design professional liability in construction

Design Professional Liability in Construction Evaluating Project Delivery Models, Analyzing the Scope of Liability,

and Minimizing Risk Through Contract Terms

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WEDNESDAY, AUGUST 15, 2012

Presenting a live 90-minute webinar with interactive Q&A

Joel L. Halverson, Member, Severson & Werson, San Francisco

Theodore D. Levin, Partner, Morris Polich & Purdy, Los Angeles

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DESIGN PROFESSIONAL

LIABILITY IN CONSTRUCTION

August 15, 2012

Joel L. Halverson, Severson & Werson

[email protected]

415-677-5629

Theodore D. Levin, Morris Polich & Purdy

213.891.9100

[email protected]

Panel Topics 6

1. Standard of Care

A. General

B. Contractual

C. Statutory

2. Modern Project Delivery Methods

A. Design/Build

B. BIM

C. IPD

D. Green / Sustainable

3. Effective Project Documentation

4. Recent Legal Developments of Note

Sources of the Design

Professional's Obligations 7

Defined by Law

Defined by Contract

Defined by Licensing Laws & Regulations

Influenced by Ethical Canons and Standards

The Standard of Care

Common Definition

In performing professional services for a client, an engineer has the duty

to have that degree of learning and skill ordinarily possessed by reputable

engineers, practicing in the same or similar locality and under similar

circumstances.

It is his further duty to use the care and skill ordinarily used in like cases

by reputable members of his profession practicing in the same or similar

locality under similar circumstances, and to use reasonable diligence and

his best judgment in the exercise of his professional skill and in the

application of his learning, in an effort to accomplish the purpose for which

he was employed.

(Clark v. City of Seward, 659 P.2d 1227 (Alaska 1983) (emphasis added).)

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The Standard of Care

Core components:

Ordinary, not superior.

Geographically limited.

Limited by similar circumstance (which is most often project type, delivery model and corresponding time period).

(AIA B101 2007, Article 2.2)

9

The Design Professional’s

Statutory Obligations 10

Professional Codes

To protect public health, safety and welfare

Building Codes

Enacted by State and Local Authorities

Regulate the Design Product Rather Than the Process


Statutory Obligations 11

Rules of Professional Conduct NCARB Rules of Conduct

AIA Code of Ethics & Professional Conduct

State Rules, e.g., California’s “Rules of Professional Conduct”

Protection of the Public

Professional Integrity

Design Excellence

Advancing the Profession

Conflicts of Interest

Continuing Education Requirements

The Design Professional’s Duties 12

Duty is Owed to the General Public

The “Client”

The “Passer-By”

Injured Workers (responsibility for construction

means and methods?)

Conflicts of interest?


Contractual Obligations 13

Design Aesthetics and Materials Specifications

Responsibility for Consultants

Construction Cost

Construction Quality

On-Site Observation

14

Actual Damages

Injury to Persons or Property

Economic Loss?

Punitive and Exemplary Damages

Attorneys’ Fees and Costs

Licensee is Personally Responsible

Potential Civil Liabilities

Modern Project Delivery Methods: Design/Build

15

The Nature of the Design-Build Entity is Affected

by Legal Limitations

Contractor’s License Required in Many States to

Offer Construction Services

• An unlicensed contractor, or improperly licensed

contractor, is denied access to the courts to collect

compensation.

Only Registered Architects or Engineers Can Offer

Design Services in Many States

16

States Limit The Entities Which May Provide Design Services:

Professional Corporation

Limited Liability Company

Partnership

Limited Partnership

Limited Liability Partnership

Designer and Builder Joint Venture

Design Professional Offering or Subcontracting Construction Services

General Contractor Offering or Subcontracting Design Services

Engineering Contractor Offering or Subcontracting Design Services

Modern Project Delivery Methods: Design/Build

Modern Project Delivery Methods: BIM

Building Information Modeling Characteristics – Three

Dimensional Modeling

The BIM model is the index to data, providing the foundation

for the organization and linking of graphics and data.

A change in any view is reflected in all other views and the

associated schedules.

The model consists of intelligent objects/assemblies,

sometimes linked to the Internet to access additional data.

Each trade maintains its own system model that is integrated

into a single BIM for clash detection and conflict resolution.

