Risk Management and Professional Liability PDF

10/24/21, 4:17 PM Chapter 3.8 - RAIC Chapter 3.8 Risk Management and Professional Liability...

10/24/21, 4:17 PM Chapter 3.8 - RAIC Chapter 3.8 Risk Management and Professional Liability Print this page Definitions Indemnification: Where one party agrees to pay certain damages or losses incurred by another party. Liable: Legally bound; subject to penalty; under obligation to do; exposed or open to suffer something undesirable. Risk: An uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives. (Project Management Institute, 2017) Introduction Risk is essential for every business enterprise. Risk includes both opportunities and threats. Management of risk requires the identification of potential risks, an assessment of the degree of risk, a considered decision of whether to assume the risk in order to seize opportunity, and, if the risk is assumed, what steps to take to transfer and/or mitigate the probability and impact of any potential threats. Risk is inherent when undertaking projects. Risk can be managed but can never be completely eliminated. Risks occur throughout an architect’s career, in setting up a practice, during the life of the practice, and after retirement. Inaction can sometimes be riskier than action, and either course can have unforeseen consequences. This chapter cannot deal with every conceivable risk in an architect’s practice, but will review certain sources of risk and recommend appropriate business practices to assist the architect in developing both project and practice risk management strategies. Much of this chapter addresses sources of risk that could impact architectural practice and design projects, and mitigation strategies for if those risks occur. A comprehensive risk management strategy will involve the identification of risk, the assessment of risk probability and impact, the development of a plan to respond to risk, and the monitoring of practice and project activities to foresee risk events before they occur. Editor’s note: Readers of this chapter may find it difficult to accept the advice provided to manage practice and project risks. For example, recommendations to remove specific conditions from client-architect agreements may be difficult to accept in a “take it or leave it” environment. Changes to a client’s contractual conditions may result in automatic disqualification. There are no simple answers in this situation and no governing authority that can force clients to accept reasonable and balanced contractual conditions. The best advice is to say “No” to unreasonable contractual conditions. In the long run, saying “No” works. Sources of Project Risk: Pre-agreement Phase Client Selection, Project Selection and the GO/NO GO Decision Risks present as threats and opportunities. Careful selection of both projects and clients is an essential part of a practice’s risk management strategy. Each prospective client and each prospective project should be considered in a similar fashion, whether the architect is: pursuing a specific sector of the market; responding to a request for proposal; entering a competition; negotiating with a single client for engagement of services. This consideration includes a rigorous appraisal of the commission against a “GO/NO GO” checklist. Such a checklist identifies the potential threats involved if the architect decides to pursue the opportunity. Many checklists have been developed by both large and small practices, and by management companies and financial advisors. Some checklists are short and others exhaustive. Some use a rating formula (for example, if five out of 20 questions score negatively, the project should not be pursued). Other checklists permit the architect to determine the degree of risk after answering all the questions. The architect should recognize that the honest answer to several questions may be “Don’t know.” https://chop.raic.ca/chapter-3.8 1/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC There is a common misconception that the GO/NO GO analysis generates only one of two responses. However, the primary function of the checklist is to identify which issues need to be addressed in order to move from a NO GO to a GO position, particularly if these issues are readily negotiable or can be satisfied in favour of the architect. One of the hardest lessons for an architect to learn is when to decline a project opportunity. A proper GO/NO GO checklist and subsequent analysis can help make such a decision. To the extent it is possible, depending on the size of the firm, a practice should have more than one individual involved in the analysis. Each practice should devise its own GO/NO GO risk analysis process and use it faithfully prior to accepting a commission. The analysis can minimize the risks of accepting a commission under poor terms or conditions. The checklist covers important areas of consideration, including, but not limited to, the following: alignment of project to marketing and business plan; any actual or perceived conflicts of interest; potential for profit and fee structure; selection process; cost of pursuit; project financing, client budget (including contingency), and adequate funding in place; client experience with project type and reputation; internal resources, capacity and experience; contract terms; probability of receiving full payment for services; subconsultants contemplated and accessible; the competition, and if a firm can compete with them. See Appendix B – Additional GO/NO GO Considerations to Assess the Degree of Firm and Project Risk at the end of this chapter. It is an important practice to evaluate a prospective client before accepting the commission. Making this determination before a project begins is critical and may reduce significant business risk. Evaluation of a prospective client may include: asking whether the new client is receptive to providing