In the third of a series of articles, FIDIC president Tony Barry looks at increasing complexity of contractual obligations and the challenges in managing fitness for purpose obligations.
Changing market expectations
The services provided by consultants and the projects to which they are provided have grown in complexity and size as well as expansion in scope to include social, economic and environmental outcomes.
At the same time, investors and other stakeholders require greater certainty in terms of project outcomes. Clients executing projects have sought to manage risk more effectively and to do so with greater efficiency. The nature of the parties involved in project delivery and the complex delivery mechanisms adopted have created complex relationships and interdependencies between the parties. Technology has facilitated a high level of collaboration and information sharing and exchange, and has enabled designers and constructors to develop more elegant and effective solutions for their clients.
In this changing context, clients have sought to develop contract provisions which ensure that their accepted risk appetite is reflected in contracts and service agreements. The terms used in these contracts and service agreements have found their way into both government and private consulting service agreements.
These contractual terms have significantly extended the scope of liabilities to which consulting engineers are exposed. The complexities in project delivery have increased the risk of errors and omissions, compliance errors and target date errors.
Changing contractual terms
The contractual terms referred to in this article, which are often framed as warranties, include:
- high or very high standards of care
- fitness for purpose obligations
- absolute compliance with scope of work and technical criteria
- absolute compliance with programme target dates
- liquidated damages.
In addition to including these clauses, the contracts have been drafted to extend the consultant’s liability in terms of:
- unlimited or very high limits of liability
- duration of exposure to professional liability
- indemnities, some of which are opened ended, and no-fault indemnities
- multi-party collateral warranties
- liability for client supplied information and investigations
- liability for indirect costs
- liability for consequential losses.
These obligations become more complicated when projects are undertaken under separate agreements for various phases of the project or where the client assigns or novate their interests in a project to another party such as a contractor.
Negotiating services contracts which include these provisions has become commonplace for consulting engineers in many jurisdictions where standard forms of agreement do not have government endorsement.
Fitness for Purpose
More than most of these provisions, fitness for purpose provisions have become problematical for consulting engineers and have found their way into infrastructure design contracts.
In my understanding, this obligation developed in contracts where the intellectual property for a process (e.g. mineral processing, manufacturing) was not known or transparent to the client and where intellectual property rights were protected and valued highly. The owners of the intellectual property provided various forms of performance guarantees that the purpose would be achieved.
Fitness for purpose obligations are very difficult to manage and essentially expose a consultant to significant risk and limit the scope of a defence a consultant may offer against a claim by either a contractor or owner to whom such an obligation may exist.
In managing an engineering investigation, design and documentation assignment, a consultant needs to undertake the work in a manner which specifically enables the consultant to meet the fitness for purpose obligation.
We cannot be at all confident that the fitness for purpose requirement can be met if the consultant relies on assumptions, which may be made in the normal course of the consultant’s work.
Managing fitness for purpose obligations
From the consulting engineer’s perspective, fitness for purpose obligations fall into four parts:
- adequacy of the description of the purpose
- adequacy of the design documents
- the constructability of the design
- the contractual and functional requirements of the facility.
The complexity in responding to this obligation is that the “purpose” ranges from operational functionality of the whole facility to the component parts of a project, in a sense potentially creating thousands of separate obligations in one project.
To assist managing fitness for purpose obligations, consulting engineers need to establish:
- a clear description of the “purpose” of the facility, signed off by the client (owner or contractor) such that any ambiguity or conflicting requirements are resolved.
- clarity about whether the obligation can be varied by directions, clarifications or other statements made by the client including questions raised by the consultant.
- identify those assumptions or assumed knowledge a consultant may seek to rely on, which may be made in the normal course of engineering a project.
- produce design documents which are appropriate, accurate and complete.
- frame the scope of the design and documentation to incorporate all processes required of the client (and contractor) to ensure the design meets the fitness for purpose obligations.
It is also vital that where decisions are left with contractors, the consultant must indicate the qualifications of those entitled to make decisions, the processes to be followed and the records to be produced.
Increasingly onerous contract terms
The impact of increasingly onerous contract terms is not well researched. However, anecdotally, two things are clear:
- the cost, effort and expertise required to negotiate and manage projects with these provisions is very high and clients are paying higher fees to achieve the certainty they are looking for
- the availability and the cost of insurance is responding to the claims history which has developed as a result of breaches of these onerous contract terms.
FIDIC will continue to work with stakeholders, member associations and firms to improve contract conditions and the ability to manage the risks to which they are exposed.
Look out for the next article in the series – Consumer and competition law – on 02 August 2022.
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 – Consumer and competition law – on 02 August 2022.
The first article in this series – Professional Liability, why it is important – can be read here.
