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North Carolina Appellate Court Rules The Licensure Defense Does Not Bar Contractor’s Negligence Claims Against Design Professionals

In Wright Construction Services, Inc.v. The Hard Art Studio, PLLC, 2020 WL 7906704 (N.C. App. Dec. 31, 2020), a North Carolina appellate court held that the “licensure defense,” which prevents a builder that is unlicensed at the start of a project from recovering in a breach of contract claim, does not apply to negligence claims against design professionals, and is limited only to a builder’s breach of contract claims against owners.

In 2014, Hillsborough Lofts, LLC, (“Hillsborough”) developed plans for a mixed-use retail and student housing complex in Raleigh.  Hillsborough hired Olive Architecture (“Olive”) as the architect for the project.  Olive contracted with Collins Structural Consulting (“Collins”) to provide structural engineering and other services.  Wright Construction Services, Inc. (“Wright”) submitted a bit for the project.

During an initial meeting, Hillsborough told Wright the project needed to be complete by August, 2015.  Wright indicated it could complete the work by that date, but also informed Hillsborough it was not yet licensed to engage in general contracting in North Carolina.  Nevertheless, due to the timeline, the parties signed a contract before Wright was licensed.  The government issued Wright an unlimited general contracting license a few months later, after the project began.

In May 2015, Hillsborough terminated Olive for failure to substantially perform the terms of its contract and hired The Hard Art Studio, PLLC (“Hard Art”) to take over.  Like Olive, Hard Art entered into a contract with Collins for structural engineering.  The parties recognized that there were delays related to some design issues.  On August 26, 2015, Hard Art made a recommendation to Hillsborough that all work be stopped until all design issues were resolved.  Ultimately, however, Hillsborough terminated Wright for failure to complete the work on time. 

Hillsborough and Wright asserted claims against each other in an arbitration proceeding to which they were the only parties and the arbitrators awarded damages to Wright.  Wright also sued Hard Art and Collins for negligence based on the failure to provide proper architectural and engineering designs.   Hard Art and Collins moved for summary judgment on the ground that Wright did not have a general contractors license when work began on the project.  The trial court granted the motion, but the appellate court reversed the decision.

It is a statutory requirement that general contractors in North Carolina must obtain a license before bidding on or working on a project in excess of $30,000.00.  The North Carolina Supreme Court has held that failure to comply with this statute precludes a builder from recovering against the owner under contract. Design professionals in North Carolina owe a duty of care to those who reasonably rely on their work, including the builder on the project.  This duty arises from the special knowledge and skill an architect or engineer possesses as a professional and applies even if they are hired by the property owner and have no other business relationship with the builder. 

In this case, the Appellate Court held that the licensure defense does not bar a contractor’s negligence claims against architects and engineers.  The Court held that the licensure defense was adopted to protect the public from substandard construction work and the purpose would be undermined if design professionals could assert the defense in negligence actions and avoid liability for their negligence.  The Court reasoned that such claims are based on design professionals’ failure to use due care to avoid foreseeable harm to builders and are separate from the builder’s contractual claims against the owner. 

The defendants argued that the Court’s holding would allow contractors to avoid the licensure defense by brining negligence claims against design professionals, despite not being able to bring contract claims against the owner. However, the Court emphasized that negligence claims against the architects and engineers are distinctly different from contract claims, as the two arise from different duties.