a retainer; consulting with colleagues, including architects, engineers, cost consultants and contractors, on their past experiences with the client regarding: client decision-making processes: does the client make and own decisions? payment processes: does the client have a reputation for paying for the services contracted? evaluating client sophistication through reviewing the client’s experience with capital planning, design and construction projects. Architects need to evaluate their firm’s capabilities in delivering services and whether the firm has the necessary expertise and resources to successfully undertake the project. When a firm proceeds with a project that is beyond its capabilities, it poses significant risks to achieving the design project’s scope, quality, schedule, budget and stakeholder satisfaction objectives. Those risks may include: inadequate resources available when needed, resulting in inefficient multi-tasking, excessive overtime, and employee exhaustion, all leading to errors and omissions; greater than anticipated resources required for research and coordination, resulting in missed deadlines; apparent lack of capability leading to reduced commitment on the part of employees and consultants; in the most extreme situation, a claim of professional misconduct, resulting from failing to perform architectural services with reasonable skill and judgement. Project Selection In considering both opportunities and threats, some projects present greater risk than others, and this is an important consideration as part of the GO/NO GO analysis. One example of a potentially higher-risk project is residential condominiums, which are a frequent source of professional liability claims against architects and other design professionals. There are several reasons for this situation, including: Developers may look to reduce quality as a means to increase profit. This could lead to substandard or unacceptable construction practices and materials. Developers may seek to reduce the scope of architects’ and engineers’ involvement during the project, particularly during general review and contract administration. (See Chapter 6.6 – Contract Administration – Office and Field Functions.) In many instances when litigation is commenced on a condominium project, the developer and many of the trades may have legally dissolved their companies, leaving the professionals as the only defendants able to defend the claim. The purchasers of the condominium units may have unrealistic expectations, and may be portrayed as a sympathetic claimant. https://chop.raic.ca/chapter-3.8 2/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC An architect can take steps to guard against these risks through a careful client selection process. Architects should also exercise appropriate due diligence in the negotiation of professional services agreements with the client, which may include an indemnity clause in the architect’s favour, or a limitation of liability provision. Certain project delivery methods may increase the degree of risk, such as design-build, public-private partnership (P3) projects, and other alternative delivery methods. These alternative delivery methods may involve an inappropriate transfer of risk to the architect, well beyond that required in law and potentially not covered under the professional liability insurance policy. Like other projects, careful due diligence is recommended in considering the design-build entity as well as the ultimate client/owner of the project. For these projects, the contract needs to be carefully reviewed and negotiated. The architect should consult legal counsel and their insurance provider to review any agreement. Assembling the Consulting Team If the GO/NO GO checklist process leads to the GO decision, to pursuit of the project, it will be necessary to minimize risk by assembling a consulting team appropriate for both the project and the type of client. The architectural practice may need to hire additional staff, to form a strategic alliance with another practice, to become a subconsultant, or to form a joint venture with another practice. Each of these options requires careful consideration concerning: the competitive position of the practice; the performance of services in the event of success in being awarded the project. Subconsultants should be selected just as carefully as clients. Use Appendix D – Issues to Consider When Assembling the Consulting Design Team at the end of this chapter to select the main engineering subconsultants (structural, mechanical and electrical engineers). Even if the client plans to engage the consultants directly through separate agreements, the architect will usually be retained to manage and coordinate their work; therefore, the above-referenced checklist is still relevant. The scope of the coordination role should be clearly set out in the agreement with the client, including establishing communication protocols with the other consultants as well as the client. In certain scenarios the client may insist that the architect retain a client-preferred subconsultant. If this subconsultant is not a firm with which the architect has had previous experience, the architect may want to consider adding an indemnification clause in the client-architect agreement or otherwise documenting concerns with being instructed and compelled to use that subconsultant. The architect will need to confirm that they are appropriately insured. It is also important to recognize the importance of team “chemistry.” The success of a project often depends on team chemistry, that is, the ability of all team members to work well together. The use of the same consultants on a continuing basis may save the architect time, money, aggravation and billable time, thereby improving overall quality, coordination, client satisfaction and project profits. On the other hand, selecting new or different