Transcript Blueprint for Disaster: A Case Study of Why Architects

Blueprint for Disaster: A
Case Study of Why
Architects Should Use
Caution When Contracting
with Geotechs
Michael A. Hoffer, AIA
Hahnfeld Hoffer Stanford
M. Brandon Waddell, Esq.
Vincent Lopez Serafino Jenevein, PC
The Dairy Center Project

A Public University System retains HHS
to design a Dairy Center
– Dairy Center to be leased by University to
Local Operator and operated for profit
– Local Operator will in turn allow access to
the facility to students enrolled in dairy
classes at the University
Critical Project Issues


Accelerated Project Schedule
TCEQ Permit for Confined Animal Facility
– State required over one year to review and
release permit for lagoon construction
– High water table discovered in vicinity of waste
water lagoon

Owner procurement of rotary milking parlor
and equipment
Critical Project Issues

Weather delays
– Site excavation and lagoon construction


Electrical Co-op serving region and
TXDOT were slow to respond to
engineering requests
Construction Manager at Risk
Contract Negotiation



University drafted the contract
Basic Services included Architectural,
Civil, Structural and MEP Services
University insisted that HHS retain the
geotechnical engineer and included
the geotechnical investigation as a
Reimbursable Service under the
contract
Geotechnical Firm



TCEQ required the pond liner be engineered
by a geotechnical engineer with the
specifications sealed by the engineer
In August 2009, HHS approached a local
geotechnical firm regarding the project
Geotechnical firm assured HHS that it had
previous experience with pond liners and
could design it
Contract with
Geotechnical Firm

Geotechnical firm forwards its proposal
to HHS
– Includes the Geotechnical Firm’s Standard
Terms and Conditions

The Standard Terms and Conditions
were accepted by HHS
Geotechnical Report


Geotechnical firm forwards its
Geotechnical Report to HHS which
includes the specifications for the pond
liner
Geotechnical firm initially took 10 borings
but based on a high water table near the
pond, additional borings were required
and piezometers were placed for
monitoring
Geotechnical Report

Design included a 36-inch liner placed
in 8 inch lifts and compacted to 6
inches:
– 92% - 95% of Maximum Dry Density
– Moisture Conditioned on the wet side of
optimum between 4% and 7% above the
Optimum Moisture Content
– Compaction should be verified by lab that
a coefficient of permeability of 1x10-7
cm/sec or less is achieved
Geotechnical Report


The Geotechnical firm’s design is
submitted to TCEQ for comment in
September 2009.
No comments are immediately
received from TCEQ
TCEQ Permit


8 months following the issuance of the
Geotechnical report, TCEQ issues its draft
permit regarding the pond liner
TCEQ required an 18-inch liner:
– Minimum Compaction- 95%
– Moisture Conditioned to -1% to 3% of optimum
moisture content
– Compaction should be verified by lab that a
coefficient of permeability of 1x10-7 cm/sec or
less is achieved
Comparison
Thickness of
Liner
Compaction
Moisture
Content
Permeability
Geotechnical
Firm
36 inches
TCEQ
18 inches
92% to 95%
At least 95%
+4% to +7%
-1% to 3%
1x10-7 cm/sec
1x10-7 cm/sec
Permit Review and
Construction




Upon receipt, HHS forwards the TCEQ Permit and
liner requirements to the Geotechnical firm to
review and comment
Geotechnical firm never responds
Final Permit is issued in August 2010 and
construction commences on the liner in accordance
with the Geotechnical firm’s Specifications
Liner is fully placed, fails only one test during
construction, and the Owner is pleased with the
results
Construction of Pond
Liner


Construction was delayed by weather and
final permit approval by TCEQ
Owner hired an independent testing lab to
observe construction
– Key tests included clay liner compaction and
permeability tests required to meet TCEQ
standards

Construction took approximately 2 months
Post-Construction


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Substantial completion of the Project occurs
in in December 2010
In January 2011, a local resident contacts
TCEQ regarding the dairy and asks TCEQ to
investigate the Project
The local resident stated he was concerned
about wastewater runoff and effects of the
dairy on the groundwater
Post-Construction


