CBA Fall Construction Law CBA Fall Construction Law Conference 2010Conference 2010Conference 2010Conference 2010

THE GREAT DEBATE: THE GREAT DEBATE: WHAT RISKS DOWHAT RISKS DOWHAT RISKS DO WHAT RISKS DO

ENGINEERS REALLY ENGINEERS REALLY TAKE?TAKE?

OUTLINE OF DEBATEOUTLINE OF DEBATERound 1: Standard of CareRound 1: Standard of CareRound 2: Limitations on LiabilityRound 2: Limitations on LiabilityRound 2: Limitations on LiabilityRound 2: Limitations on LiabilityRound 3: WarrantyRound 3: WarrantyRound 4: RemediesRound 4: RemediesRound 5: Other IssuesRound 5: Other Issues

“Risk is something that we always feel comfortable“Risk is something that we always feel comfortableRisk is something that we always feel comfortable Risk is something that we always feel comfortable having the counterparty take”having the counterparty take”

-- Arnold H Olyan (Circa 2010)Arnold H Olyan (Circa 2010)Arnold H. Olyan (Circa 2010)Arnold H. Olyan (Circa 2010)

STANDARD OF CARESTANDARD OF CARESTANDARD OF CARESTANDARD OF CARE

What is a reasonable standard of care?What is a reasonable standard of care?What is a reasonable standard of care?What is a reasonable standard of care?

Recognized & generally accepted professional Recognized & generally accepted professional engineering standards & practices associated engineering standards & practices associated withwith thesethese services [at the time the services wereservices [at the time the services werewith with thesethese services [at the time the services were services [at the time the services were performed] and [in the geographical area in performed] and [in the geographical area in which the services were performed]which the services were performed]

Is this the benchmark? Is this the benchmark?

STANDARD OF CARESTANDARD OF CARESTANDARD OF CARESTANDARD OF CARE

Is it reasonable to impose a higherIs it reasonable to impose a higherIs it reasonable to impose a higher Is it reasonable to impose a higher standard of care?standard of care?

Do engineers impliedly bind themselves to a Do engineers impliedly bind themselves to a higher standard by holding themselves out as ahigher standard by holding themselves out as ahigher standard by holding themselves out as a higher standard by holding themselves out as a specialist in a certain area?specialist in a certain area?

Should an engineer’s fee be considered when Should an engineer’s fee be considered when determining the appropriate standard of care?determining the appropriate standard of care?

STANDARD OF CARESTANDARD OF CARESTANDARD OF CARESTANDARD OF CARE

What about performing professionalWhat about performing professionalWhat about performing professional What about performing professional engineering services in accordance with:engineering services in accordance with:

Owner’s instructions as amended from time to Owner’s instructions as amended from time to timetimetimetimeSpecs, plans & drawing issued by OwnerSpecs, plans & drawing issued by OwnerEngineer’s own QA programEngineer’s own QA program

INDEMNITY & LIABILITYINDEMNITY & LIABILITYINDEMNITY & LIABILITYINDEMNITY & LIABILITY

For what should the engineer be liable:For what should the engineer be liable:For what should the engineer be liable:For what should the engineer be liable:Wilful Misconduct Wilful Misconduct –– You intended to do it!You intended to do it!

Gross NegligenceGross Negligence Really bad failure to meetReally bad failure to meetGross Negligence Gross Negligence –– Really bad failure to meet Really bad failure to meet standardstandard

NegligenceNegligence –– Failure to meet a standard of careFailure to meet a standard of careNegligence Negligence Failure to meet a standard of careFailure to meet a standard of care

Breach of Contract Breach of Contract –– You didn’t do what you You didn’t do what you agreed to doagreed to dogg

Absolute Liability Absolute Liability –– no matter what happens, you no matter what happens, you (Owner/Engineer) are responsible(Owner/Engineer) are responsible

LIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITY

Risk mitigation strategies are numerous:Risk mitigation strategies are numerous:Risk mitigation strategies are numerous:Risk mitigation strategies are numerous:

–– Avoid risk in the field (systems, administration, Avoid risk in the field (systems, administration, ( y , ,( y , ,QA/QC)QA/QC)

–– Mitigate your liability with [someone’s]Mitigate your liability with [someone’s]–– Mitigate your liability with [someone s] Mitigate your liability with [someone s] insuranceinsurance

All t i k t t llAll t i k t t ll–– Allocate risk contractuallyAllocate risk contractually

LIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITY

Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?–– What liabilities are being capped?What liabilities are being capped?