consultants for a specific project may put the architect in a better position to be awarded the commission, particularly if special expertise or client preferences are a consideration. Each project needs to be assessed on its own merits and unique attributes. A written agreement should always be prepared, outlining the roles, expectations, and responsibilities as well as payment for each consultant. Architects should avoid relying on experience as the normal method of operating. Good relationships can be soured because of a lack of mutual understanding of routine items, such as the scope of services, the number of site visits or the responsibility for the review of shop drawings. Nothing should be taken for granted. The use of the Canadian Standard Form of Contract Between Architect and Consultant: RAIC Document Nine is recommended. The subconsultants should always be bound by the provisions of the prime agreement between the architect and the client. It is not recommended that an architect agree to the standard terms and conditions put forward by a subconsultant as there may be clauses within those terms that increase the liability to the architect. Particular attention should be paid to the insurance requirements and limitations of liability provisions when entering into agreements with subconsultants. In all cases, professional subconsultants must carry appropriate levels of professional liability insurance. Part of the architect’s due diligence should include obtaining certificates of insurance from subconsultants on an annual basis during the life of the project, and beyond if circumstances warrant. The limits of insurance should mirror the requirements in the prime agreement. In certain scenarios some specialty subconsultants may not have or be able to obtain the required levels of professional liability insurance. An architect may want to consider entering into master service agreements with preferred subconsultants that set out the key terms and conditions of a relationship. Even with a master agreement in place, each project should be assessed on its individual requirements, and issues such as scope should be set out clearly in writing for each project. https://chop.raic.ca/chapter-3.8 3/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC If a joint venture is contemplated, the contractual relationship should be properly documented and reviewed with both legal counsel and the professional liability insurer. A client may request or insist that the architect retain the services of consultants responsible for the investigation of existing assets or conditions. The owner receives the benefits of capital asset ownership and is accountable for their associated risks. It is an owner’s responsibility to manage those risks of ownership by retaining consultants specializing in investigation. These consultants include: geotechnical engineers; hazardous materials engineers; land surveyors; environmental engineers. See Chapter 2.3 – Consultants for a discussion of investigation consultants. The RFP/Proposal Stage and Risk Once the determination is made to pursue a project, and the subconsultants have been identified and hopefully secured, the firm will put its best foot forward and start work on the proposal. This document involves a significant time commitment and presents an opportunity to convince the client why the project should be awarded to the firm. In many instances, the prospective client will include the contract terms in the proposal documents. These need to be carefully reviewed and considered as part of the response to the proposal. Sometimes there will be an opportunity to raise questions or propose amendments to the contract terms within a specified timeframe. Other times, it might be specifically provided that no changes to the contract terms will be permitted. If the proposed terms represent a marked departure from association-sanctioned agreements, an architect should review them with legal counsel and their professional liability insurer. It may also be advisable for an architect to engage their local professional association. The association may decide to issue a special bulletin to members alerting other professionals to the onerous nature of the proposed contract. In terms of the preparation of the proposal itself, an architect should be careful not to overpromise or overcommit. In most cases, the proposal document forms part of the contract between the parties and can be relied on during the project and thereafter. Non-disclosure Agreements There may be situations during the proposal stage when the client or other business partners ask the architect to enter into a separate confidentiality and non-disclosure agreement (NDA). These agreements can have far-reaching obligations and, like other types of agreements, should be carefully reviewed and considered. An architect may also wish to consult with legal counsel prior to signing the proposed NDA. In most instances the intent of such an agreement is to maintain confidentiality about project details. These agreements may be very broad and even an unintentional disclosure could constitute a breach, mandating the payment of liquidated damages. In addition, if subconsultants are hired, they must enter into an NDA with similar conditions to those of the architect. Contracted Owner Representatives and Project Management Service Providers (PMSP) Facility owners may retain the services of a contracted third party to act as their authorized representative. The role of this person or entity will vary from project to project. In many instances, having a project manager in place can be very helpful, particularly if the owner is neither sophisticated nor experienced. An experienced project manager with a sensibility to the design-construction industry may be reasonable to deal with. However, this type of arrangement may have disadvantages, the most important of which are