Professional liability: Bespoke head contract obligations

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In the second of a new series of articles, FIDIC president Tony Barry looks at the risks faced from bespoke head contracts in which liability derives from combinations and permutations of multiple clauses. 

Bespoke head contracts and requests for tender documents for major infrastructure projects are often hundreds of pages underpinned by complex strategies to manage the client’s risk exposure and in some cases to eliminate it.

In preparing tenders for projects to be delivered under such contracts and tender documents, sophisticated contractors undertake complex legal and project risk analysis to understand their own exposures. The complexity of these documents is such that there are contractual risks spelled out in single clauses and many others which involve combinations and permutations of multiple clauses.

Analysing and understanding how the clauses work both individually and together is vital to understanding total risk exposure on a project.

Contractors’ risk strategies

Having understood their risk exposures, sophisticated contractors will develop strategies to accept and manage risk themselves and, in many cases, laying some or all of it, separately or together, off to subcontractors and consultants.

The latter may involve, referring to or including head contract clauses in subcontracts and consulting agreements as well as clauses which may make subcontractors and design consultants mutually responsible for all collaboration, coordination, information supply, programme dependencies and compatibility of design documentation.

This may occur without the subcontractors and design consultants being aware of the other parties’ identities, their role, their capacity or the terms of their contract, thus creating multiple avenues for the head contractor to make claims against subcontractors and consultants, without them being aware of the risks they are assuming.

Contractor – Design Consultant Agreements

In recent years, this approach has become more complex with head contractors and design consultants entering into one agreement for the provision of design services during the tender phase and a separate agreement for the contract phase. This may result in causation being established for the same claim under both contracts or, situations in which the contract phase agreement embodies and carries forward the obligations or increases the exposure in the tender phase.

Contractors may seek to pass down head contract obligations either by general head contract compliance clauses, by reference to the head contract in the agreement with the design consultant or by duplicating clauses from the head contract in the agreement with the design consultant. All methods expose the design consultant to risk.

By passing down an obligation in the head contract and in some cases expanding it through the inclusion of warranties and liability clauses in the agreement with a design consultant, a contractor may succeed in making design consultant’s liable for the whole of a loss arising from a default in that obligation.

Such an approach, will extend a consultant’s liability well beyond a reasonable standard of care, potentially making the design consultant liable for all direct costs and consequential losses arising from the breach.

Design consultants are often required to execute “certificates” of adequacy and compliance which may include terms which extend the design consultant’s liability beyond what is contained in the agreement with the design consultant. Great care must be taken with the wording of such certificates to ensure they do not expose the consultant to unnecessary risk.

How do we manage these risks?

To better manage these risks at a project level, design consultants must:

  • Develop their own understanding of these risks and
  • have access to, advice and support from contract lawyers to negotiate balanced terms in the agreements
  • Charge fees which cover the services required and all the effort required to manage and deal with the risks
  • Engage staff with the capacity, capability and experience to handle these projects in a way which ensures their health, safety and wellbeing is looked after
  • Work with contractor clients to be transparent and collaborative in managing project, design and contractual risk
  • Work with their professional indemnity insurer to be transparent and collaborative as to the risk to which the design consultant is exposed and how they are managed
  • Establish a clear project governance regime to ensure the design consultant’s team acts in accordance with the agreement at all times
  • Induct project teams into the risk and governance frameworks on the project
  • Administer the contractor – design consultant agreement rigorously
  • Implement reporting mechanisms which record achievement and facilitate early identification of any risks or departures from the requirements of the agreement

Understanding the agreements and the implications for their business and their people, many design consultants would be well advised to refuse to enter into such agreements, if necessary, walking away from the opportunity to avoid the negative impacts which may arise.

For the most part, the design consultant’s fee will be a small portion of the project value. Where head contract provisions are passed down to the design consultant, the claims which may arise against the design consultant may be many times the total value of the fees to be paid to the design consultant.

It is therefore also appropriate that a design consultant negotiate clear limit of liability provisions which limit the design consultant’s liability to that:

  • caused directly by the design consultant
  • where there are multiple parties at fault, liability is proportionate
  • within an aggregate limit of liability applying to all claims which may be made by the contractor under the agreement
  • within a reasonable aggregate amount of professional liability insurance required under the agreement.

Further, it may be appropriate in certain circumstances, to exclude a design consultant’s liability for:

  • specific technologies supplied by other parties which the consultant is directed to include in the design
  • specific conditions, which may be unknown or uninvestigated or under investigated
  • designs and documents supplied by the client, the contractor or other parties
  • matters where the design consultant is directed by the contractor.

It may be prudent, depending on the extent of reliance and risk, to negotiate to have the contractor to indemnify the design consultant in such circumstances.

Consultant’s enterprise risk

Of course, there are many aspects of major design agreements and the projects to which they apply that need to be taken into account in considering one’s participation in contracts involving significant risk. It is not proposed to address this here but it is important that any business has a view as to its capacity to handle major projects, major project risk, contractual risk, regulatory risk, wellbeing, health and safety risk for people, reputational risk and of course financial risk, to name a few.

The level of financial net assets required to support the operation of a design consultancy is relatively small and, in many cases, unlikely to be able to cover the losses behind claims made by a head contractor. Hence, design consultants purchase professional indemnity insurance.

In recent years, claims by contractors against their design consultants have been very significant in some markets in terms of both the frequency of claims and the size of those claims. It is less likely that they arise from physical failures and breaches of a reasonable standard of care, and, more likely that they are contractual claims which have their genesis in onerous contract terms.

If we consider that professional indemnity insurance premiums are a small proportion of a design consultants total costs and its fees are a small proportion of project costs, it is clear that exposures in which we call on professional indemnity insurance must be limited and well managed, if we are to have a sustainable professional indemnity insurance market.

A way forward

Maintaining a vibrant healthy industry requires that we encourage and support innovation, delivery quality, sustainable infrastructure safely with consulting engineers, designers, project managers and staff who can contribute to the best of their ability and are rewarded appropriately.

We need consulting firms to be financially sound, to act with integrity and be driven by sound values. We need professional indemnity and other insurances to be available on reasonable terms. Lastly, we need our clients to benefit from and enjoy the experience of working with the consulting firms in our industry.

From an integrity viewpoint, one might reasonably contend that we should not enter into contracts, in which we cannot meet all of the obligations for which we sign up.

This is clearly an area where we need more discussion with governments, the head contract clients, the head contractors, industry partners and insurers, to develop contractual models that are sustainable for all parties and will more efficiently deliver better outcomes.

Nonetheless, there are also many opportunities and methods by which design consultants can manage obligations, they accept under contracts and it is incumbent on the firms to develop their capability further in this area. The effective management and communication of risk by design consultants will reduce the risks to which contractor clients are exposed under head contracts and hence increase the return on investment in infrastructure.

FIDIC will continue to work with its member associations and their member firms to address this key issue.

About this series
Infrastructure Global is pleased to have Tony Barry, president of international engineering body FIDIC, write a series of articles looking at the growing problem of professional liability standing in the way of collaborative global infrastructure delivery and what can be done about it.

Tony has over 40 years’ experience in infrastructure design and delivery. He is not a lawyer and does not have any specific contract law training. He has written this series of opinion articles to promote discussion and awareness of the liability issues facing consulting engineers. Please seek specific legal advice if any of the issues described in these articles concern you.

Look out for the next article in the series – Expanding contractual obligations – on 18 July 2022.

The first article in this series – Professional Liability, why it is important – can be read here.