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Contracts for Design Professionals – module 9 of 9. Discussion of the following contract clauses: Termination, Third Party Beneficiaries, Time Limits on Filing Suit, Underground Utilities and Warranties.  This course may be taken for AIA Continuing Education Credit. Slides for Contracts for Design Professionals – Module 9

Video Transcript

Hello, this is Jay Kent Holland. It’s my pleasure to present this course on contracts for design professionals. The specific clauses that we will discuss in this particular module of the course will be shown on the next slide. Throughout the presentation, I will be using slides to include examples of the contract language that we’re discussing. With that brief introduction, let’s jump right into the clauses.

Termination for Convenience

Let’s look now at the termination clause. On a typical project, you’re going to have a contract that says that you have determination for default provision and you’re also going to have a termination for convenience provision. And that termination for convenience provision is the one that is of most concern to us because it certainly allows a project owner or your client who might be a prime consultant to terminate the services of the design firm for its own convenience. For example, the project funding didn’t come through or any other number of reasons why the project owner may want to terminate the project and get rid of all the consultants and contractors and typically without having to pay a profit but would pay the normal expenses to terminate.

What I’m seeing, however, is that in more and more of the owner generated contracts it states that the owner can terminate the contract for convenience but it says nothing about paying the termination expenses that the design firm reasonably incurs in wrapping up. Getting its project trailers off the site, paying its personnel to get moved, all the overhead, the general administrative cost, all these types of things that don’t just simply go away on a turn of a dime. They take time. They need to be paid for. I like to therefore to put into the contract a simple provision that says that, “Sure, you can be terminated for convenience but you get paid your reasonable termination expenses.”

The EJCDC E-500 has a clause that reads as follows: “In the event of termination by the owner for convenience or by engineer for cause, engineer shall be entitled in addition to invoicing for those items identified in preceding paragraphs to invoice the owner and to receive payment of a reasonable amount for services and expenses directly attributable to termination. And it goes on from there.”

The AIA deals with termination expenses a little bit differently. And at Article 9.7 of the B101 form the AIA states the following: “Termination expenses are in addition to compensation for the architect services and include expenses directly attributed to termination for which the architect is not otherwise compensated plus an amount for the architect’s anticipated profit on the value of the services not performed by the architect.”

Now that last paragraph or last sentence of that provision surprises me, that the AIA would suggest that an architect be paid profit on work not performed. That’s contrary to federal procurement. That’s contrary to almost all contracts I see. So I don’t think that a project owner that is aware that this language is in the AIA form would ever agree to it. So don’t be surprised when that gets stricken. I would not deem that to be a very reasonable clause to push for.

Third party Beneficiaries

Third party Beneficiaries. Claims by individuals or corporations against design professionals with whom they have no contract are really becoming more common. And it’s important to try to put language into your contract to avoid any potential for a third party to assert that they were an intended beneficiary or that you owe duties to that third party.

The B101 at Article 10.5 does that very well with the following language: “Nothing contained in this agreement shall create a contractual relationship with or cause of action in favor of third parties against either the owner or architect.” It’s important to use language dealing with third parties because as I mentioned, we are seeing more litigation. And rather than trying to cover that litigation in this workshop today, if you’re interested in seeing cases like that which have gone both ways, some finding the design professional is liable to laborers of contractors who were injured or to the public that was injured, some cases hold them liable, other cases say no liability. Go to my website at www.constructionrisk.com. Look at the index of all my articles and you will find many articles dealing with that subject.

Time Limitations for Filing Suit

Let’s turn now to time limitations for filing suit. Rather than relying exclusively on statutes of limitations or statutes of repose, you might consider establishing by contract a specific time frame that would limit the time in which the owner can bring action against the design professional. An example clause like that would be out of the AIA B101 at Article 8.1.1 and it reads as follows: “The owner and architect shall commence all claims and causes of action, whether in contract, tort, or otherwise against the other arising out of or related to this agreement in accordance with the requirements of the method of binding dispute resolution selected in this agreement within the period specified by applicable law but in any case not more than 10 years after the date of substantial completion of the work. The owner and the architect waive all claims and causes of action not commenced in accordance with this section.”

The beauty of that language is that what it establishes as a starting point for a statute to run is the date of substantial completion. So you’ll have in some states that an owner of a project or someone could file suit against a design firm 40 years after discovering that they’ve been injured. That would be according to the statute of limitations which says you have to file within a few years of discovering your injury.

Other states have a statute repose that might be anywhere from seven to 10 more years but this clause says that if the statute of limitations might be only two or three years, well, they have to file within that two to three years but even if there was nothing that would have prohibited the lawsuit at state law this clause says the suit cannot be filed more than 10 years after substantial completion. It’s really a very great way to put an end to the risk. So you say, “Look, we know we’ve got some risk. We’ll insure that risk for 10 years out but we don’t have to worry about it forever because this is going to cut us off 10 years after the last project was substantially completed.”