loss of direct communication with the client and the potential for the PMSP to transfer their business risk and liability to the architect. This arrangement may result in an increase in the time and effort of the architect as the reporting requirements of the PMSP could be significantly more than the architect is accustomed to. If the owner intends to hire a third-party project manager, the architect should have a very clear scope of service in their own agreement with the client to avoid gaps and overlap of services and to provide clarity in role definition and responsibilities. A third-party project manager may make commitments to the owner relating to cost savings and schedule. This could result in increased scrutiny of the architect’s design documents to find savings through reducing quality and simplifying design features. The architect may be expected to accept the risk associated with the application of inappropriate materials, poor details, and acceptance of substandard construction. The architect must be aware that only the architect is accountable for the quality of services delivered. As part of the client selection (GO/NO GO) process, the identity and role of a third-party project manager should be investigated and considered. Any agreement with the client should be negotiated with this in mind. Sources of Project Risk: Client-Architect Agreements https://chop.raic.ca/chapter-3.8 4/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC It is not only professional but also good business practice to have a clear, written agreement that outlines the roles and responsibilities of both client and architect. There should be a policy that requires a written agreement in place for all projects, regardless of size of the project, size of the fee, or length of relationship with the client. The use of the Canadian Standard Form of Contract for Architectural Services is always recommended. The RAIC Document Six was updated in 2018 after extensive consultation with stakeholders within the design community, including owner representatives, insurers, provincial associations of architects and other interest groups. Document Six reflects a balanced approach to the contractual relationship between client and architect, and provides a reasonable and appropriate distribution of responsibilities and risk. These standard forms may require some minor modifications to suit the specific architectural firm and the project. Some architects have created their own standard forms of agreement modelled after the RAIC Document Six or provincial or territorial architects associations’ standard forms of agreements. Verbal agreements should never be used. Some provincial associations of architects have a short-form agreement to be used as an interim or “binder” agreement until a full standard form of agreement can be prepared and executed. An architect should never agree to a client-prepared purchase order as the only basis for a contract. Purchase orders may be supplemental documents to a contract. However, in most instances, purchase orders are used to procure materials and equipment as opposed to professional design services. They are typically very onerous and usually contain many inappropriate and uninsurable obligations, including warranties and guarantees. One of the best ways of minimizing risk is to spend time with the client at the outset and carefully discuss the client-architect agreement, clause by clause, describing: what services will be provided; what the services entail; what will not be included in the agreement; allocation of risk; standard of care; payment of fees; termination; dispute resolution. Contract negotiation also provides an opportunity to understand a client’s motivations and attitudes towards risk and other items. It is an important part of the GO/NO GO analysis. Architects must manage expectations as well as risks. Problems often occur later in the project because the expectations of the two parties differ. Early review of the agreement helps to avoid problems. While minor amendments to the standard forms of agreement may be needed, significant changes and the addition of supplementary conditions should be avoided to the extent possible. If accepted, the changes should be signed or initialed by both parties. Changes to the standard form may create additional risk for the architect and should be reviewed with the professional liability insurer and/or legal counsel. If the client is a corporation, an architect should ensure that the person signing the agreement for the client has the authority to commit the corporation. If in doubt, an architect can request a copy of the appropriate minutes of the board of directors’ meeting which confers such authorization on the individual. Similarly, if the client is a public entity, an architect will need to ensure that the person has authority under the relevant body to execute the agreement (this may be found in the bylaws of that entity). If an architect is entering an agreement with a partnership, they must determine who is authorized to enter contracts for that partnership. In addition, if an architect is working for more than one individual (for example, a married couple), they may want to have both parties execute the agreement. Some corporate and institutional clients, particularly larger companies and some government departments, will prefer to use their own “standard agreement” forms instead of the Canadian Standard Form of Contract for Architectural Services. These agreements generally are written in favour of the client, often to the detriment of the architect’s interests. Prior to executing such an agreement, the architect should review it carefully with legal counsel and with the professional liability insurer to ascertain the extent of risk that is being assumed over and above those risks in the standard forms of agreement and common law or Civil Code requirements. Some