the decedent’s sister. Breaking with precedent, and in a seminal statement that would be analyzed by future courts in countless cases, the Biakanja court said, “The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involved the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.”
This came to be called the six-factor Biakanja balancing test, the test to be used in determining whether the defendant in any given case under the circumstances owed a duty to exercise reasonable care to avoid injury to others not in privity with him. Noting that the “end and aim” of the will was to convey the entire estate to the plaintiff, the Biakanja court found that every one of the six factors weighed heavily in the plaintiff’s favor.
The Biakanja ruling was thereafter, over the years, extended to soil engineers, land surveyors, architects, accountants, attorneys, and other professionals. The guiding principle in all of the cases was foreseeability. In particular, in the case if architects, courts repeatedly held that the architects in question, hired by the developer of a project, knew their design was for structures that would eventually be sold by the developer to future owners and that it was foreseeable that future owners could be harmed by defective plans and specifications. Cooper v. Jevne, 56 Cal. App. 3d 860 (1976).
For example, in Huber, Hunt & Nichols Inc. v. Moore, 67 Cal., App. 3d 278 (1977), the court noted that “In our view the architects can be held liable for the negligent acts in the capacity of an independent contractor. The general rule in California is that a professional person may be held liable to third persons who suffer damage proximately caused by the negligence of the professional person as an independent contractor in the performance of his professional duties event though there is no privity of contract between the third person and the professional person and even though the client does not complain about the quality of service. … Foreseeability and proximate cause now supplant the former requirement of privity of contract.”
Waning
All bubbles eventually burst. The expansion of professional liability could not go on forever. There had to be limits. Along came Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992). Bily involved a nascent computer company that retained Arthur Young to perform an audit of its financial statements – statements that purported to report substantial profits in prior years but which also showed even more substantial losses which Arthur Young failed to detect, causing the plaintiff investors to lose money. At trial, plaintiffs recovered $4.3 million in a negligence verdict based on the standard BAJI jury instruction that said, “An accountant owes a further duty of care to those persons who reasonably and foreseeably rely on an audited financial statement prepared by the accountant. A failure to fulfill any such duty is negligence.”
The Bily court noted initially that the role of an audit in the business world is unique and complex. Due to its uniqueness and complexity, according to Bily, the “general rule” of professional liability to foreseeably harmed third parties should not apply to professional auditors.
The Bily Court was particularly troubled with the unlimited concept of “foreseeability” in the context of auditing and those potentially thousands of persons who could conceivably rely on an audit. Alluding to prior cases which had limited recovery for emotional distress, the Bily court observed that, “Foreseeability’…’is endless because [it], like light, travels indefinitely in a vacuum’…’there are clear judicial days on which a court can see forever and thus determine liability but none on which that foresight alone provides a socially and judicially acceptable limit on recovery of damages for [an] injury.” (Quoting Thing v. La Chusa, 478 Cal. 3d 644 (1989)). The court went on a note, “judicial endorsement of third party negligence suits against auditors limited only by the concept of foreseeability raises the spectre of multibillion-dollar professional liability that is distinctly out of proportion to” the auditor’s fault.
Thus, under Bily an auditor can be held liable in negligence to no one other than its client. An auditor owes a duty to exercise reasonable care to no one other than the client.
One would imagine that the holding in Bily would be limited to the unique context of auditing financial statements. But in Weseloh Family Ltd. Partnership v. K.L. Wessel Construction Co. Inc., 125 Cal. App. 4th 152 (2004), Bily’s parsimonious application of the Biakanja factors was extended to the design of retaining wells by engineers.
In Weseloh, the plaintiff property owner contracted with a general contractor to build and automobile dealership. The general contractor contracted with a specialty subcontractor to build retaining walls on the project. That subcontractor, in turn, retained engineers to provide earth retention calculations (which turned out to be faulty) for a fee of between $1,500 and $2,000. When a retaining wall failed plaintiff sued the engineers and others for $6 million. Applying the Biakanja factors, and citing Bily’s concerns for unlimited liability, the Weseloh court concluded that the engineers were too far down the food chain to owe the plaintiff property owner a duty of due care. Their Connection to the plaintiff property owner was too tenuous.
Beacon: The Pendulum Swings Back
Hoping Bily and Weseloh precedents signaled a trend in limiting a professional’s potential liability to nonclients, the defendant architects in Beacon endeavored, unsuccessfully, to evade liability to a homeowners association whose building they had designed. They argued that their plans and specification were mere “recommendations” to the developer who could approve or disapprove them. But the architects in Beacon played a far greater role in the design and construction than did the specialty engineers in Weseloh. They provided all architectural and engineering for the project and they performed construction observation services throughout the construction all for the hefty sum of $5 million. Significant to the Beacon court was the fact that the defendants were the principle design architects and engineers, not subordinate to other professionals, and that their design was the cause of numerous building failures. Applying the six Biakanja factors, the Beacon court held that under these circumstances the architects did owe the future homeowners association a duty of due care and therefore were amendable to that association’s negligence claim.
The Beacon court decision establishes clearly that there is no trend in limiting the potential liability of professionals to nonclients. A professional’s potential liability will depend on the particular facts of the case.