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BIM Characteristics

Data associated with BIM objects and assemblies can be used to analyze:

structural parameters and performance

shading and shadows

wind and air flow

radiance

massing

acoustic performance

energy performance

lighting requirements

quantity take-offs

costing

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The Allure and Promises of BIM

“When you can design and document in exacting detail and accuracy, when you can test and simulate without constructing, when construction costs can be reduced 20 percent and more, when construction time can be reduced significantly and when you can efficiently maintain and operate completed projects, it changes everything.”

(Dennis Neeley, SmartBIM, Western Region 2012 Spring Meeting, American Architectural Manufacturers Association, April 10-11, 2012.)

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Is BIM the Standard of Care?

In 2009, about 50% of surveyed construction professionals, mostly contractors, in the U.S. were using BIM.

February 2012 UK Survey of design professionals:

% of Professionals

31% Reported currently using BIM (more than double since 2010).

63% Agreed BIM is too expensive to consider at the moment.

65% Reported BIM delivers cost efficiencies.

78% Reported BIM is the “future of project information.”

80% Agreed BIM increases coordination of construction docs.

80% Reported that the industry is not clear on what BIM is.

95% Expected to be using BIM within five years.

20


The Obstacles of BIM

Cost.

Time, including more downtime on the front

end due to extra training required.

For most projects, the BIM models are not

shared or integrated.

21

Modern Project Delivery Methods: IPD

Integrated Project Delivery – “All for One, One for All”

Owners, architects and contractors make decisions as a

team, take on risk as a team and are rewarded as a

team.

Project goals are placed ahead of individual interests.

Core team members (owner, architect/engineer and

contractor) are selected based on their experience,

technical expertise, and ability to communicate and work

collaboratively—not just on who offers the lowest price.

Team members work collaboratively to find solutions

rather than shift blame.

22


IPD Logistics

Core team members sign one contract, with minimal legal

precedent.

Other team members, such as subcontractors, sign onto the contract

and agree to adhere to the scope of work and level of responsibility

and collaboration.

Contingencies are lumped together, so the success of every team

member is directly tied to the performance of all other team

members.

Liability waivers and fiscal transparency are typical, with a no-fault

sharing of cost overruns on a pre-determined basis.

IPD promises cost predictability, high-performance design and long-

term efficiency of building operations.

23


IPD is enabled through the use of BIM because it

forces builders and designers to be together and

build the project virtually, requiring integration at an

early stage:

Identify and resolve design issues.

Provide strategic cost estimating services.

Influence construction sequencing.

Streamline materials procurement.

24


“Target Value Design” replaces value engineering and mandates the GMP cannot be exceeded.

Designs are prepared according to a detailed estimate, rather than having builders estimate based on a detailed design.

The design is constrained by cost, leading to potential problems.

25


Most Common IPD Projects Designed By AIA Members

24% Healthcare facilities

14% Single-family homes

12% Government buildings

12% Education facilities

10% Office space

(April 2012 Survey by AIA Center for Integrated Practice.)

26


Is IPD the Standard of Care?

Owners must be convinced, but:

Do not see advantages.

Are resistant to change, especially in recessionary times.

Are concerned about the general lack of precedent.

Are usually able to have projects built on time and budget according to traditional delivery methods.

27


Is IPD the Standard of Care? % of AIA Members

84% Were aware of IPD’s market presence.

70% Associated cost predictability with delivery methods such as IPD.

62% Associated schedule predictability with delivery methods such as IPD.

59 % Associated construction efficiency with delivery methods such as IPD.

55% Associated risk management with delivery methods such as IPD.

40% Demonstrated an understanding of IPD.

13% Reported having used IPD as a delivery method.

(April 2012 Survey by AIA Center for Integrated Practice.)

28

Risks and Challenges of BIM for the

Design Professional

Identifying where BIM is required by the “normal”

practice.

Embracing available processes and technologies no later

than when they become “ordinary.”

Retaining and continuing to apply the professional skill

and judgment consistent with the training and licensing

to verify and validate output data.

Defining the boundaries of contractual commitments

consistent with capacity to fulfill those commitments.

Documenting the key assumptions, expectations,

procedures, mutual expectations and future uses.