of the risks may pose coverage concerns under the architect’s professional liability policy. Client-initiated variations to the standard forms of agreement often include the following phrases or conditions: architect to warrant contractor’s work; architect to assign copyright to client; client will not pay for reproduction of drawings; architect will supply a stipulated number of construction drawings and specifications; architect will guarantee building permit will be issued; https://chop.raic.ca/chapter-3.8 5/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC architect will guarantee construction cost estimate; architect will guarantee LEED or other certification; architect will visit site only when called by client; architect will engage surveyor, geotechnical engineer, and hazardous materials consultant; architect will perform to a higher standard of care; architect will be responsible for site safety and contractor means, methods and sequencing; “time is of the essence” and guarantees of timely delivery of services as well as construction; withholding or set-off of the architect’s fees. Many clauses inserted in client-prepared contracts not only increase the architect’s liability but also may not be covered by professional liability insurance. Examples include: warranty of performance; guarantee of conformity to code; guarantee of the work of all others; responsibility for liquidated damages and/or penalties; indemnity. As an additional reference, see Appendix C – Checklist: Contract Review, provided by AXA XL Insurance, at the end of this chapter. The architect should never warrant or guarantee any aspect of professional services. Contractual Clauses of Concern Indemnification Although all client-prepared contract terms and conditions should be carefully reviewed, the indemnity clause has the potential of posing the broadest implications from a risk perspective. Simply put, “indemnify” means to reimburse a client following a loss. If an architect agrees to indemnify for anything beyond damages caused by their own negligence, the architect will be contractually liable for damages that they would not have been liable for under common law. Any assumption of indemnity that extends beyond negligence is problematic from an insurability perspective. Most, if not all, professional liability insurance policies have a contractual liability exclusion which would apply in these circumstances. In addition, the architect should not agree to “defend” the client in any legal proceedings. This is unlikely to be covered under the insurance policy, which will generally not pay for the client’s legal defense “up front.” Insurance policies will only reimburse the client for a portion of their fees, and only after negligence, as well as damages, have been established. Additional clauses to be mindful of are provided below. This is by no means an exhaustive list. Lender Requirements and Certifications Client-prepared agreements may require the architect to co-operate with the lenders and also sign documents that the lender is then entitled to rely upon. This should be avoided. The documents may include certifications and warranties that are excluded from coverage under the professional liability insurance policy. Any commitments to others should be deleted from an architect’s agreement with their client. Even without this contractual commitment, an architect may be asked to sign lender-prepared documents during the life of the project. This, too, should be avoided altogether and failing that, should be reviewed by a lawyer and a professional liability insurer. Copyright and Ownership of Documents In many instances the client may seek to transfer the architect’s copyright to the client. This should be avoided. An agreement should specifically state that copyright and ownership of documents will be retained by the architect. If a decision is made to give away any of these rights, the architect should insist on a provision that protects them from unauthorized changes or reuse. This can be achieved through a hold harmless and indemnification clause. Design-Build and Public-Private Partnerships Having a balanced contract as part of these alternative delivery methods is very important. All contemplated agreements should be carefully reviewed with legal counsel and a professional liability carrier. In many of these arrangements, other parties may look to transfer inappropriate and uninsurable risks to the architect. Examples include warranties, certifications, and responsibility for liquidated damages. Limitation of Liability https://chop.raic.ca/chapter-3.8 6/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC RAIC Document Six includes a limitation of liability clause that is recommended for all client-architect agreements. This becomes even more important should a firm decide to accept some degree of uninsured business risk.* Limitation of liability is considered to be a “deal-maker” during the contract negotiation process, and is recommended for all agreements. Liability can be limited to a pre- determined dollar figure or the amount of insurance that is available at the time of a settlement or judgement. *Note: Some provincial or territorial associations of architecture deem it professional misconduct for an architecture firm to deliver services that are not insurable under a professional liability insurance policy. Standard of Care Sometimes a client will insert a standard of care clause in their agreements that elevates the standard beyond what is otherwise required in law. Examples of unacceptable terms include “highest,” “first class” and “best.” Another example is a client’s insistence on creating a fiduciary relationship between client and architect. Still other clauses may require that the services be performed “to the client’s satisfaction” or be “free of defect.” All of these potentially pose insurability concerns. The appropriate