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Copies of all test reports are provided
to TCEQ
In February 2011, HHS and members
from the Environmental and
Geotechnical teams meet with TCEQ
Geotechnical firm defends its design
TCEQ Response


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March 31, 2011- TCEQ issues a letter to the
University stating the pond liner, as built,
does not meet the compaction requirements
of the permit
TCEQ directs the University to construct the
liner in accordance with the compaction
requirements of the permit
Problem- Remediation of the liner would
require removal and replacement due to the
elevation of an inlet pipe that prevented
placement of additional lifts per the TCEQ
specification
Claim is Made



The University forwards the demand
to reconstruct the liner to HHS
HHS contacts Joe Bryant to report the
claim
Carrier engages Brandon Waddell to
represent HHS
Initial Meeting

Issues addressed:
– HHS willing to do whatever was
necessary to bring the project online
– Carrier wanted to address the issue
quickly due to potential for a significant
consequential damage claim by the
University and Operator

Contracts reviewed and facts
discussed
The Plan: Quick and Cost
Effective



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Engage an independent expert to analyze
and defend the initial liner design
Promote acceptance of the design to the
University and ultimately to TCEQ
Simultaneously make demand to the
geotechnical firm to pay for the remediation
costs
In the event TCEQ refuses to accept the asbuilt liner, facilitate prompt payment of the
claim so that the facility could open and
HHS could pursue the Geotechnical firm
Demand to Geotechnical
Firm

Attorney demand sent to Geotechnical firm
upon engagement
– Set forth the terms of the Agreement for
Engineer to provide specifications for the liner in
conformance with TCEQ Regulations
– Demanded the Geotechnical firm to pay for the
cost of replacement plus attorney’s fees
– Geotechnical firm given 10 days to respond
Expert Review and TCEQ



Independent geotechnical expert
reviews as-built design and agrees
that liner is sufficient to comply with
permeability standards issued by TCEQ
Based on the expert’s opinion, HHS
contacts TCEQ to arrange a meeting
TCEQ unwilling to meet with HHS
because HHS was not the “Applicant”
for the permit
TCEQ Meeting



University contacted regarding the
necessity for University to request
meeting as Applicant
University initially unwilling to ask the
TCEQ to meet with our expert
After a week of negotiation, the
University agrees to request the
meeting but is apologetic to TCEQ and
is unwilling to advocate on behalf of
HHS
TCEQ Meeting


Within 3 weeks of the claim being
made, the meeting with TCEQ occurs
Independent expert and Mr. Hoffer
present data evidencing that the liner
is suitable given the in-situ conditions
and clearly explain that the as-built
liner will perform substantially better
than the liner proposed in the permit
TCEQ Response

TCEQ instructs that the liner must be
removed and replaced
– TCEQ would not give credit for any
portion of the liner that did not meet the
compaction requirements
Geotechnical Firm



Geotechnical firm’s deadline to respond to
demand had passed
We learned that the Geotechnical firm was
unwilling to submit its claim to its carrier
After 2nd demand letter and several
conversations between the Geotechnical
firm and its broker, the Geotechnical firm
submits the claim
Contract with University

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Drafted by University
Architect’s Services included:
– Basic Services

Architectural, Civil, Structural, MEP, etc.
– Reimbursable Services

Geotechnical, TCEQ Permitting, Site Survey,
etc.)
Contract with University

“Architect shall take reasonable precautions
to verify the accuracy and suitability of any
drawings, plans, sketches, instructions,
information, requirements, procedures,
requests for action and other data supplied
to Architect (by Owner or another party)
that Architect uses for the Project. Architect
shall identify to the Owner in writing any
such documents or data which, in Architect’s
professional opinion, are unsuitable,
improper or inaccurate in connection with
the purposes for which such documents or
data are furnished.”
Contract with University
(Cont.)


“Architect’s services shall be free from any
material errors or omissions in accordance
with the Standard of Care.”
“Owner shall have the right to reject any of
Architect’s services because of any fault or
defect in the Project due to any material
errors or omissions in the Plans, Drawings,
Specifications, and other materials prepared
by Architect or its consultants.”
Contract with University
(Cont.)

