Risk Management Articles
Limiting Exposure for Contractor Claims Against Design Professionals
By Paul M. Lurie, Esq.
Construction contractors can be the source of legal claims, which can cause financial damage to design professionals. This damage can take the form of legal awards, settlements, attorneys and expert expense. Even without direct expense the claims can damage client relationships and result in negative inferences in future design selection processes. These claims are usually brought for delay damages caused by interference with the contractor's as-planned construction schedule. Even when the project finishes on time, the contractor may claim damages for loss of efficiency or acceleration of effort to meet the schedule. Even if the design professional is exonerated, these claims can be expensive to defend because they often involve examination of the entire construction process and the use of expensive scheduling experts and accountants.
There are several specific claims the general contractor may make against the design professional. Contractors may make direct claims against design professionals alleging some error, omission, delay or interference caused by the design professional. Typical claims allege excessive errors or omissions, delay in reviewing shop drawings and/or delay in responding to requests for information. Where the contractor's claim is against the prime professional, that professional may seek recourse from the consulting engineer.
Some states prohibit direct claims for "economic losses" against parties with whom there is no direct contractual relationship. A primary function of the AIA and EJCDC form agreements is to prevent such a direct contractual relationship. In those states where such claims for "economic loss" are restricted, the contractor makes his claims against the owner with whom it has a contract. The owner may then seek recourse against its design professionals.
What strategies can limit the design professional's exposure to these claims?
- In states that do allow direct claims for economic losses, the construction contract should have a supplementary general condition in which the contractor agrees to look solely to the owner for any claims and cannot maintain a direct action against the design professional. The contractor is not giving up the claim; rather it must pursue only the entity that is a party to the contract.
- If the claim is made only against the owner, the client should be persuaded not to file a third party action against the design professional. Usually the design professional can be of great assistance to the owner and it is not in the owner's best interest to become adverse to the design professional. The owner's willingness to defer a claim is usually based on an assurance that the design professional and its insurer will stand behind the design professional's services.
- Discourage the use of the project schedule as a contract document. The contract time should be defined in the construction agreement. The project schedule can establish "milestones" which, if not reached, can be the basis for a contractor claim. If the schedule is a contract document, disclaim any entitlement to the contractor based on an early finish. In any event, avoid the inclusion of unrealistic contract completion times without the limitations of liability discussed below.
- Provide in the contract documents that delay claims based on the review of submittals can only be compensable after a notice period to the owner and the design professional. Further, contractors should be required to adhere to the submittal schedule and not allow the design professionals to become overloaded by tardy submittals.
- Insist on not removing the non-binding alternative dispute resolution techniques from the AIA and EJCDC form agreements. Where the consulting engineer is not the prime, this may require education of the engineer's client. When a contractor-owner dispute develops, the design professionals should be keenly interested in making sure that an effective mediation process is utilized using experienced and trained construction mediators. The design professionals on large projects may want to encourage the use of Dispute Review Boards. Since most construction disputes are settled, rather than tried, a lot of expense and aggravation can be avoided if settlements occur earlier rather than later in the dispute resolution process.
- Binding arbitration should be encouraged as the backstop to the non-binding remedies. The fear of an arbitration award often encourages settlement during mediation. Further, it is likely that experienced arbitrators, rather than judges and jurors, can better understand the role of the design professional as distinguished from the contractor. Moreover, the use of the AIA and EJCDC arbitration clauses in the design professional agreements prevents the consolidation of an arbitration between the design professional and the owner with the arbitration between the contractor and the owner.
- The 1997 AIA documents provide for a waiver of consequential damages in both the construction and design professional agreements. This would effectively limit most type of contractor delay claims. These clauses should not be stricken. However, the owner should understand that by including such clauses, the owner also given up its claims for delay in contract completion. Often the trade off is valuable to the owner.
Paul M. Lurie is a senior partner in the Construction Group of the law firm of Schiff Hardin & Waite in Chicago (ph: 312-258-5660 or e-mail: firstname.lastname@example.org). He is general counsel to many architectural and engineering firms and a regular contributor to STRUCTURE.