standard of care is articulated in GC 7.1 of RAIC Document Six, which provides “standard of care ordinarily exercised by other members of their professions under similar circumstances, at the same time and in the same or similar locale.” Time Is of the Essence This phrase appears in many client-authored documents and should be deleted. This clause may constitute an elevation in the standard of care, and therefore is problematic. There are many circumstances beyond the architect’s control that have an impact on schedule. Any contractual obligations related to timeliness of performance should be linked with the standard of care imposed by law. Sustainable Design and Certifications Many clients, in the interest of being or appearing to be environmentally conscientious, may request that their buildings meet or be certified by a sustainable building rating system, such as LEED. The architect should never guarantee or warrant that a building will be certified. Such certification involves not only specific design elements but also construction procedures to be done by the builder, and certain operating and documentation standards by the owner which are beyond the control of the architect. Furthermore, the certification is based on an assessment by an independent review agency and it is impossible to guarantee the agency’s conclusion in advance. Like other guarantees of performance, these are likely to create insurability concerns. Professional Fees If a client seeks to pay a fee that is inadequate in an architect’s professional opinion, the architect should consider declining the project. If fees are not sufficient, it may be a red flag of future budget and payment problems. If the fee is the primary factor in a client’s decision when securing professional design services, it is a warning sign. Architects should avoid being influenced by the promise of future work. In some cases, an architect may want to demand a retainer fee in advance. This is particularly advisable when working with a new client. If the fees for a particular project are not commensurate with the professional services required or the risk involved, the architect should attempt to re-negotiate. If the fees cannot be re-negotiated, the experience and “lessons learned” should be taken into consideration when calculating fees on future projects. In any event, the professional services must not be compromised. Do not assume that the loss will be offset by gains during the contract administration phase; surveys indicate clearly that profits during contract administration are generally only 50% of profits in the earlier phases of a project. As mentioned above, the fee must always be commensurate with the scope of services required for the project. Refer to Mastering the Business of Architecture (outside Ontario, called Mastering the Business of Design). This publication itemizes services that the architect can provide. The client and the architect can jointly use the publication to select the services required for a specific project, following which the two parties can readily establish and agree upon an appropriate fee. Refer also to the RAIC document, A Guide to Determining Appropriate Fees for the Services of an Architect. “All Other Architects Accept and Sign This Agreement, Why Won’t You?” Certain clients may say, “All other architects accept and sign this agreement, why won’t you?” This statement is a “red flag,” and the architect should seriously consider whether to assume such risks by signing the agreement. Consider the following: the statement is likely incorrect – “all other” architects do not sign such agreements; others may have signed against their better judgement and crossed their fingers hoping all would go well (all may indeed go well, but is it worth the gamble?); other architects have signed and have suffered the consequences or damages – we just don’t hear about it. When such clauses are proposed, the prudent architect should: https://chop.raic.ca/chapter-3.8 7/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC discuss the questionable clause with architects who have purportedly signed it; review the proposed agreement with legal counsel, the professional liability insurer, and the provincial or territorial architectural association; determine the extent to which the practice can be exposed to such risk; attempt to negotiate contract changes with the client; consider declining the project. When the architect is prepared to sign a contract with such adjustments and assume the subsequent risks, it is strongly recommended to review the portions of the agreement that will be the responsibility of the subconsultants and to obtain their concurrence before executing the agreement with the client. The subconsultants may not be prepared to accept terms and conditions which may not be covered under their professional liability policies. These issues must be resolved prior to execution of the contract, or the architect will not be in a strong negotiating position after the agreement has been executed. As prime consultant, an architect can be held responsible for the acts of their subconsultants through the legal doctrine of vicarious liability; therefore, it is very important to ensure the subconsultants are bound by the terms and conditions contained in the prime agreement. Finally, the architect must be cautious to not promise unsubstantiated performance of sustainable design features, such as increased employee productivity or reduced employee turnover, which could result in a claim by a dissatisfied client. If, during the life of the project, changes are made involving scope or other key issues, these changes should be memorialized in writing as an amendment to the contract. Summary Regardless of the size of the firm, there should be agreement review protocols in place to ensure that contract terms are reviewed by someone with the requisite skill set