ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY. C.A. No. 78-934.
Adams and Weis, Circuit Judges, and VanArtsdalen, District Judge*fn*
In this appeal, Ewing, Cole, Erdman & Eubank (Ewing, Cole), an architectural firm, challenges the judgment of the district court that it is liable in tort for damages incurred by its client. Because we determine that the plaintiff failed to carry its burden of proving that Ewing, Cole had not met the standards of a reasonably prudent architect, we reverse.
This dispute arises out of the construction of student dormitory housing for the New Brunswick campus of Rutgers University. The New Jersey Educational Facilities Authority (the Authority) and Ewing, Cole entered into a contract on September 25, 1971 under which Ewing, Cole was to serve as executive architect for the project. The trial court found that under the terms of the contract Ewing, Cole was responsible for providing all necessary architectural and engineering services: specifically, preparation of a feasibility study and bidding documents, and administration of the contract between the Authority and the contractor. App. at a-41. Nothing in the contract required Ewing, Cole to give advice about protecting the Authority from the possibility that the contractor would file for bankruptcy, nor did the Authority ever specifically request such advice.
Stirling Homex Corporation (Stirling Homex), a manufacturer of pre-fabricated housing, was awarded the contract by the Authority. Instead of using conventional on-site construction methods, Stirling Homex proposed to manufacture modules at its plant in Avon, New York and then to ship the completed modules in groups to New Brunswick, where they would be assembled into dormitories.
Between the time the contract was awarded to Stirling Homex and July 12, 1972, when Stirling Homex filed a petition in bankruptcy, Ewing, Cole authorized five progress payments to the contractor for materials purchased and work completed at the Avon plant. Following each request for payment, a representative from Ewing, Cole visited the Stirling Homex plant. He conducted spot checks to ascertain that the materials specified in the requests for payment existed, were segregated and identified as belonging to the Authority, and were insured against theft, fire and vandalism. App. at a-44.
Shortly after Stirling Homex filed its bankruptcy petition, a trustee in bankruptcy was appointed, who claimed title to all of the materials and work-in-progress at Stirling Homex' Avon plant, including those goods that had been paid for by the Authority. The trial court sitting without a jury calculated the total value of the undelivered materials and modules for which the Authority had paid to be $441,874.*fn1
Stirling Homex had, at the inception of the project, procured a payment and performance bond from Travelers Indemnity Company (Travelers), in favor of the Authority. After Stirling Homex declared bankruptcy, the Authority called upon Travelers to honor its performance bond. Travelers negotiated with the trustee to obtain the materials still at the Stirling Homex plant in Avon for which the Authority had paid. When it was unsuccessful, Travelers arranged for another contractor to complete the project, and made no further efforts to assert claims to the goods and materials.
Following the completion of the project, Travelers brought suit as the subrogee of the Authority against Ewing, Cole contending that the architect had breached its contract with the Authority and had acted negligently by permitting progress payments for off-site work and materials. The district court concluded that there had been no breach of the contract between the Authority and Ewing, Cole, App. at a-45, but that the architect was liable in tort because it had violated its duty to exercise reasonable care. App. at a-47. The determination of liability was based on the conclusion that Ewing, Cole had a duty to inform "the Authority of any method whereby it could exercise control over its property." App. at a-48. The court noted specifically that the architect might have suggested to the Authority that it could have increased the protection of its interest in the property against the possibility that Stirling Homex would file for bankruptcy by employing such options as field warehouses or bonded warehouses. App. at a-47. The district court did not address the issue of causation between the alleged tort and the damage claimed, nor did it explore the question whether a government agency represented by legal counsel could reasonably have relied on its architect to suggest legal mechanisms for protecting its property interests in materials and work-in-progress remaining in the possession of its contractor.
Both parties agree that in this diversity action New Jersey law controls, and they appear to accept the proposition that in New Jersey an architect may be held liable in tort if he fails to exercise that level of care expected of a reasonably prudent architect and his negligence is the proximate cause of injury to his client. See Note, Liability of Design Professionals -- The Necessity of Fault, 58 Iowa L. Rev. 1221, 1228 n.47 (1978) (citing cases). It is also undisputed that Ewing, Cole did not inform the Authority that, by paying for materials and work-in-progress without gaining actual physical possession, the Authority was incurring certain risks if ...