29

Risks and Challenges of BIM for the

Design Professional

Identifying contributors’ roles, contributions and rights of

access, modification and use.

Establishing contributors’ responsibilities for content, process

and schedule requirements for input and validation.

Determining when to open the model to use, contribution, and

manipulation by others and then transferring primary overall

responsibility for the model at that point.

Reasonably tempering client and contractor expectations by

making clear that BIM by itself is only a technology.

30

Risks and Challenges of IPD for the

Design Professional

Identifying where IPD is required by the “normal”

practice.

Changing established behaviors and attitudes.

Ensuring all parties clearly understand their

responsibilities and liabilities.

Identifying hidden liabilities.

31

Risks and Challenges of IPD for the

Design Professional

Avoiding insurance coverage problems.

Identifying and developing the necessary

skills/knowledge.

Addressing licensing concerns.

Defining the boundaries of contractual

commitments consistent with capacity to fulfill

those commitments.

32

GREEN / SUSTAINABLE DESIGN

The Purpose of Green / Sustainable Design:

“To eliminate negative environmental impact

completely through skillful, sensitive design.”

(McLennan, J. F. (2004), The Philosophy of Sustainable

Design)

33


Statutory requirements at multiple levels of government:

New 2012 IgCC – “International Green Construction Code”

1998 U.S. Green Building Council (USGBC) – environmental sustainability and resource conservation

CALGreen – California’s mandatory minimum sustainable design

building code, applicable to new residential construction,

commercial buildings, hospitals and schools

International Energy Conservation Code

ICC-700, the National Green Building Standard

ASHRAE Standard 189.1

Municipal requirements

34


Voluntary Standards:

In addition to mandatory standards, voluntary categories

for owners who want their buildings to be even “greener”

Leadership in Energy and Environmental Design (LEED)

– most popular and well-known green building

certification program in the U.S.

Green Globes

GreenPoint

35


Voluntary Standards:

most are a point-based certification systems, allowing

building developers to reach certain levels of “greenness”

in different ways

third party verification can be very expensive

can also add significant time to project delivery

36

CALGreen has two separate sets of voluntary

code provisions raising the bar even higher:

– Voluntary Tier 1

For example, buildings to achieve a 15% reduction in energy use

over current Title 24 California Energy Code requirements

– Voluntary Tier 2

For example, buildings to achieve a 30% reduction in energy use

over current Title 24 California Energy Code requirements

GREEN / SUSTAINABLE DESIGN 37

Risks, Liabilities and Client Considerations

Associated with Sustainable Design

Understand, manage and document the Owner’s design

expectations and “green” program

Document that CALGreen/LEED/or other certification is new and

may be subject to interpretation

Never guarantee a level of certification

Clearly define roles and responsibilities of project participants

Carefully identify the specific tasks required to accomplish the

project requirements, and assign to party best suited to complete

the task

38



Representations as to the qualifications or experience with

sustainable design

Review website/marketing materials, and carefully consider how

qualifications and experience are represented

Be careful of promises or over-generalizations when

discussing project performance

Failure to properly use, or consider, “newer” technologies,

including those that may be used for design and “sustainable

value engineering”

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Liability for products to be specified as part of the design

Risk with new, experimental or innovative products, practices or

technologies

Risk of project impact (e.g., delay and acceleration) and other

claims resulting from sustainable design requirements

New legislative schemes will require additional governmental

oversight/involvement, and paperwork

Need to be considered in the budgeting and

scheduling process

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Costs to later implement sustainable design elements, lost tax

incentives, and lost or reduced leases:

Tax and other governmental incentives relating to green building

Tax credits, grants and other public sector incentives under stimulus

legislation for green, sustainable and energy efficient construction

Incentives and related deadlines /schedules must be identified as

project goals early in a project’s design in order to ensure that the

Owner is able to take advantage of them

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Project Documentation – The

Contract 42

Before beginning work, a Design Professional must sign a written contract with its client, which includes:

A description of services to be provided,

A description of any basis of compensation applicable to the

contract, and method of payment agreed upon by the parties,

The name, address, and license or certificate number of the

Design Professional, and the name and address of the client,

A description of the procedure that the Design Professional and

the client will use to accommodate additional services, and

A description of the procedure to be used by any party to terminate

the contract.


