This article originally ran in the April newsletter produced by the American Institute of Architects (AIA) North Carolina chapter.
The North Carolina Court of Appeals’ recent ruling in Wright Construction Services, Inc. v. The Hard Art Studio, PLLC, et al. has important implications for architects and engineers practicing in North Carolina. In Wright, the court made clear that design professionals cannot assert a contractor’s lack of proper licensure in defense of professional negligence claims. While this case did not involve the design professional recommending the project owner award the contract to the unlicensed contractor, in future projects where that does happen, the results could be even worse, as we will explain below.
In North Carolina, anyone who undertakes to bid, construct, or superintend a construction project must be properly licensed by the North Carolina Licensing Board for General Contractors where the cost of the undertaking is at least $30,000. This licensing requirement is intended to “protect the public from incompetent builders,” as the North Carolina Supreme Court put it in Bryan Builders Supply v. Midyette. North Carolina courts have long recognized that “contracts entered into by unlicensed construction contractors, in violation of a statute passed for the protection of the public, are unenforceable by the contractor.” An unlicensed contractor who seeks to recover for an owner’s breach of the contract is barred from recovering more than the sum specified in the statute. However, no North Carolina appellate court case had previously addressed the question of whether design professionals can use that same defense that owners use.
Wright answered that question. The case involved a mixed-use retail and student housing development in Raleigh known as Hillsborough Lofts. Wright Construction Services was selected to serve as the project’s general contractor. At the time Wright submitted its bid and entered into a contract with the project’s owner, Wright was not yet licensed as a general contractor in North Carolina.
During the course of the project, the owner terminated its architect and retained the services of The Hard Art Studio, which in turn retained the services of Collins Structural Consulting, the project’s structural engineer under the previous architect. Both prior to and after The Hard Art Studio became involved, the project experienced a number of alleged delays, including several associated with alleged design-related issues. Due to the alleged design issues, The Hard Art Studio recommended that all work stop on the project until they could be resolved. Wright was subsequently terminated from the project.
Following litigation between Wright and the project’s owner, Wright filed suit against The Hard Art Studio and Collins Structural Consulting, asserting claims for professional negligence. On appeal, the central issue was whether Wright’s claims were barred by the so-called licensure defense. Critical to its ruling, the Court of Appeals (1) reiterated that design professionals owe a duty to use due care in the exercise of their skills and abilities to avoid foreseeable harm, and (2) recognized the distinction between the claims asserted by Wright and the rights and responsibilities that existed between Wright and the project’s owner.
Relying on these critical features, the court held that North Carolina’s licensure defense does not apply to professional negligence claims asserted against a design professional by a general contractor. According to the court, design professionals are not part of the public that the licensing statutes seek to protect, and applying the licensure defense to these types of professional negligence claims would shield design professionals from legal responsibility in instances where they breached their standard of care.
The fallout from the project could have been a lot worse for the design professional had a state statute concerning contractor recommendations also been implicated. North Carolina General Statute § 87-13 makes it a Class 2 misdemeanor for an architect or engineer to recommend to a project owner the award of a contract to a person not properly licensed as a general contractor, unless the recommendation was made in reliance upon current written information received from the licensing board (in other words, if the licensing board got it wrong). Consequently, design professionals could face significant civil exposure to the contractor and potentially the owner, and criminal charges in circumstances where an unlicensed contractor – to which the design professional recommended the owner award the contract – alleges negligent performance by the design professional.
In order to mitigate risk, design professionals responsible for recommending the owner award a contract to a contractor should always verify the contractor’s licensure status with the licensing board first. And, whether they were involved in the recommendation or not, design professionals now know for certain they cannot use a contractor’s lack of licensure as a defense against a professional negligence claim.