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“Upon notice of any such errors or
omissions, Architect shall promptly provide
any and all services necessary to correct or
remedy them at no additional cost to the
Owner.”
“Architect’s obligation to correct its error
and omissions is in addition to, and not in
substitution for, any other remedy for
defective services which Owner may have at
law or in equity or both.”
Contract with
Geotechnical Firm



Proposal for engineering of the pond
liner included a $4,000 fee
Geotechnical firm’s Standard Terms
and Conditions were attached to the
Proposal
Signed and accepted by HHS
Limitation of Liability

Limitation of Liability- SHOULD [ENGINEER] OR
ANY OF ITS PROFESSIONAL EMPLOYEES BE
FOUND TO HAVE BEEN NEGLIGENT IN THE
PERFORMANCE OF ITS WORK, OR TO HAVE MADE
AND BREACHED ANY EXPRESS OR IMPLIED
WARRANTY, REPRESENTATION OR CONTRACT,
CLIENT, ALL PARTIES CLAIMING THROUGH
CLIENT, AND ALL PARTIES CLAIMING TO HAVE IN
ANY WAY RELIED UPON [ENGINEER’S] WORK
AGREE THAT THE MAXIMUM AGGREGATE AMOUNT
OF THE LIABILITY OF [ENGINEER] SHALL BE
LIMITED TO $25,000 OR THE TOTAL AMOUNT OF
THE FEE PAID TO [ENGINEER] FOR ITS WORK
PERFORMED WITH RESPECT TO THE PROJECT,
WHICHEVER IS GREATER
Indemnity

Indemnity- To the fullest extent permitted by law,
[Architect] expressly agrees to defend (at Architect’s
expense and with counsel acceptable to Engineer),
indemnify, and save and hold harmless [Engineer] from
and against any claims, suits, losses, causes of action,
damages, liabilities, and expenses of any kind whatsoever,
including, without limitation, all expenses of litigation and
arbitration, court costs, and attorney’s fees, arising on
account of or in connection with any and all damages to
the property (including the loss of use thereof)….
INCLUDING DAMAGES WHICH ARISE FROM OR IN
CONNECTION WITH, OR ARE CAUSED BY ANY ACT,
ERROR, OMISSION, OR NEGLIGENCE OF
[ENGINEER]…BUT EXCLUDING DAMAGES CAUSED BY THE
SOLE NEGLIGENCE OR WANTON AND WILLFUL
MISCONDUCT OF [ENGINEER].”
Response from Geotech’s
Carrier


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Engineer’s liability is limited to $25,000
Engineer’s design was justified
Damages were not caused by the sole
negligence of Engineer
Geotech has instructed the Carrier to
seek indemnification for all attorney’s
fees incurred pursuant to the contract
Translation
Limitation of Liability


Limitation of Liability (LOL) clause- A
contractual provision that restricts the
amount of damages a client can recover
from a designer
Properly drafted, and where enforceable, it
can provide protection against contractual
breaches and negligence
– Will not protect against intentional misconduct
– Will not limit the designer’s liability to persons
other than the client
Indemnity

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Indemnity Provision- A clause which states
that a party to the contract agrees to
compensate the other party for any losses
incurred as a result of the performance of
the contract or in association with the
contract.
Important to understand the differences
between LOL and indemnity clauses: one is
a damage cap, the other is an agreement to
pay another for damages they incur or have
to pay
Limitation of Liability


No per se rule in Texas that prohibits a
design professional from limiting its liability
through contract
However, there are very few reported cases
concerning the issue of the enforceability of
a design professional’s limitation of liability
and whether such a clause violates public
policy
Case Law

CBI NA-CON v. UOP, Inc. (1998
Houston case)
– Designer’s liability limited to reperforming
non-conforming work
– The court did not provide any legal
analysis regarding the enforceability of
the provision
– However, the provision was upheld by a
2-1 margin
Case Law

