Contracts – PROFESSIONAL LIABILITY UPDATE

Design Contracts Imposing Duties Beyond Ordinary Care Create Extraordinary Risk

Posted on November 3, 2020November 3, 2020 by Tim Soefje

Design professionals are under assault by those in the construction industry determined to contractually alter the standard of care that applies to these design professionals’ work.

Every design professional and construction contract comes with its own set of risks. But design professionals that agree to heighten the standard of care that applies to their work not only subject themselves to extraordinary risks, but also jeopardize their available insurance coverage when mistakes are made.

In ancient times, the standard of care for builders was to do exactly what the king, pharaoh, or ruler ordered them to do. If they failed to adhere to those exacting standards, severe consequences, including execution, could follow. Fortunately, the legal standard of care today is not quite that strict.

Today, most states define the standard of care for design professionals as a duty to use ordinary care.

The classic statement of the design professional’s standard of practice is found in Coombs v. Beede, 89 Me. 187, 36 A. 104 (1896). In Coombs, a client won a trial court judgment based solely on what the client and architect discussed verbally regarding price and design. The Supreme Judicial Court overturned the ruling, holding:

“The responsibility resting on an architect is essentially the same as that which rests upon the lawyer to his client, or upon the physician to his patient, or which rests upon any one to another where such person pretends to possess some skill and ability in some special employment, and offers his services to the public on account of his fitness to act in the line of business for which he may be employed. The undertaking of an architect implies that he possesses skill and ability, including taste, sufficient to enable him to perform the required services at least ordinarily and reasonably well; and that he will exercise and apply, in the given case, his skill and ability, his judgment and taste, reasonably and without neglect. But the undertaking does not imply or warrant a satisfactory result. It will be enough that any failure shall not be by the fault of the architect. There is no implied promise that miscalculations may not occur. An error of judgment is not necessarily evidence of a want of skill or care, for mistakes and miscalculations are incident to all the business of life. Id at . 36 A. at 104-05.

Section 2.2 of American Institute of Architect’s (AIA) B101, Standard Form of Agreement between Owner and Architect (2007), incorporates this classic standard.

“The Architect shall perform its services consistent with the professional skill and care ordinarily provided by architects practicing in the same or similar locality under the same or similar circumstances. The Architect shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.”

The Engineers Joint Contract Documents Committee (EJCDC) E-500, Paragraph 6.01.A, Agreement between Owner and Engineer for Professional Services similarly defines the standard of care for engineers.

“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 and in the same locality. Engineer makes no warranties, express or implied, under this Agreement or otherwise, in connection with any services performed or furnished by Engineer.”

Other commonly used standardized form contracts available from ConsensusDOCS do not include a definition of the standard of care applicable to architectural and engineering services. The ConsensusDOCS drafters decided it was better for design professionals to be held to a standard imposed on them by their own profession (i.e., one imposed by the standard a court would endorse) rather than one defined by the ConsensusDOCS.

There are significant differences between AIA, EJCDC, and ConsensusDOCS forms, but regardless of what forms used, every industry organization wisely recommends that the agreements’ references to the professional’s standard of care should not be modified.

The Association of General Contractors (AGC) for example cautions that adding language that would hold a design professional to a standard of care above that which is customary and normal for design professionals in the same time and location also might result in the unintended consequence of voiding professional liability coverage available to the designer

Despite this widely shared warning, it unfortunately remains common place for owners to demand that design professionals sign contracts committing them to a significantly higher level of professional services than the common law standard of ordinary care.

Design professional must be on the lookout for an owner and other parties to insert phrases into a contract such as “highest level of care,” “with no material errors,” or “trust and confidence.”

The problem arises because these phrases like “highest level of care” are not well-defined by code, case law, or by peers working on similar projects. The design professional likely may not discovery how a court would define such a contract term until after another design professional testifies in litigation about the latest and greatest, cutting-edge technology being used by other design professionals on the other side of the country.

Other terms like “trust and confidence” can imply a special relationship between the design professional and the client, and thus a severely heightened standard of care.

Design professionals also should avoid agreeing to contract terms that commit them to comply with all regulations, codes, ordinances, and laws, and assume liability for the owner’s damages resulting from a failure to comply.