Contract 43

Scope of Services - “An Engineer’s duty is dependent

only on his/her contractual obligations.” (Thompson v.

Gordon, Ill. S.Ct., January, 2011.)

Make certain that contractual scope of services

accurately reflects project responsibilities.

If the Design Professional’s scope is broadly defined

in the contract (or not defined at all), then its liability

will be similarly broad.

More specificity is better.


Contract 44

Language to avoid in a scope of services

provisions:

“…the consultant will perform all necessary

services…”

“…the consultant will provide complete

services…”


Contract 45

“Standard of Care: 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 Engineer’s services.” Engineers Joint Contract Documents Committee (EJCDC); Article 6.01 A.


Contract 46

Related liability and risk drivers

Avoid giving any guarantees or warranties of the

design professionals work or quality

Disclaim fiduciary responsibilities (Carter & Burgess

v. City of Victorville jury verdict)

Scope Creep: performing work beyond the Design

Professional’s contractual scope of services


Contract 47

Limitation of Liability Clause

provision that limits the Design Professional’s

maximum liability to a set amount

good leverage in litigation, including settlement

negotiations


Contract 48

Factors Affecting Enforceability of Limitation of Liability Clauses:

a fair opportunity to accept, reject or modify the

provision

the relative bargaining power of the parties

the visibility of the clause (type size and font)

the amount of the cap compared with potential

damages that might be caused by the Design

Professional

initialing of the provision


Contract 49

Waivers of Consequential Damages

Parties agree to waive damages that do not arise

directly from a breach of the contract, but rather by

“special circumstances” that may not be foreseen

Consequential damages usually include loss of

profits, delay damages, lost productivity, and similar

type claims


Contract 50

“No Third Party Beneficiaries” Provision

Clause that prevents those not a party to the

contract from claiming legal rights to enforce the

contract or share in proceeds

If not included, can create unintended

consequences to contract and expand claims

against Design Professional (e.g., contractor suing

for alleged breach of Owner/Design Professional

contract as “third party beneficiary”)

Documentation Strategy During Construction

Purposes of Contemporaneous Documentation:

Clear Communication

Organization / Efficiency

Reconstructing the Project: For the Design Professional’s own recollection and

verification

For others on project

For claims / litigation

51


Document in writing all non-written communications

(e.g., telephone, voicemail and informal and formal

meetings) which involve:

An agreement on a point of significance

Notification to another party of a point of

significance

A request for some action or follow-up on a point

of significance

52


Other Key Contemporaneous Documentation Considerations

Transmittals should include a complete and detailed description of the information being transmitted, the purpose of the transmittal, and the expected follow-up.

All project-related e-mail should be incorporated into the project records and staff members must be reminded that e-mails are professional communications.

Texting should be limited to scheduling and requests for communication, never for project information given or received.

53

Insurance Considerations for the Design

Professional

The Design Professional’s insurance policy may not

provide coverage for obligations assumed through

contractual indemnity, such as with attorneys’ fees.

To keep indemnity clauses within the coverage grant of the

policy, it is essential that the Design Professional:

Only accept responsibility for damages to the extent caused

by his or her negligence

Reject language calling for the Design Professional to defend

the client (or anyone else)

54

Recent Legal Developments of Note

Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal. 4th 541

Indemnitors owe an immediate duty to defend indemnitees irrespective of negligence.

Merely by agreeing to provide contractual indemnity, the indemnitor is obligated – absent language to the contrary – to pay the indemnitees’ attorneys’ fees and costs irrespective of indemnitor’s negligence.

55


UDC Universal Development L.P. v.

CH2M Hill (2010) 181 Cal.App.4th 10

Expanded Crawford -- Although no allegation

that CH2M Hill was negligent, developer’s

determination that HOA’s claims “implicated”

CH2M Hill’s work on the project triggered duty

to defend.

56


Equal Rights Center v. Niles Bolton 602 F.3d 597 (4th Cir. 2010)

A developer of multi-family housing projects hired architect Niles Bolton to design apartment buildings that the Equal Rights Center and several other disability advocacy groups claimed violated the FHA and ADA provisions requiring multi-family buildings to be designed and constructed to be accessible to persons with disabilities.