I also use a clause that reads like the following: “Any actions by either party against the other party for any cause of action whatsoever, whether known or unknown, including but not limited to claims for breach of this agreement or for failure to perform in accordance with the applicable standard of care, how so ever stated, shall be barred two years from the time claimant knew or should have known of its claim but in any event not later than four years after substantial completion of the design professional services.”

Now I like this clause because we’re actually even shortening the time more than the AIA does. So we’re saying it’s barred two years from the time that the claimant knew of its injuries but even if it didn’t know of its injuries it’s barred four years after substantial completion. So it’s a shorter period. It deals with all causes of action. Again, it’s a clause you should consider.

Underground Utilities

Underground utilities. Owners occasionally include a clause in the design contract concerning underground utilities that is so broad that it would potentially create uninsurable risk, almost a warranty-type risk. An example of such a clause is the following: “Design professional shall locate all underground utilities and obstructions prior to the commencement of intrusive operations at the project site, such as drilling or excavating, and shall be responsible for damage to such utilities or structures caused by its operations, including data collection, soil and ground water sampling, and any excavating.”

Under that clause the design professional seems to be agreeing that it’s going to be responsible for doing its own intrusive investigation into this site. And that if it fails to detect something there, it will be responsible but the reality is that when a project owner awards a design contract they’ve already done a geotechnical survey. They’ve got site borings. This was usually included with the RFP that the design firm relied upon in putting together its proposal in planning what kind of foundations, et cetera, it would install for this project and the design firm should be able to rely on that. It’s not reasonable for an owner to expect the designer to take this kind of risk.

The irony is that an owner really doesn’t expect to pay for that risk. It’s not part of the scope of service. They’re not going to pay the design firm to go out and put a lot of borings in the ground after a geotech already did it. So this clause, in my view, is inappropriate. The way I would deal with it is say, the design professional is entitled to rely on information and use a standard of care in how it goes about doing some investigation before it starts allowing intrusive constructive work onto the site or doing its own intrusive investigatory work.

And so a good clause would be the following: “Owner shall advise and provide the design professional with all information and data in its possession concerning the type and location of all underground utilities, both public and private. Design professional shall be entitled to rely on the information provided being complete and accurate. The owner-contractor agreement shall make contractor responsible for locating all underground utilities. To the extent that the design professional performs any services to locate underground services, it shall use reasonable means to identify and locate underground utility and structures such as complying with state ‘one call’ laws and shall exercise reasonable precautions to avoid damage to the utilities.”

In other words, the design professional’s going to call Miss Utility or otherwise check with maybe as built drawings, information that was readily available concerning the site to determine the location of underground utilities but doesn’t have responsibility beyond that. And indeed is entitled to rely on the information provided by the owner.

Warranties and Guarantees

By agreeing to warrant that your professional services will produce some specific result including but not limited to error-free designs, the design professional may be contractually liable based on breach of warranty even though it meant the generally accepted standard of care. In other words, it wasn’t negligent. An example of language doing that would be something like the following: “The architect represents and warrants that it will take total responsibility for errors and omissions on its documentation and will rectify all such instances at no additional cost to the owner.”

Now think about what is done in that clause. You’re warranting. You actually use the word warrant, that you’re going to have total responsibility for all errors and omissions. It doesn’t say, “Negligent errors and omissions”, it just said, “Errors and omissions and will rectify all instances at no cost to the owner.” Well, that enough that you’re going to rectify, apparently redoing your design but this suggests that to the extent that there were any ramifications. Perhaps construction change orders, maybe some defects with parts of the overall design or construction as a result of these errors and omissions, that the design firm is fully liable for that.

Now remember you’re taking on that liability by virtue of your contract. The Common Law would not impose that liability on a design firm unless the design firm was negligent. Therefore, this is an uninsured risk that you’re taking on.

EJCDC at Article 6.01A establishes a standard of care, that disavows any warranties and it reads as follows: “The standard of care for all professional engineering and related services performed or furnished by engineer under this agreement will be the care and skill ordinarily used by members of the subject profession practicing under similar circumstances at the same time in the same locality. Engineer makes no warranties, expressed or implied under this agreement or otherwise in connection with engineer’s services.” You will recognize the first part of that paragraph is very similar to the AIA language that we quoted before when we were looking at standard of care.

What the EJCDC has added is a specific provision saying, “Look, we’re not giving any warranties.” And I mentioned earlier when we talked about standard of care, that this is one of the ways that I like to avoid these hidden warranties that might be in the contract is just put within the standard of care provision a sentence like this saying, “Look, no matter what else we say in this contract we’re not giving you any warranties and guarantees.” That makes it perfectly clear and I believe enforceable.

Thank you for joining me today. I hope you enjoyed this session that we did on risk management. And if you would like to contact me I am putting a slide up here at the end that has my name, phone number, email address, and website information. Don’t hesitate to call me or contact me. And particularly if you would like continuing education credits, we’ll explain how that can be accomplished. Thanks, look forward to seeing you again.