Hidden risks in design contracts

This subtle but onerous language is becoming fairly widespread in design contracts and, if overlooked, could leave design firms with significant, potentially uninsured exposures.

When design and construction professionals negotiate contracts with clients, they know to flag potential issues involving standard of care and indemnification. Now, however, the uncertainty of maintaining firm revenues and viable project backlogs could prompt some professional firms to miss and sign on to less obvious contractual terms they ordinarily would sought to have deleted, or at least modified, under pre-COVID circumstances.

Here are four examples of subtle but onerous language that’s becoming fairly widespread in design contracts and, if overlooked or unaddressed, could leave design firms with significant and potentially uninsured exposures:

1. Agreeing to act in a fiduciary capacity. While most AEC firms won’t agree to contract clauses obliging them to act to the highest level of their profession, certain contractual language may have the same implications. Consider this wording taken from an architect-engineer sub-consultant agreement: “Consultant accepts the relationship of trust and confidence established between it and Architect….” This “disguised” standard of care language may be as problematic as agreeing to perform to the highest standards. Why? This language includes “key” words creating a fiduciary relationship between the parties. A fiduciary owes the utmost level of care and must put its interests aside in all of its dealings as a fiduciary or trustee. This relationship is typically not present in the AEC context and is reserved to situations where the beneficiary is at a measurable disadvantage to the fiduciary (such as monies in a trust account set aside for the benefit of a minor). A fiduciary relationship is not evaluated in the context of “reasonable” performance and is therefore potentially subject to standard policy limitations tying professional liability coverage to a “reasonable” standard of care while excluding purely contractual assumptions of liability (such as a guarantee of perfect performance).
2. Hiring consultants historically hired directly by the owner. Owners typically hire architects (or engineers) to design their project; the architect (or engineer) then hires subconsultants covering various service disciplines. That stated, some scopes of services, such as geotechnical engineering and environmental investigations, are traditionally independently retained by the owner, outside the prime designer’s responsibilities. However, more contracts are requiring the prime consultant to retain all subconsultants on the project including firms selected by the owner. Design firms generally should not agree to this. If you hold the contract, you are liable for the subs’ negligence and the owner may sue you for their error.
3. No right to rely on owner supplied information. In any project, the design team can only complete its work after it receives relevant information and documents from the owner – be it geotechnical reports, as-builts of existent structures, etc. Traditionally, contracts addressed at least two related obligations – one on the owner to provide accurate information in a timely manner; the other on the designer giving them and their subs the right to rely on that information. Watch for overly broad language requiring the designer to identify and ask the owner for information needed to perform their services. Try to convince the owner to remove wording imposing an affirmative duty on the designer to verify all owner-supplied information, asserting the designer has “no right” to rely on such information, and that it is proceeding at its own risk. Recognize that if you accept this language, you technically “own” that owner-supplied information and consequently are liable for any damages resulting from errors or omissions present in or arising from reliance upon or use of that information.
4. Acknowledging the impact of COVID-19 as a Guarantee of Schedule. Think back to March 2020, when COVID, the transition to remote workstations, and project shutdowns drew our attention to the nuances of force majeure provisions (or lack of them) in professional service agreements. Reasonable force majeure clauses could give both sides to the contract – the client and design firm – the mechanism to take reasonably accommodated project interruptions regarding schedule, etc. Sound business practice during the ensuing summer months may have included the tweaking of your form agreements to specifically list “pandemics” or “COVID” as a trigger event to the force majeure clause. Recently, however, contracts have included language, such as the following: Consultant acknowledges that it is fully versed in the potential impact of COVID-19 on its workforce and on projects of this nature. Consultant warrants that COVID will not have any current or future impact on its ability to perform its services on time, on-budget, and so as not to adversely impact the overall Project. The concern is twofold. As a practical matter, how can anyone know the future impact of COVID? Nonetheless, you’re required to attest that you can/have and that no future government guidelines – local, state, or federal – will impact your ability to perform the “services.” Second, the provision is a written warranty of performing on time (and on budget) and any claim made against you citing this language would likely be excluded from coverage. In a real sense, this language is the exact opposite of reasonable force majeure provision and ideally would be deleted form the final, signed agreement.

Even as they seek to win more business in the challenging environment caused by the pandemic, AEC firms must remain vigilant about not assuming excessive risk. By carefully reviewing their contracts – ideally with the assistance of an attorney and knowledgeable insurance broker – AEC firms may avoid inadvertently signing on to significant additional exposures, uninsured risks, and elevated costs.

Rob Hughes, senior vice president and partner, Ames & Gough. He can be reached at rhughes@amesgough.com.