and experience. In addition, the firm should establish guidelines as to who within the firm can enter into agreements. Some of the provincial and territorial regulatory bodies have issued bulletins related to client-prepared agreements that pose insurability concerns. This problem has been identified as a potential professional conduct issue, and members are warned of uninsurable business risks as well as a potentially harmful public interest risk. Some provincial regulators have warned that entering into these agreements may result in an assessment of unprofessional conduct. There are several publications and learning tools available which provide a comprehensive review of issues surrounding professional services agreements for architects and other design professionals. In addition, most associations provide educational materials on this subject. Finally, many professional liability insurance companies have resources available for their policyholders. Firms are strongly encouraged to inform themselves of this important topic. This chapter has raised some, but by no means all, of the areas that may pose a concern. Sources of Project Risk: Design and Documentation Three high-level risks in the design and construction documentation phases of an architectural project are: the practice will lose money in producing the documents; the project will be over budget; an error or omission in the documents will result in a claim. Integrated Project Information Systems and Building Information Modeling (BIM) The objective of optimal effectiveness and efficiency in design and construction is closer to realization with the advent of building information modeling (BIM) methods supported by sophisticated software and design-process innovation. If taken to the fullest extent, the implementation of BIM would result in an integrated project information system where data, information and, potentially, knowledge would flow more freely through the design-construction-operation supply chain. BIM represents not only operation changes in design processes but new business processes as well. Many proponents of BIM claim that these new documentation and modeling processes will reduce conflicts between design elements and result in better coordination of construction documents, and therefore reduce claims. The Institute for BIM in Canada (IBC) has developed a BIM appendix, to be attached to the client-architect, architect-consultant and client-constructor contracts, that delineates the responsibilities for the use of the building model. The Canadian Construction Documents Committee (CCDC) published CCDC 30 – 2018 Integrated Project Delivery Contract. This multi- party contract establishes new business relationships in the design-construction-operation supply chain. At time of publication, there is insufficient history in the use of BIM and integrated project delivery (IPD) projects to test these assertions or propose risks. It is premature to assess the legal consequences of these forms of contract, and architects should review these types of contracts with their lawyer. https://chop.raic.ca/chapter-3.8 8/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC AXA XL Insurance has provided “BIM projects: Top 10 loss prevention recommendations”. Refer to https://axaxl.com/-/media/axaxl/files/pdfs/design-professional/about/bimtop-10-loss-prevention-recommendations_us_ca.pdf The following issues should be considered in managing risks related to design and documentation. Composition of the Design Team The “chemistry” among the various people on the project may require re-assessment. (Consider changing the personnel if working relationships are not harmonious.) The relationships to be considered include the internal relationships within the firm, the relationships with the client, and the relationships with the contractor and trades on site. In some instances, the client-prepared agreement will include a clause which allows for replacement of personnel involved, at the client’s discretion. Language should be added to such clauses that any decision regarding replacements should be made by the client, acting reasonably. Method of Project Delivery There are several methods of project delivery, and each has unique risks for the architect. It is critical that the role of the architect and the scope of services for each project delivery method are clearly understood and that the correct form of contract is used. Architects should consult their lawyer and professional liability insurers about any contracts when they are considering entering into an agreement for a method of project delivery with which they are not familiar. Governments of all levels are now using alternative forms of project delivery such as public-private partnerships or “P3s” to transfer many project and financial risks to the private sector (there is different terminology in various jurisdictions for this form of project delivery). As most P3 projects are usually very significant and the stakes very high, all architects are advised to ensure that all professional service contracts for P3 projects are developed and reviewed by their lawyers and professional liability insurers. Many of these agreements could lead to a potentially uninsured risk for the architect. Design-build projects are another example where the architect needs to exercise proper due diligence in terms of client selection as well as in contract terms. Typical problematic clauses in these types of contracts include client requirements for warranties and guarantees, as well as transferring responsibility for liquidated damages for delays to the design professional. See Chapter 4.1 – Types of Construction Project Delivery. Also refer to the RAIC’s A Guide to Determining Appropriate Fees for the Services of an Architect for a discussion of the benefits and trade-off of each project delivery method and the inherent associated risks. Project