Under Pressure

David Kozak, P.Eng. takes a deep breath and reads: “Proponents shall protect, defend and save the city harmless against any demand for payment for the use of any patented material, process, article or device that may enter into the manufacture, construction or form of the work covered by either order or Contract. Proponents further shall indemnify and save the city harmless from suits or actions of every nature and description brought against it, for or on account of injuries or damages received or sustained by a party or parties by or from any of the acts of the Proponents, and/or agents, employees, successors or rights or assigns of the Proponents.”

“That’s an example from a proposal call we had earlier this summer,” says Kozak, who is manager of engineering for GENIVAR in Moncton, New Brunswick.

“So you see, Kozak explains, “We’re getting more and more proposal calls and contracts where we are being asked to certify, guarantee or warranty virtually everything under the sun. We are being asked to indemnify clients against losses that are not caused by negligence. We’re being exposed to indirect and consequential damages, and we’re expected to provide unreasonable and unrealistic insurance coverage.”

Across Canada consulting engineers are facing the same dilemma. Their clients are expecting them to sign contracts that make the engineers legally responsible for an untold range of the situations that commonly plague construction projects.

Engineers are so concerned that Consulting Engineers of Ontario, for example, has formed a committee to look at these new business risks. Peter Mallory, P.Eng., of CH2M HILL, and a member of the CEO board, chairs the committee: “Most of our clients now are insisting on their own agreements, which tend to be one-sided. And they’re written by the client’s lawyers without much flexibility for negotiation. So we formed a new business risk committee at CEO and our number one priority is the increasing liability that clients are asking us to take on.”

Risk is part of doing business

In certain situations, such as design-build and public-private partnerships where the consulting engineer is an equity partner and will share in the profits of a development, it might make sense for the engineers to agree to accept more legal responsibility for things that could go wrong during the construction. John Gamble, P.Eng., president of ACEC, says: “We have to recognize that risk is part of doing business, and in fact is a business opportunity.”

But Gamble quickly adds that first of all the engineers must really understand the type of risk they are taking on. “Secondly,” he says, “they need to have the expertise and contractual authority to manage and mitigate the risk. And thirdly, they should be fairly compensated for taking on the risk.”

Not all clients are trying to pass down more liability. Ask Anthony Pagnanelli, P.Eng., director of design and construction with the City of Toronto, and you get a different perspective. “I can assure you the wording in the agreements between us and our consulting partners has not changed.”

“But,” he continues, “maybe our expectations have increased. Maybe we’re looking more closely now than we used to. As far as the city is concerned, when we contract out work, specifically design and contract administration services, we expect our consulting partners to look after our interests.”

Where’s the crunch?

No consulting engineer would disagree with Pagnanelli that it is their duty to look after the owner’s interests and work diligently for the project to be successful. Nonetheless, aside from any situation in Toronto, the weight of evidence is that clients are expecting consulting engineers to assume new areas of liability.

Client-engineer contracts have catch-all clauses covering all and sundry possible impacts, as seen in the labyrinthine clause Kozak cited above. “Part of the struggle we have with a clause like that,” says Kozak, “is that it involves indemnifying and saving the city harmless against patent materials, processes, and other devices that enter into the construction. That’s not an aspect of the work that as consulting engineers we’re even undertaking. We’re not actually the ones doing building.”

“For example,” Kozak continues, “If we specify a manhole on site, we verify that it meets the intent of the specifications, we review the shop drawings, and to the best of our ability we make sure it meets the intent of the design, but who knows what is happening in the background? On some municipal projects, we may not be on site during the construction.”

Mallory agrees all-inclusive liability clauses are a problem: “You will get a contract that says the consultant is responsible for anything and everything, regardless of whose fault it is. What we are asking for is negligence-based liability to hold us responsible for the things we have control over.”

Clients are also making engineers liable for “consequential damages.” “This is where you can end up responsible for something that happened that wasn’t due directly to your own efforts,” says Mallory. “An example would be if a client, or even a third party, had a loss of profit because of something that happened on the project. For example, a contractor hits a power line and he takes out the power to a city block. On that block there are some industries that lose income because they’re shut down. If you as the consulting engineer sign the wrong contract, you can end up liable for those third party losses. Some clients are asking us to take all that responsibility.”

Traditionally liability for that kind of incident would fall to the contractor, but now, says Mallory, “clients are using the same clauses for the contractor and the consultant. Clients are trying to shed as much responsibility as they can to others.”

Lateness has been a perennial problem with construction projects. But now clients are holding engineers responsible even when the delays are beyond their control. For example, Mallory explains, it could be the contractor who did a poor job of getting things done on time, or it could be the client who didn’t review the drawings fast enough. Or it could be that the environmental approvals were tied up with the regulator. “If the delays result in some kind of cost implications to the client, they’re passing that on to us in the contract,” he says. Unfairly, the contract won’t include a clause such as “to the proportionate extent” that would limit the engineer’s liability to the activities for which they were actually responsible.