City of Dillingham v. CH2M Hill (Alaska
Supreme Court)
– Owner signs a contract with Civil Engineer that
includes an LOL clause
– Alaska Anti-Indemnity Statute: bars indemnity
for the sole negligence of a design professional
in a construction contract
– Court commented that it was clear that the
legislature, by enacting the statute, intended to
prevent parties from bargaining away liability
- HELD: LOL clause was unenforceable.
Case Law

Lanier v. Planners and Engineers Collaborative, LP
(Georgia Case)
– LOL Clause: “In recognition of the relative risks and
benefits of the project, both to Developer and Engineer,
the risks have been allocated such that Lanier agrees, to
the fullest extent permitted by law, to limit the liability of
Engineer and its subconsultants to Developer and to all
construction contractors and sub-contractors on the
project or to any third parties for any and all claims,
losses, costs, and damages of any nature whatsoever...so
that that the total liability of Engineer and its
subconsultants to all those named shall not exceed
Engineer’s total fee for services rendered on the Project.”
Case Law

Lanier (cont’d.)
– Georgia Anti-Indemnity Statute states: “A
covenant, promise, agreement or understanding
in a contract relative to the construction,
alteration, repair or maintenance of a structure
…purporting to indemnify or hold harmless the
promisee against liability for damages to
property caused by or resulting from the sole
negligence of the indemnitee is against public
policy and is void and unenforceable.”
– There was no finding that the Engineer’s sole
negligence was the cause of the construction
defect.
Case Law
Holding:
– LOL is unenforceable

Reason: as drafted, it allowed the
Engineer to shift liability to third
parties and applied even if the sole
negligence of the Engineer was the
cause of the damage
Case Law

1800 Octillo v. WLB Group (Arizona Supreme Court)
– Registered Land Surveyor's contract included a
limitation of liability provision
– LOL Provision: “Client agrees that the liability of
WLB, its agents and employees, in connection with
[the] services hereunder to the Client and to all
persons having contractual relationships with
them, resulting from any negligent acts, errors
and/or omissions of WLB, its agents and/or
employees is limited to the total fees actually paid
by the Client to WLB for services rendered by WLB
hereunder.
Case Law
– Arizona Anti-Indemnity Statute stated: “A
covenant clause or understanding in, collateral
to or affecting a construction contract or
architect or engineer professional services
contract that purports to indemnify, to hold
harmless or to defend the promisee from or
against liability for loss or damage resulting from
the sole negligence of the promisee or the
promisee’s agents, employees or indemnitee is
against the public policy of this state and is
void.”
Case Law
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Holding: The LOL provision is enforceable.
Rationale: “The LOL provision [did] not
completely insulate the Surveyor from
liability, as would an indemnity or hold
harmless provision, nor did it require the
Developer to defend the Surveyor. Instead,
the provision merely limited liability.”
Case Law

Markborough v. Superior Court (California)
– Geotechnical Engineer included an LOL clause in
the “fine print” of its standard terms and
conditions
– California Anti-Indemnity statute provided that
“all provisions which purport to indemnify the
promisee against liability for damages for death
or bodily injury, property damage or any other
loss arising from the sole negligence of the
promisee or for defects in design furnished by
the promisee are against public policy and are
void and unenforceable.”
Case Law

Holding: The LOL is enforceable so long as
the parties had an opportunity to negotiate.
– The court gave 4 caveats to holding:

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The client was a major residential developer and
capable of negotiating commercial agreements
The suit did not involve personal injuries—as the court
put it, the damages were “only money”
The limitation amount was reasonable (greater of
$50,000 or the total fee). The damage was over
$5,000,000.00!
Court found there was an actual opportunity for
negotiation (Geotech did not refuse to negotiate)
Texas Anti-Indemnity
Statute

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In 1987, the Legislature enacted a very
limited Anti-Indemnity statute that
prevented design professionals from seeking
indemnity from contractors for the design
professional’s sole negligence
It did not prevent design professionals from
indemnifying each other
As of January 1, 2012, Texas has a new
Anti-Indemnity Statute
Texas Anti-Indemnity
Statute