Such terms may seem reasonable at first glance but they create the potential for an absolute warranty and guarantee that the services provided comply with regulations, codes, ordinances, and laws that the design professional erroneously believed did not apply.

Ironically, often the owners insisting on these heightened standards of care are those working on the tightest budgets, and therefore expecting Cadillac service at a discount price.

Additionally, experience reveals that the owners demanding these contractually heightened standards of care greater than the industry norms frequently turn out to be the most difficult and demanding clients on every aspect of the project.

An owner demanding that the design professional execute an onerous contract should always be a red flag the project may not be worth the fee or hassle.

If a demanding owner insists on the use of these terms, the design professional may be able to skillfully negotiate additional language that mitigates the risk or eliminates it entirely. For example, a design professional may consider including limiting language elsewhere in the contract such as:

“No terms contained this contract are intended to create a guarantee, warranty, or a strict liability standard. The parties agree that the design professional shall only be required to not perform its professional services negligently, or as a result of willful or reckless misconduct. Nothing in this Agreement shall be construed to establish a fiduciary relationship between the parties.”

As discussed above, contractually raising the standard of care above the ordinary care standard also can jeopardize insurance coverage. Most professional liability insurance policies exclude coverage for acts other than ordinary negligence. The insurer will perceive this as a voluntary assumption of risk for which the design professional would not otherwise be responsible, and therefore uninsurable.

For example, the design professional may defeat a claim for negligence but lose on a breach of contract count based on other contract language creating a higher standard of care. As a result, the design professional’s professional liability insurance policy may not cover the loss because it may be excluded by either the “contractual liability” or “warranty” exclusions of the policy.

Fortunately, design professionals can eliminate many of these situations by taking a few simple steps:

Be diligent. Every design professional should implement a strong internal contract review process. Additionally, many design professionals surprisingly remain unaware that many of the best professional liability insurance policies provide for contract review services as part of the benefits available in the policies.
Never sign a contract that alters the standard of care from the common law or industry standard language without first consulting an experienced construction law attorney to fully understand the terms used and potential risk assumed.
Consult with an insurance broker that specializes in the field to make sure that every risk assumed by the design professional in the contract is insured if it is insurable.
Negotiate limiting or mitigating language to redefine the terms used in the contract to mean ordinary care and to hopefully eliminate any unintended standards of care, guarantees, or warranties

Construction contracts are a minefield of potential liability for the unwary or inexperienced design professional. A strong contract review team is the first and best line of defense.

But every design professional also must be prepared to walk away from a deal where the owner insists on contract terms that increase the standards of care beyond an acceptable standard, or be prepared that such onerous contracts may likely result in no insurance coverage when something inevitable goes wrong.

Timothy B. Soefje is the Managing Member and head of the professional liability and construction defect group at the boutique firm of Seltzer Chadwick Soefje & Ladik, PLLC based in Dallas, Texas. He is admitted in Texas and Oklahoma. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at www.realclearcounsel.com or contact him at tsoefje@realclearcounsel.com.

Samuel P. Baldwin is Of Counsel at the boutique firm of Seltzer Chadwick Soefje & Ladik, PLLC based in Dallas, Texas. He is admitted in Texas. His practice focuses on the defense of professional liability, construction defect, and complex commercial litigation claims. For regular information about professional liability matters, follow him on Twitter at @Sam_Baldwin5 and search #ProfessionalLiability. For more information, visit us at www.realclearcounsel.com or contact him at sbaldwin@realclearcounsel.com.

Arbitration Clauses Remain Popular, But Frequently Misunderstood And Poorly Drafted

Posted on July 21, 2017August 4, 2017 by Tim Soefje

Arbitration continues to serve as a popular forum for resolving construction-related disputes, but unfortunately, clauses compelling arbitration frequently are poorly drafted and misunderstood by the parties involved.

Each state’s laws compelling arbitration are unique and continue to evolve, especially when it comes to compelling arbitration by non-signatories to the arbitration agreement itself. For example, in May 2017, the United States Supreme Court overturned a state-court opinion, ruling that an attorney-in-fact could waive the right to a jury trial on behalf of a decedent even where state law otherwise conveyed to the decedent a “God given right” to a jury trial.