Sometimes clients even try to impose “liquidated damages” i.e. financial penalties for the engineer if they don’t make a deadline, says Mallory. Again, these are features that were very common in the clients’ agreements with contractors, but now are creeping into their agreements with engineers.

Steve Panciuk, vice president of ENCON’s insurance program for architects and engineers, sees problems from the insurance side. He sees, for example, engineers signing contracts where they agree to be responsible if a project goes over budget. “Traditionally, from a professional liability insurance policy point of view the duty would be on the contractor to prove an error or omission that led to the damages. But with contractual relations, the client can just point at a clause in a contract and say, ‘Listen the project was $100 million over budget, and you have a share in that.’”

Like Gamble, Panciuk isn’t always against the engineers taking on more risk of liability if it’s a sound business decision: “There are two conditions: Number 1, you should get paid fo
r it, and Number 2, you should have the capacity to control and manage that risk,” Panciuk says.

But he sees engineering companies signing contracts without taking enough care, and then finding out too late that their insurance policy might not cover them for the situations they’ve agreed to.

Taking on responsibility for unforeseen site conditions is an example. “This baffles me,” says Panciuk, because historically owners have absorbed that risk.

He recalls an engineer’s insurance claim in the Maritimes. The engineers had done a thorough Phase 1 environmental review of a developer’s site and found nothing at all that would possibly indicate a problem. However, during the excavations contaminated material that had migrated from an adjacent property was found. In such a case, Panciuk says: “You’ve done your homework, you’ve done your preparation, you’ve appropriately reviewed the site to the industry standard, then — boom! Out of nowhere comes a problem.” And yet, “The only way to absolutely guarantee that a site is not contaminated is to remove all the fill and replace it, and no-one would do that.” In other words, the engineers were being held allegedly responsible for a project issue that was not under their control.

Then there’s the troublesome clause requiring a completed project to be “fit for its intended purpose.” That is a very broad expression, says Panciuk. He points out that a bridge’s purpose is to convey traffic from one side to another. “To take an extreme example,” he says, “if a meteor hits the bridge and takes it out, is it ‘fit for its intended purpose’? No. But under this clause an owner could try to pursue the consultants because they didn’t design for a meteor strike.” Most clients don’t have that intention, but lawyers could have a field day in certain situations.

What the clause should say, Panciuk argues, is more precisely that the bridge was designed according to the current codes and standards and to be “fit for its intended purpose as laid out in the original design intent.” This kind of wording is what at least one municipality has agreed to.

Gamble cites other common examples where some clients are pushing the envelope. They are asking engineers to sign contracts that make them responsible for workers’ safety on the construction site — again something that is clearly outside the design engineers’ realm. They are asking engineers to warranty that regulatory approval for a project will be granted in a certain timeframe. Most recently they expect engineers to warranty that a project will receive a certain level of LEED certification: “This is an emerging trend,” Gamble says.

Society’s expectations have changed

Why has the industry gone from what 20 years ago was often just a handshake and a short-form agreement of a few pages between owner and engineer, to the detailed, elaborate, multi-paged legal contracts of today?

“There is a cultural change in what clients expect,” says Mallory. He continues: “I think one of the drivers is that municipalities, provinces and governments are under financial stress, often with high debt, and that is driving more focus on costs, to the detriment of the projects,” he says.

Transparency is also an issue today, with governments increasingly being held to account for their actions. So there is much more media coverage of projects that have gone over budget or have hit technical snags, which means bureaucrats are anxious to cover all the legal bases.

And some engineers have a simpler explanation. Municipalities are suffering from a shortage of staff with construction experience. It is young people in their 20s who are often in the driving seat and without realizing their mistake they use the same contract for hiring consultants as contractors, and even the same one for purchasing widgets. Hence, for example, “Every now and again we will see a request for proposals where they are looking for bid bonds and performance and materials bonds for an engineering engagement, which is completely ludicrous,” says Kozak.

Most clients are willing to discuss issues,” he continues. “We haven’t met any client groups who are challenging us and saying, “This is the only way it is. The vast majority of public sector people are very willing to learn.” He finds that it’s helpful to bring ACEC’s standard documents to the table, pointing out that these are an industry standard prepared by many organizations. “They respect that,” he says. (Kozak is vice-chair for ACEC-Canada.)

Others don’t think it is so easy to escape the pressure. They hear about municipalities adopting a “take it or leave it” mentality, even “bullying” consulting engineers into signing contracts that make them unfairly liable for problems beyond their control. Small firms might be especially vulnerable and in a shrinking economy, companies can’t always afford to say no.

“It’s a bit crazy,” says Mallory, “but depending on the size of your firm and where your office is located, when a large client says, ‘This is our standard contract,’ and you look at it and see problems, you can’t just suddenly stop working for them or you could be out of business.” cce