Section 151 of the Texas Insurance Code
– “A provision in a construction contract, or in an
agreement collateral to or affecting a construction
contract, is void and unenforceable as against public
policy to the extent that it requires an indemnitor to
indemnify, hold harmless, or defend a party, including a
third party, against a claim caused by the negligence or
fault, the breach or violation of a statute, ordinance,
regulation, standard, or rule, or the breach of a contract
of the indemnitee, its agent or employee, or any third
party under the control or supervision of the
indemnitee."
Effects on Enforceability
of LOL Provisions

Arguments for Enforcement of LOL
– CBI NA-CON v. UOP, Inc. case
– Routinely enforced in other areas of the law

Arguments against Enforcement of LOL
– City of Dillingham and Lanier cases are now
persuasive in Texas
– Legislative intent to restrict risk shifting in the
construction industry
Effect of LOL Provision in
This Case

HHS’ carrier would not proceed
against the Geotechnical firm
– Reason: They believed the limitation of
liability provision would be difficult to
overcome
Resolution of the Claim

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Faced with the potential delay damage
to the Owner, HHS’ Carrier authorized
full payment of the claim
Portion of the liner is removed and
dried
Upon replacement, the liner fails
compaction tests and the owner has to
import soil
Additional Claim for
Money


University requests additional sums from HHS
Settlement Agreement stated “University releases
and forever discharges HHS from any and all
property claims, damages, demands, costs,
expenses, compensation, losses (including loss of
use), property damages, actions and causes of
action of each and every nature whatsoever,
whether past, present or future, whether known or
unknown, whether in tort or in contract, without
limitation, that University has or may have against
HHS relating to the Pond Liner.”
University’s Response


University acknowledged the release
of HHS, but argued that they would
file a claim against the Geotechnical
firm
Argued that HHS would then have to
defend a claim for indemnity from the
Geotechnical firm
HHS’ Reply

University could not make a claim against the
Geotechnical firm because it had assigned those
claims to HHS pursuant to the Settlement
Agreement
– “University, for good and valuable consideration,
the receipt and sufficiency of which is hereby
acknowledged, does hereby grant and convey to
HHS, all of its right, title and interest in any and
all claims and causes of action which University
could maintain against Engineer arising from
Engineer’s acts or omission in performing
engineering services incident to the design and
construction of the pond liner.”
Recap



As of today, HHS’ carrier paid in excess of $200,000
for a geotechnical “problem” that HHS did not
cause
Faced with the LOL and Indemnity Provisions
against the Geotechnical firm, HHS’ Carrier would
not authorize any action against the Geotechnical
firm and will not seek to recoup the funds
Roadblocks:
– TCEQ’s unwillingness to deviate for standard specifications
– University’s unwillingness to advocate for a deviation as
the Applicant
– Geotechnical firm’s unwillingness to cooperate
– Contractual provisions funneled liability to HHS
Recommendations

Architects
– Insist that the Owner hire the Geotechnical Firm
– If you must, then include language in your contract that
states the Geotechnical firm is hired solely as a
convenience to the Owner, that the Architect has no
means of control over the work performed by the
Geotechnical firm, that the work product will be delivered
to the Owner, and that the Architect will be entitled to rely
on the accuracy of the information received
– Include your own LOL clause in your contract or strike any
that the Geotechnical firm includes if you cannot include
one in your contract with the Owner
Recommendations

To Geotechnical Firms
– Continue to utilize LOL clauses in your
contracts
– If the Owner or Architect will not agree to
your standard limit in your contract,
negotiate a higher limit of liability in
exchange for a higher fee (some limit is
better than no limit)
Recommendations to All


Review your standard contract
Review other contracts that you sign
– What are your rights in a dispute and who bears the risk?

Your LOL clause has a better chance of survival in
court if it:
– Is conspicuous
– Is reasonable and not so drastic as to remove the
incentive to perform your services with due care
– Is separate from any Indemnity Provision
– Does not conflict with the Anti-Indemnity Statute
– Does not limit liability for your sole negligence