In Kindred Nursing Centers, Limited Partnership v. Clark, the Supreme Court held that the Federal Arbitration Act requires state courts place arbitration agreements “on equal footing with all other contracts.” In so ruling, the Supreme Court overruled the Kentucky Supreme Court’s ruling that to agree to arbitration, “the representative must possess specific authority to waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury.”

Arbitration presents numerous disadvantages often overlooked by inexperienced parties. Architects, engineers, and other design professionals should consent to a mandatory arbitration clause in their contracts only after a thorough consultation with an experienced, local attorney to fully understand the unique advantages and disadvantages of arbitration in the specific jurisdiction.

Many design professionals wrongly believe that arbitration always offers a more cost-effective and predictable alternative to the jury trial system. While this can be true in some large, complex litigation matters, arbitration can be exceedingly more expensive than some parties believe.

The expense of an American Arbitration Association arbitration, especially if it is a mandatory 3-member panel, easily can exceed five or six figures, which would not be incurred if the case is presented to a judge or jury.

A surprising number of design professionals do not understand exactly what rights they are giving up. Design professionals should fully understand that once they agree to arbitration they almost always waive all rights to appeal except in a few, limited circumstances. Typically, the right to appeal will exist only in cases of corruption, fraud, evidence of partiality or misconduct by the arbitrator, exceeding jurisdiction, or refusing to postpone an arbitration hearing for a good cause.

The limited right of appeal and sweeping decision-making power of a single arbitrator often creates significant levels of anxiety among the participants, especially in high-exposure cases involving issues of law that have not been well-settled in the jurisdiction. Such uncertainty may present a strong incentive by one party to settle a claim it otherwise might be willing to try to a jury if the right of appeal were not waived.

The parties also should carefully draft arbitration clauses to agree in advance about what rules of discovery and evidence will apply to avoid future misunderstandings and confusion. For example, it is not uncommon for design professionals to be surprised that pre-arbitration settlement offers and the limits of existing insurance policies regularly are made known to the arbitrator. Such offers of settlement or existence of insurance policy limits rarely would be shown to a jury in a typical jury trial. Many believe such knowledge of pre-suit offers and insurance policy limits can sway arbitrators to award at least some damages to a party that may not otherwise be awarded.

Arbitrations also have distinct advantages of course. Generally, the parties can obtain a final resolution substantially sooner than with a jury trial. It is not uncommon for an arbitration, even in a complex construction matter, to be scheduled within 6 months to a year. The same matter may take 24-36 months to reach a jury trial. When you consider the waiver of any right to appeal, matters routinely are resolved much quicker in arbitration.

Design professionals, however, are often surprised to find that the other side can frustrate the process by refusing to pay their share of arbitration. This can lead to unexpected delays, which frustrates the purpose of arbitration. A well-drafted arbitration clause should include a harsh penalty for any party that fails to fund its share of the arbitration promptly.

One of the significant advantages of arbitration is the ability to adopt more lax rules of evidence and procedure than available in a court of law. This can make it substantially easier to obtain and admit evidence and witness statements (ie., affidavits). This can prove especially helpful in some construction claims, where work crews who are key fact witnesses have moved on to projects in other states or countries.

The ability to selected arbitrators with specific industry experience and technical backgrounds not usually possessed by a trial judge presents another strong factor in favor of arbitration. While the use of such specialized arbitrators can be substantially more expensive, many design professionals prefer arbitrators experienced in their industry because they believe they can more readily predict the results. If the design professional considers this a significant factor, the requirement to use an arbitrator with specific industry experience in construction-related claims should be included in the arbitration clause itself.

Some design professionals prefer arbitration because it affords the parties the opportunity to resolve their dispute without the public nature of a jury trial. The private resolution of disputes can prove especially advantageous when it involves a high-profile claim, the loss of life on a project, or the potential for long-term, reputational damage to the design professional that may far exceed the amount involved in the dispute.

Finally, many design professionals believe arbitration can level the playing field where they are the “out-of-town” party or the less influential or politically-connected party, such as in disputes with local governmental entities or a large, local employer.