A true aggregate cap covering all of theA true aggregate cap covering all of theA true aggregate cap covering all of the A true aggregate cap covering all of the engineer’s obligations?engineer’s obligations?Are separate caps for warranty/workmanship Are separate caps for warranty/workmanship p p y pp p y pobligations desirable?obligations desirable?Is one of the parties better able to assume certain Is one of the parties better able to assume certain i k ?i k ?risks?risks?

LIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITY

Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?What is a reasonable amount?What is a reasonable amount?

what liability should not be limited?what liability should not be limited?–– Third party claimsThird party claimsp yp y

–– TaxesTaxes

–– LiensLiens

–– Gross negligence and wilful misconductGross negligence and wilful misconduct

LIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITYLIMITATIONS ON LIABILITY

Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?Monetary Caps on liability?Does the scope of work impact limitations on Does the scope of work impact limitations on liability?liability?–– EngineeringEngineering–– Design BuildDesign Build

Exclusion of consequential damages? Exclusion of consequential damages? ( l f fit l f d t l( l f fit l f d t l(e.g. loss of profit, loss of products, loss (e.g. loss of profit, loss of products, loss of use)of use)

LIMITATIONS ON SCOPE OF LIMITATIONS ON SCOPE OF WARRANTYWARRANTY

Key considerations:Key considerations:–– What is the scope of work?What is the scope of work?pp–– What is the appropriate scope of warranty?What is the appropriate scope of warranty?

ReRe--performance of the work only?performance of the work only?ReRe--performance of the work only?performance of the work only?Resultant impact/rip and tear?Resultant impact/rip and tear?Where does insurance fit in?Where does insurance fit in?Where does insurance fit in?Where does insurance fit in?

LIMITATIONS ON SCOPE OF LIMITATIONS ON SCOPE OF WARRANTYWARRANTY

Key considerations:Key considerations:–– What is a reasonable warranty period for What is a reasonable warranty period for

engineering work?engineering work?–– Long term warranty vs. likelihood of Long term warranty vs. likelihood of g yg y

intervening cause?intervening cause?–– Should the Engineer’s liability in relation to the Should the Engineer’s liability in relation to the g yg y

performance of engineering services be performance of engineering services be limited to its warranty obligations?limited to its warranty obligations?

WARRANTYWARRANTYTHE CALLTHE CALL BACK REMEDYBACK REMEDYTHE CALLTHE CALL--BACK REMEDY BACK REMEDY

(in the EPC World)(in the EPC World)OwnerOwner EngineerEngineerOwnerOwner

If you breach your If you breach your Warranty, you must Warranty, you must reworkrework –– repairrepair –– replacereplace

EngineerEngineerObligation to Obligation to rework/redesign limited rework/redesign limited ––we cannot control costswe cannot control costsrework rework –– repair repair –– replace replace

until you get it right! until you get it right! (Alternative: If I do it, I’ll (Alternative: If I do it, I’ll charge you for it)charge you for it)

we cannot control costswe cannot control costsMight pay LDs if unable Might pay LDs if unable to fix problem, but LDs to fix problem, but LDs must be limitedmust be limitedg y )g y )

Why pay for something Why pay for something for which I have already for which I have already paid? (& which didn’tpaid? (& which didn’t

must be limitedmust be limitedAlternative: Pay me to Alternative: Pay me to rework!rework!paid? (& which didn t paid? (& which didn t

work the first time)work the first time)What can Owner do to What can Owner do to drive Engineeringdrive Engineering

Alberta Advantage: Alberta Advantage: Consider working Consider working elsewhere if Owner won’t elsewhere if Owner won’t

f k!f k!drive Engineering drive Engineering accountability accountability pay for rework!pay for rework!

REMEDIES:REMEDIES:“Where the “Where the hits the hits the ““

Wh t i th i t ti ?Wh t i th i t ti ?What is the intention?What is the intention?Motivate improved behaviours over the course of Motivate improved behaviours over the course of the contractthe contractthe contractthe contractPut Owner in the position it would have been in if Put Owner in the position it would have been in if the engineer had not breachedthe engineer had not breachedEngineer to “feel the pain” for bad behaviourEngineer to “feel the pain” for bad behaviour

Remedies are numerous, but what drives Remedies are numerous, but what drives desired behaviour?desired behaviour?

LDs, milestone payments, withholding of payment, LDs, milestone payments, withholding of payment, t i ti tt i ti ttermination, etc.termination, etc.

