What would you do if you were asked to sign a contract with the following provision?
Design Professional warrants and represents that the Services and Work Product shall be free from faults and defects of design, material, and workmanship. Design Professional agrees it shall immediately take any and all measures required to satisfy its warranty obligations to correct any faults and defects, without cost to Client.
Hidden risks
When you warrant or represent a certain condition, it creates a promise to deliver that specific result. This allows your client to seek damages in the event that the promised condition fails to materialize or proves to be untrue. Warranties and representations are particularly concerning when the promise is coupled with phrases such as, “free from faults and defects” or an obligation to “correct any faults and defects, without cost to the Client.”
By holding you responsible for all errors and defects, even those caused by factors outside of your reasonable control, the above language imposes on you a standard of perfection in the performance of your services. To illustrate the implications of this type of language: let’s say that an error in your design is attributable to an inaccuracy in the soils report provided to you by the client or the client’s consultant, or your failure to comply with applicable regulations is attributable to the enactment of new laws passed after your designs were accepted by your client. Who should bear the cost of correcting those defects? If you accept responsibility for the heightened standard imposed by the language above, the answer could be you.
Coverage concerns
In contrast, the law holds you to a standard of reasonable skill and care, requiring that your services comport with what a reasonable professional with your same education, training, and background would have done under similar circumstances. This standard does not rise to the level of perfection and allows for reasonable errors or defects, such as those caused by factors outside of your control. As was so exquisitely explained by the court in City of Mounds View v. Walijarvi in 1978:
Architects, doctors, engineers, attorneys, and others deal in somewhat inexact sciences and are continually called upon to exercise their skilled judgment in order to anticipate and provide for random factors which are incapable of precise measurement…because of the inescapable possibility of error which inheres in these services, the law has traditionally required, not perfect results, but rather the exercise of that skill and judgment which can be reasonably expected from similarly situated professionals (see, City of Mounds View v. Walijarvi, 263 N.W.2d 420, 424 (Minn. 1978).
The notion that a standard of reasonable skill and care does not require perfection is long established. So, if a client seeks to place all of the risk associated with any errors or defects onto you, that client is asking you to assume a higher standard of care than is imposed by law and raising the standards your services must meet. This increases the likelihood of a successful claim being made against you, and further heightens your risks by creating a potentially uninsured exposure under your professional liability insurance policy.
Professional liability insurance policies are designed to protect you against the immutable responsibility you have to exercise reasonable skill and care in the performance of your services. If you assume a heightened standard of care in your contracts through language seeking to impose liability onto you for all faults and defects or requiring you to exercise the best professional standards, that additional legal risk you assume may not be covered by your professional liability insurance policy under the exclusion for contractually assumed liability that would not exist in the absence of the contract.
Managing the risk
For the above reason, it’s important to define the standard that applies to your services appropriately, such that you can be compensated with an equitable adjustment to your schedule and fee for errors, defects, or delays caused by factors outside of your control. Standard industry documents, such as those drafted by the American Institute of Architects (AIA), provide a great starting point in thinking about the kind of language you might discuss with your attorney for inclusion in your contracts. Some examples include, but are not limited to:
Standard of care
The AIA B101-2017, § 2.2, defines the applicable standard of care in a way that aligns with your normal legal liability under a standard of reasonable skill and care. This is accomplished by using terms such as “ordinarily provided,” “in the same or similar locality,” and “in the same or similar circumstances.” More specifically, the provision states:
AIA B101-2017, § 2.2: The Architect shall perform its services consistent with the professional skill and care ordinarily provided by Architect practicing in the same or similar locality under the same or similar circumstances…
Avoid phrases that require your services to conform with the “highest standards in the profession” or the “best professional standards;” seek to label you as a “specialist” or “expert” in an area where you may not hold that “expertise;” or require you to act as a fiduciary of the client, as this type of language can impose upon you a standard that is difficult to measure or meet and goes well beyond reasonable skill and care.
Right to rely
Right to rely provisions allow you to rely upon information you receive from others without an obligation to independently verify their accuracy. This can protect you against errors caused by inaccuracies in the information provided to you, such as a survey or soils report given to you by the client, or a representation by a product manufacturer that a material is suitable for project needs.
Some examples of right to rely provisions seen in industry standard documents include the following:
AIA B101-2017, § 1.2, allows you to rely on the initial information provided to you by the client:
AIA B101-2017, § 1.2: The Owner and Architect may rely on the Initial Information. Both parties, however, recognize that the Initial Information may materially change and, in that event, the Owner and the Architect shall appropriately adjust the Architect’s services, and the Architect’s compensation. The Owner shall adjust the Owner’s budget for the Cost of the Work and the Owner’s anticipated design and construction milestones, as necessary to accommodate material changes in the Initial Information.
AIA B101-2017, § 3.1.2, allows you to rely upon the information and services being provided by the client or the client’s other consultants:
AIA B101-2017, § 3.1.2: …The Architect shall be entitled to rely on, and shall not be responsible for, the accuracy, completeness, and timeliness of, services and information furnished by the Owner and the Architect’s consultants...
AIA E204-2017, § 2.5.2, allows you to rely upon the representations provided by the manufacturers and suppliers of materials and equipment being specified on that project:
AIA E204-2017, § 2.5.2: …the Architect shall be permitted to rely on the manufacturer’s or supplier’s representations and shall not be responsible for any damages arising from failure of the material or equipment to perform in accordance with the manufacturer’s or supplier’s representations.
Avoid language that explicitly denies you the right to rely upon provided information, or that requires you to independently verify or investigate information provided to you by the client, the client’s consultants, suppliers, or manufacturers. Though firms bear a responsibility to reasonably evaluate the information provided to it, a requirement to verify or investigate that information goes beyond the standard of reasonable skill and care and often involves an increased scope and fee. At a minimum, before assuming such duties, craft your scope of services and fees appropriately to reflect the added responsibility and risk.
Services necessitated by changing laws
AIA B101-2017, § 4.2, allows for an equitable adjustment to your schedule and fee in the event additional services are required. The specific language reads:
AIA B101-2017, § 4.2: The Architect may provide Additional Services after execution of this Agreement without invalidating the Agreement. Except for services required due to the fault of the Architect, any Additional Services provided in accordance with this Section 4.2 shall entitle the Architect to compensation pursuant to Section 11.3 and an appropriate adjustment in the Architect’s schedule.
AIA B101-2017, § 4.2.1(2), specifically lists “services necessitated by the enactment or revisions of codes, laws, or regulations, including changing or editing previously prepared Instruments of Service” as an event calling for additional services by the design professional.
Avoid overly broad terms such as “all,” which can impose liability onto you for damages beyond those caused by your failure to meet the standard of reasonable skill and care. For instance, contract language making you responsible for all errors and defects, or requiring your services to conform with all laws, rules, regulations, and codes. If you choose to proceed without striking these kinds of overly broad obligations from your contracts, make sure you price your services appropriately to reflect that higher level of risk you’re being asked to take on and ensure that the risk-reward calculus is one that makes sense for you.
Additional resources
Unreasonable warranties and representations are one of the many issues that can be reviewed and identified using Victor’s Contract Sifter, our automated contract review tool that is available exclusively to our policyholders. We also discuss the above language and other contract provisions creating coverage concerns in one of our professional practice webinars, What’s covered, what’s not? Understanding the value of professional liability insurance. To sign up for upcoming sessions where we discuss emerging risk trends and strategies, please see our webinar calendar.