Source: http://www.lexology.com, June 12, 2015
By: Laura J. Stipanowich, Smith Currie & Hancock
Alternative project delivery methods, such as design-build, are increasingly prevalent in the modern construction industry. Occasionally, the design-build team consists of a constructor that, pursuant to a prime contract with the project owner, is the “single point of responsibility” for both design and construction. This design-builder engages design professionals such as the architect or engineer (A/E) as a subcontractor to meet the design and engineering requirements of the project. In this framework, the relative risks and obligations of the parties understandably shift from those of a traditional project. A party must identify these risks before signing onto a project in order to avoid costly lessons when it is too late to back out.
Contractual and Professional Liability Considerations for Design Professionals
As a preliminary matter, the A/E must be cautious of the inherent conflict between its duties to the design-builder and the ultimate owner of the project. On the one hand, the A/E is engaged by the design-builder and, therefore, the A/E’s client is the design-builder—not the owner. On the other hand, the A/E owes a duty of care to third parties, including the owner, to conduct its work in accordance with the skill expected of those in the industry. An A/E serving as a subcontractor for the design-builder may run into unanticipated conflicts arising from this divided loyalty. This arrangement does not create an unavoidable conflict of interest for the A/E, but an A/E can occasionally find itself torn between competing interests.
For example, the design-builder may push the A/E to meet the project schedule, thus preventing the A/E from devoting the time to the design that it would have otherwise. The owner, consequently, might allege this acceleration has impacted the quality of the design and seek to recover from the design-builder for professional negligence. The A/E must communicate clearly with the design-builder about the expectations for the A/E’s performance, so as to allow the A/E to exercise the requisite degree of professional skill and independent judgment.
Moreover, risk allocation provisions in the prime contract may impact the professional liability exposure for an A/E contracting directly with the design-builder. A subcontractor A/E may have a greater scope of responsibility than on a traditional project. For example, the A/E might be placed in charge of contracting with subconsultants to perform engineering and other professional services. This carries higher potential liability, especially if the subconsultants’ performance is deficient. Moreover, as a general rule, the method of risk allocation in the prime agreement between the owner and design-builder will govern the risk allocation between the design-builder and the A/E. This is often achieved by incorporation of the prime contract by reference in the A/E’s contract. In these circumstances, professional liability exposure for the A/E is dramatically increased.
Contractual and Professional Liability Considerations for Design-Builders
Under the contractor-led design-build paradigm, liability for non-conforming work by subcontractors (including the A/E) falls on the design-builder. Under a traditional framework, the design and construction responsibilities are clearly delineated. The design-builder, however, has increased responsibility for design defects. The contractor must decide if such a contractual framework warrants the risk that said contractor faces liability for a faulty design.
Even in situations where the design-builder is presented with initial drawings upon which to base its bid, typical design-build contracts place responsibility for the sufficiency, completeness, and accuracy of the design on the design-builder. As such, the design-builder will have little recourse against the project owner for a defective design. An A/E should also be wary, as this lack of recourse against the owner increases the risk of claims by the design-builder against its A/E subcontractor.
A design-builder may not be aware of the liability and risks facing the A/E, thus placing the design-builder (and, consequently, the A/E) at a distinct disadvantage when negotiating the prime contract. For those reasons, it is important that the design-builder involve the A/E and its counsel in contract negotiations as they relate to project design.
An owner may find this “single point of responsibility” under a design-build agreement appealing, but it must weigh the risk of losing its contractual privity with the design team. While an A/E owes a basic duty of care to the public, however, such a duty does not equate to a contractual obligation to the project owner.
Contractual and Professional Liability Considerations for Owners
Owners must also weigh the relative risks of alternative delivery methods. For example, an owner could be required to adhere to provisions in the prime contract in the context of subcontractor claims, despite the lack of privity. In Cuningham Hamilton Quiter, P.A. v. B.L. of Miami, Inc., 776 So. 2d 940 (Fla. 3rd DCA 2000), the court held that an owner could be required to arbitrate claims against a subcontractor design firm, even though there was no signed contract directly between the parties. The owner’s claims arose out of the design-build contract with its general contractor, which contained an arbitration provision governing claims “arising out of or relating to” the prime contract and which further required all subcontracts to contain similar arbitration provisions. An owner must be cognizant of the likelihood that prime contract requirements may govern any disputes with the design-builder’s subcontractors.
An owner must also be prepared for the risks attendant in losing its contractual privity with the design team. Most jurisdictions that have addressed the issue have declined to imply warranties for professional services. By placing responsibility for design in the hands of a subcontractor, an owner reduces its contractual protection. Owners would be wise to watch closely the allocation of responsibility for the project’s design and carefully negotiate its remedies under the prime contract.
Conclusion
The increasing popularity of alternative project delivery methods makes it crucial that parties understand the interplay between the various contractual relationships in play. The risks associated with these projects are varied and affect each party in different ways. While attention to detail and active participation in contract negotiations are critical to the mitigation of risk, it is not always clear where the traps for the unwary lie in wait. No matter how sophisticated a party may be, it should have an attorney review its agreement before signing on the dotted line.