LIQUIDATED DAMAGES:LIQUIDATED DAMAGES:“Speak Softly and Carry a Big Stick”“Speak Softly and Carry a Big Stick”

OwnerOwner EngineerEngineerLink to certain Link to certain performance criteria of performance criteria of facilityfacility

Perhaps in a true EPC Perhaps in a true EPC (“turnkey”) environment, (“turnkey”) environment, but not if the performance but not if the performance

bl i d t thbl i d t thfacilityfacility problem is due to other problem is due to other contractor or ownercontractor or owner

• An exception to an exclusion for consequential damages• An exception to an exclusion for consequential damages• Should reflect matrix of risk & responsibility• Genuine pre-estimate of damagesGenuine pre estimate of damages

(out of pocket costs plus lost profit)- conditioned on lost production- determined / calculated on project specific basis

LIQUIDATED DAMAGESLIQUIDATED DAMAGESLIQUIDATED DAMAGESLIQUIDATED DAMAGES

Designer vs. Constructor vs. ConstructionDesigner vs. Constructor vs. ConstructionDesigner vs. Constructor vs. Construction Designer vs. Constructor vs. Construction Manager vs. OwnerManager vs. Owner

DesignerDesignerConstructorConstructor ConstructionConstructionConstructor Constructor ConstructionConstruction

ManagerManagerOwnerOwnerOwnerOwner

The finger of Shame!The finger of Shame!gg

SITE CONDITIONSSITE CONDITIONSWhat Were You Expecting?What Were You Expecting?

Geotechnical Concerns:Geotechnical Concerns:Geotechnical Concerns:Geotechnical Concerns:–– Owner responsible for preOwner responsible for pre--existing conditions, existing conditions,

howeverhoweverhowever however –– Engineer responsible for its own testing Engineer responsible for its own testing –– What is the Engineering Report telling the What is the Engineering Report telling the

reader?reader?Assumption that sampling is representative of Assumption that sampling is representative of conditions across siteconditions across siteLimitations on Advice: Excessive?Limitations on Advice: Excessive?Limitations on Advice: Excessive?Limitations on Advice: Excessive?

SITE CONDITIONSSITE CONDITIONSdd33rdrd Party RelianceParty Reliance

Engineering report reliance limited to theEngineering report reliance limited to theEngineering report reliance limited to the Engineering report reliance limited to the addresseeaddresseeWhy not let others rely? Site conditions have notWhy not let others rely? Site conditions have notWhy not let others rely? Site conditions have not Why not let others rely? Site conditions have not changed…changed…Insistence that (another) Contractor to Owner beInsistence that (another) Contractor to Owner beInsistence that (another) Contractor to Owner be Insistence that (another) Contractor to Owner be able to rely on Engineering Reportable to rely on Engineering ReportProvision of Reliance Letters by Engineer toProvision of Reliance Letters by Engineer toProvision of Reliance Letters by Engineer to Provision of Reliance Letters by Engineer to Contractor Contractor –– Limitations on relianceLimitations on relianceLimitations on relianceLimitations on reliance

APPROVAL VS. ACCEPTANCEAPPROVAL VS. ACCEPTANCEorororor

On What did I Just Sign Off?On What did I Just Sign Off?

OwnerOwner

Signature = You are on Signature = You are on th i ht t kth i ht t k

EngineerEngineer

Your signature = Your signature = C fi ti th t itC fi ti th t itthe right trackthe right track

I am not the expert I am not the expert ––Engineer is!Engineer is!

Confirmation that it was Confirmation that it was done rightdone right

Specify exactly what youSpecify exactly what youEngineer is!Engineer is! Specify exactly what you Specify exactly what you want to:want to:–– See (Notice only)See (Notice only)

–– RecordRecord

–– ReviewReview

–– ApproveApprove

APPROVAL VS. ACCEPTANCEAPPROVAL VS. ACCEPTANCEorororor

On What did I Just Sign Off?On What did I Just Sign Off?EngineerEngineerOwnerOwner

I’m the Owner I’m the Owner –– I I

EngineerEngineer

Happy to receive Happy to receive tt BUTBUT ttwant to commentwant to comment

Exclude Owner Exclude Owner

comments, comments, BUT BUT must must the comments be the comments be incorporated?incorporated?

Liability when Owner Liability when Owner “Approves” “Approves” d t t dd t t d

incorporated?incorporated?–– Who bears the risk if Who bears the risk if

comments arecomments aredocuments presented documents presented to Owner by to Owner by ContractorContractor

comments are comments are incorporated?incorporated?

ContractorContractor

PROFESSIONAL LIABILITY PROFESSIONAL LIABILITY O C SO C SPOLICIESPOLICIES

Key issues:Key issues:Key issues:Key issues:–– The need to fill the gap created by The need to fill the gap created by

f i l li bilit l i i CGLf i l li bilit l i i CGLprofessional liability exclusion in CGLprofessional liability exclusion in CGL

–– AvailabilityAvailability

–– The interrelation with the cap and views on The interrelation with the cap and views on project specific policiesproject specific policiesp j p pp j p p