This article is the sixth in my series of discussions about contractual risk allocation. This installment focuses on two design-related contract clauses (1) adequacy of design and (2) design responsibility. Both clauses address potential liability for design errors and omissions. Both also contain the potential to assign significant liability to contractors who have very little ability to mitigate or control the associated risks.
Adequacy of Design:
In Texas, the common law states that the contractor warrants the plans and specifications for the adequacy of design. This rule of law dates back to a 1907 case called Lonergan v. San Antonio Loan & Trust.
In that case, the contractor, Lonergan, agreed to construct a building using owner-supplied plans and specifications. Once completed, the building collapsed and the owner required Lonergan to rebuild it at its own cost. In the lawsuit that followed, the court ruled that the owner was not in a position to guarantee that the design documents would be sufficient to build the structure. In fact, the court held that the contractor was in a better position than the owner to know whether the plans and specifications were defective and that by submitting a bid, the contractor was accepting the risk of defective plans.
The Lonergan Doctrine, as it is known, is problematic for contractors. It places a high amount of risk on the contractor for work done by a design professional. The contractor has no control over the quality of the design professional or its work product. Because the owner contracts chooses the design professional and can control the quality of the design, the owner is best positioned to accept the risk of inadequate design.
Further exacerbating the problem for contractors is the fact that the Texas Supreme Court has recently held that contractors cannot sue design professionals for negligence or negligent misrepresentation. The recent case means contractors have to sue owners for damages resulting from design errors. The court determined that this arrangement made sense because it maintained the contractual links between the parties. However, when the Lonergan Doctrine is added to the equation, the contractor is left without recourse. If the design fails or requires accommodations during construction, the owner has a remedy against the design professional.
Because a contractor’s only remedy is against an owner, the Lonergan Doctrine plays an important role in risk assessment. Unless the contract places the burden of faulty design on the owner, a contractor might be in the position of accepting all-risks for faulty design without any recourse from either the owner or design professional. The key clause for contractors to look for is one that expressly places the warranty for adequacy of design on the owner.
If the owner represents that the contract documents are suitable for use in constructing the project and warrants the adequacy of design, the contractor’s rights are preserved. Likewise, the owner still retains its rights against the design professional. This type of clause will place risk on the parties most able to accept it and provides an equitable allocation for this concern.
Design responsibility clauses work in connection with the adequacy of design issue. Typically, these clauses require contractors to review the design documents prior to commencing performance. Often, these clauses have covenants assigned to the contractor regarding notification of potential design errors. Some of these clauses contain language that creates liability or waives claims dependent upon the actions or inaction by the contractor.
A design responsibility clause that is particularly onerous for contractors would be one that reads as follows:
Before beginning the Work, Contractor shall carefully examine the Contract Documents and shall verify field conditions in order to determine that the Work can be performed in accordance with the design. Contractor must notify Engineer of any discrepancies, conflicts, or concerns with the Contract Documents prior to commencing Work. If Contractor fails to review the Contract Documents or prosecutes the Work without first notifying the Engineer of a potential conflict, Contractor shall be liable to Owner for all costs, claims and damages that arise from or could have been avoided if Contractor had performed its obligation in accordance with this section.
A slightly less burdensome clause would not make the contractor liable for damages, but would contain a waiver of claims. Such a clause eliminates the contractor’s ability to recover costs if the contractor failed to provide notice of a conflict and the performance of the work created extra costs in overcoming the design error. A clause of this nature might replace the last sentence of the clause above with the following:
Should Contractor fail to notify Engineer of any potential errors, conflicts, discrepancies, or concerns, Contractor expressly waives any claims for damages or increases to the Contract Sum and Contract Time resulting from any required correction, modification, or accommodation to relieve the design concern.
The take-away for design responsibility clauses—contractors should seek to negotiate a clause that engenders cooperation among the parties. A clause that utilizes the capacities of all parties and accomplishes an equitable allocation of risk should be the goal.
An equitable clause would require contractors to carefully examine the contract documents before commencing work to avoid conflicts. The engineer would then be given an opportunity to evaluate and review the potential conflict. Finally, the owner would accept liability to pay for any necessary accommodation. This arrangement places risk appropriately because 1) contractors should be responsible to owners and offer expertise in means and methods, 2) engineers should be given the opportunity to properly design the work, and 3) owners should pay for the work required to deliver a final project. In this situation, each party bears responsibility for its role and responsibilities while preserving the rights and recourse granted to it by law.