Developer filed a cross-claim against its architect to recover its damages and the remediation costs “given Niles Bolton’s superior knowledge, skill and involvement in the design of the properties.”

57


Equal Rights Center v. Niles Bolton 602 F.3d 597 (4th Cir. 2010)

Fourth Circuit ruled that an owner who has been found in violation of the FHA or ADA cannot seek indemnity from its architect for the costs to remedy the violations.

Such state law claims are preempted by the FHA and the ADA since they “interfere with the methods by which the federal statute was design to reach its goal.”

“Compliance with the ADA and FHA is ‘non-delegable’ in that an owner cannot ‘insulate himself from liability for…discrimination’ in regard to living premises owned by him and managed for his benefit merely by relinquishing responsibility to another party.”

58


Terracon Consultants v. Mandalay Resort Group 206 P.3d 81 (Nev. 2009)

Terracon, a geotechnical engineering firm, prepared a soils report and recommended foundation designs for the construction of a $1 billion resort hotel in Las Vegas. Based on its analysis and the anticipated weight of the building, Terracon predicted a certain amount of settling would occur. The building, however, ultimately settled considerably more than projected.

The court held that the economic loss doctrine applies to preclude negligence-based claims against Design Professionals who provide services in the commercial property development or improvement process.

59


Terracon Consultants v. Mandalay Resort Group 206 P.3d 81 (Nev. 2009)

“Purely economic loss” = “the loss of the benefit of the user’s bargain including pecuniary damage for inadequate value, the cost of repair and replacement of a defective product, or consequent loss of profits, without any claim of personal injury or damage to other property.”

The doctrine’s purpose is “to shield defendants from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable.”

Left open the question of whether economic losses are recoverable under negligent misrepresentation theory.

60


Rolf Jensen & Assocs., Inc. v. Mandalay Corporation 128 Nev., Advance Opinion 42 (Nev. 2012)

Following Niles Bolton, the Nevada Supreme Court held that that the ADA preempts indemnity claims brought by owners for their own violations.

Concerning Mandalay’s other remaining state claims for breach of contract, breach of express warranty and negligent misrepresentation, the Court held that these claims were also preempted by the ADA “because, in substance, these claims are merely a reiteration of Mandalay’s claim for indemnification.”

61


Carter & Burgess v. City of Victorville (Cal. Superior Court, 2010)

The City of Victorville was awarded $52.1 million from Carter and Burgess, the Design Engineer, Owner’s Engineer and Construction Manager for the Foxborough Cogeneration Power Plant.

The jury found that Carter and Burgess negligently misrepresented key facts to the City that turned out to be untrue and which the City relied upon to make its decision to build the plant.

This was the first time that a breach of fiduciary duty verdict was returned against a California engineering firm.

62


Precision Planning, Inc. v. Richmark Communities, Inc. 679 S.E.2d 43 (Ga. App. 2009)

A $50,000 Limitation of Liability clause in a contract was enforced by the Georgia Court of Appeals in a case where a developer sued an architect for breach of contract and negligence when a retaining wall failed.

The developer had the option of paying more for a higher limitation of liability. It did not exercise that option.

63


“Anti-Indemnity” Cases

Oklahoma – ruled contrary to Crawford in Estate of King v. Waggoner County Board of County Commissioners (2006) 146 P.3d 833 (Pre-Crawford)

Arizona - MT Builders LLC. v. Fisher Roofing, Inc. (2008) 197 P.3d 758, 764-765 held that defense obligation only existed for indemnitor’s negligence

Nevada – Reyburn Lawn & Landscape Designers, Inc. v. Plaster (2011) 255 P.3d 268, 278 held that the indemnity provision did not require a defense obligation for the indemnitee’s own negligence

64


“Anti-Indemnity” Statutes

Florida Stat. §725.08 - precludes indemnity provisions between public agencies and design professionals, except for provisions that would require a party to indemnify or hold harmless the other party to the extent of negligence caused by the indemnifying party.

Texas Local Gov’t Code § 271.904 - bars contracts between licensed engineers and/or registered architects with government that require indemnification of defense beyond the design professional’s negligence.

California Civ. Code §2782, et seq. - various similar limitations on indemnity provisions, including construction contracts and agreements with public entities.

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