Undoubtedly, arbitration clauses are here to stay in the construction industry. Design professionals, however, should carefully review with an experienced attorney whether arbitration may be the right choice on the project, and then carefully draft an arbitration clause that achieves the benefits intended.

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Timothy B. Soefje is Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at www.realclearcounsel.com or contact him at tsoefje@realclearcounsel.com.

Design Professionals Must Prepare Now For The Inevitable

Posted on November 16, 2015July 20, 2017 by Tim Soefje

A wise old lawyer once said: “If you’re not being sued, you’re not making money.”The point he was making was that as a professional’s business grows, it is statistically inevitable litigation will follow.

We partly can blame the rising volume of construction defect lawsuits brought against design professionals on the litigious world in which we live. Design professionals themselves, however, must shoulder some blame as well.

Too many design professionals remain uneducated about the litigation traps they unwittingly create daily on a job site; fail to develop internal policies to mitigate against the risk of suit; and remain unprepared to defend against the inevitable lawsuit when it comes.

A design professional’s legal liability typically flows from the duty to act reasonably with the same skill and care ordinarily exercised by other professionals in their field. A design professional is generally civilly liable only for damages arising from defects in their designs, but the full scope of liability for specific defects in construction or other work by the design professional is typically determined by contract.

How design professionals unwittingly create liability:

Design professionals frequently, however, create liability where none otherwise would exist. Sometimes, design professionals create liability because they are trying to be helpful during the construction process. At other times they create liability because of the conflicting responsibilities imposed by their codes of ethics and professional responsibilities.

For example, the National Society of Professional Engineers (NSPE) Code of Ethics directs engineers to report concerns about building safety to the appropriate individuals or authorities. Ironically, the design professional typically could not be held civilly liable for a failing to report a known design defect or safety hazard, even where an injury or death occurs, unless the state where the events occurred imposes a “Good Samaritan Law” that creates such a duty.

A design professional who fulfills this objection and voluntarily reports a defect or safety hazard could prove the key to a successful defense or even the key to avoiding litigation altogether. Unfortunately, conscientious design professionals attempting to meet their professional responsibilities sometimes unwittingly create liability for construction defect where none would otherwise arise.

Assume a design professional reports a design defect or safety concern to a building owner. In an attempt to be helpful, the design professional voluntarily assumes the role of consultant or adviser to help the owner resolve the potential defect or safety hazard. In such a case, the design professional could be held civilly liable in a subsequent lawsuit brought by the owner or a third party if he fails to act reasonably or breaches the applicable standard of care that results in damages.

For example, assume a sound engineer is retained only to design a theater on the second floor of a building. While inspecting the job site, he observes that the second-floor truss system is improperly designed because splices have not been constructed according to the plans. He reports his concerns to the building owner or general contractor.

The architect, however, goes on to offer his unsolicited opinion the trusses should be fine until repairs can be made or the truss system is replaced. The owner relies on the architect’s opinion to delay taking immediate action. The next week, before repairs can be made, the second-floor collapses, causing substantial property damages and serious bodily injury to several people onsite.

In this circumstance, if the architect would simply have reported his concerns and not offered his opinion the trusses would be okay for a few days, the architect would have fulfilled his professional duties and likely have created no civil liability. In this example, however, the architect can be expected to be sued because he offered his professional opinion the trusses likely would be safe for a few days. As a result, it arguably was reasonable for the owner to rely on that representation to delay taking action to mitigate against the collapse.

In another example, assume the sound engineer goes onsite to inspect the progress, and thereafter, prepares a written report to the owner, noting the second floor is “complete.” The sound engineer recommends the owner move forward with the next phase of the project, including installing the theater seating on the second floor. During construction, the second floor collapses because the trusses were not constructed in accordance with the designs of the truss engineer and were insufficient to hold the additional weight of the seating. People are injured. Litigation will inevitably follow.

A creative plaintiffs’ attorney will argue the owner could reasonably rely on the representations by the sound engineer that the second-floor was “complete” only if the engineer had concluded the truss construction by the contractor and subcontractor was performed in accordance with industry standards and the truss engineer’s plans to adequately hold the weight of the theater seating. In this case, the sound engineer may have unwittingly created liability where none otherwise would have existed because he failed to foresee such liability when preparing his report advising the second-floor was “complete” and his phase of the project was ready to proceed.

Ordinarily, a design professional who approves the work of a contractor that later turns out to have been deficient does not automatically mean the design professional will share liability with the contractor. The design professional, however, likely will be placed in the position of having to explain why the observations and tests he made before approving the work did not uncover the defects.

Every design professional firm should take care to develop internal policies and procedures to mitigate against the risk of creating such legal liability. In our examples above, a careful design professional should have implemented an internal policy that prohibited any design professional from individually offering any onsite opinion or consultations that were outside the scope of the written contract with the design professional’s firm.

Where a design professional is asked to offer such an opinion onsite, a clearly-worded policy could be drafted to require the design professional to obtain express, written authorization from a firm supervisor. The supervisor, in turn, confirms in writing with the owner/contractor the scope and limitations of liability applicable to such an unplanned opinions or consultations that are outside the scope of the original contract and arise only because of the unique situation involving a design defect or safety concern.

What to include in a litigation mitigation policy:

A strong litigation mitigation policy should mandate that every design professional who reports any defect or safety concern should immediately document:

who was told;
what was said;
when it reported;
where the report was made;
why the design professional felt compelled to report, and
how the matter was resolved, including whether the design professional offered any opinion or consultation as to how to resolve the defect or safety hazard.

Every design professional firm would be well-advised to develop a written form for reporting such communication, which is signed by the reporting design professional.

The internal litigation mitigation policy should advise all design professionals to routinely clarify in all external oral or written communication that they are making no representations that can be construed as approval of any work performed by any contractor or subcontractor for which the design professional is not contractually responsible. It may be advisable to draft standard, limitation of representation language to be included in any outgoing emails or correspondence.

While such steps may appear excessive and burdensome, invariably lawsuits seem to turn on the innocuous email or handwritten notation prepared without consideration at the time of how the email or report would be used in subsequent litigation.

Additionally, every design professional firm should develop a litigation response plan. For example, every design professional firm should designate an internal litigation response team comprised of senior members of the firm, who are prepared to act quickly when a situation arises.

Every design firm should develop a strong relationship with an experienced construction litigation counsel who becomes part of such a litigation response team. By directing the investigation, litigation counsel can seek to preserve the attorney client privilege for documents prepared as part of the investigation, communications among employees, and investigations of potential witnesses.

The firm’s litigation response plan also should include a well-defined document retention policy to preserve all emails, correspondence, and documentation that may be available for anyone involved in the incident. Frequently, the preservation of documents only arises as an afterthought once a lawsuit is filed, which may be years after emails and a construction file it lost or destroyed in the ordinary course of business.

Experience litigation counsel also can assist a design professional firm and its professional liability insurer to quickly evaluate the design professional’s potential exposure and possibly help coordinate a plan with other potentially responsible third parties to develop a cost-effective a mitigation plan to reduce the future damages and costs of litigation.

Design professional companies must prepare for the inevitability of litigation through a long-term commitment to ethical conduct; the implementation of ongoing, internal training to educate their employees on the legal pitfalls that confront design professionals every day; and development of strong internal policies and procedures to quickly respond and effectively manage the inevitable litigation that will arise. A well-crafted litigation mitigation and response plan is a positive first step.

The basics of a litigation mitigation plan check list:

Establish written ethics policy;
Internal training to avoid creating unintended legal liability;
Documentation of all external communication with owners, contractors, and subcontractors;
Implement limitation of liability language for all external communications;
Require written supervisor’s approval prior to any design professional offering any advice or consultation outside scope of a written contract;
Develop documentation retention policy;
Designated internal litigation response team of senior design professionals and project leaders;
Establish a pre-existing relationship with qualified legal counsel.

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For a quick-tip video on this topic and other issues effecting design professionals, architects and engineers, visit http://admiral-design.omnisure.com/quick-tip-videos/

Timothy B. Soefje is Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC. in Dallas, Texas. Follow him on Twitter at @TimSoefje. For more information, visit at www.realclearcounsel.com or contact Mr. Soefje at tsoefje@realclearcounsel.com