Management of the Design Project Firms should use a project management methodology to plan and track scope, schedule and costs. This information will support management of project resources, keep the team on track to meet their schedule obligations, provide ongoing cost information, and generate historical data to assist in future project planning. Multiple project management software programs are available; however, the critical issue becomes exercising the discipline to plan projects and execute the plan. Quality Assurance (QA) and Quality Control (QC) Quality assurance (QA) is the process of ensuring that quality management systems, processes and tools are in place and being used as intended. QA is conducted largely through audits that examine quality planning and quality control procedures. As an example, does the office validate the client requirements for each project and ensure that a client sign-off of requirements is obtained for each project? Does the office conduct a coordination review of all documents at the 95% completion stage of document production? The results of a QA audit are a clear demonstration of the standards of care to which the office holds itself. Quality control (QC) is the process of ensuring that the output of each operation, be it design, production, or contract administration, satisfies the requirements for which the deliverable is intended. To many clients, QC is synonymous with document coordination. See Chapter 5.4 – Quality Management for additional information on quality management systems. Checklists One of the most important elements in the management of risk is a thorough and comprehensive checking process. Unfortunately, this is often rushed or omitted due to inadequate scheduling, insufficient resources or unreasonable deadlines. This element may be singularly most important in mitigating the risk of incomplete, incorrect, non-comprehensive or uncoordinated documents. Many practices develop and use exhaustive checklists to ensure that the many items required to complete a set of drawings have been included. https://chop.raic.ca/chapter-3.8 9/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC A proper checking process is highly disciplined and should be followed rigorously. A simple method is to apply – without exception – the rule that the drawings and specifications are not to be sealed until after the checking process has been completed. For additional information on checklists, see Chapter 5.4 – Quality Management, Chapter 5.1 – Management of the Design Project, and Chapter 6.4 – Construction Documents. An employee other than the originator of the drawing or specification should check drawings. Once the documents are assembled for checking, consider using a colour-coded checking process for paper-based printed check sets: Step 1: Check all notes and dimensions. Use a yellow line or note to cover the agreed-to or correct items, circle incorrect items with a red line, and place the corrected item or information next to the red circle. Step 2: After the “red-lined” information is corrected, draw a green line over the item on the marked-up print immediately after the correction is made on the original. The individual who did the original checking with red and yellow lines should be the same one to review the corrected original against the red-lined version to confirm that all corrections have in fact been made. Step 3: Upon confirmation, a heavy black line is then drawn across the green line on the marked-up print. The checking process is not complete until every print is fully marked with yellow for correct items and red-plus-green-plus-black for items requiring correction. For electronic document checking, many software review programs are available, each with a suite of checking tools. Software programs such as Bluebeam are intended to not only provide coordination of the construction documents but also facilitate the coordination of the activities of construction and construction contract administration. This process, known as “back-checking,” is not complete until the back-checker signs off on each print. Only after “sign-off” are the documents ready for seal and signature, and not before. Checking to this extent is time-consuming. However, such a rigorous check will avert problems later on, when they are much costlier to correct. All architects should allocate and budget appropriate time and fees for this aspect of risk and quality management. It should also be noted that some client-prepared agreements may require the architect to have QA and QC processes in place and to demonstrate their use and effectiveness. This clause needs to be carefully considered, as it may elevate the standard of care otherwise required. Sources of Project Risk: Bidding and Contract Award There is a long history of jurisprudence across Canada which relates to the bidding process. Architects should familiarize themselves with the basic legal principles involved, particularly the uniquely Canadian concept in tendering law: Contract A, the bidding contract and Contract B, the construction contract. For a comprehensive discussion, refer to Paul Sandori and William Piggott’s book Bidding and Tendering: What Is the Law? 5th Edition. The risk of litigation by unsuccessful bidders can be minimized by using clear and concise criteria, setting out the method of contractor selection, and adhering strictly to these criteria. The architect should use standard bid documents and become familiar with CCDC 23 – A Guide to Calling Bids and Awarding Construction Contracts. All privilege clauses in the bid documents, such as “The lowest or any bid may not necessarily be accepted,” should be reviewed and written based on Section 2.0, The Principles of the Law of Competitive Bidding in CCDC 23 – A Guide to Calling Bids and Awarding Construction Contracts. A decision to award the contract to anyone other than the lowest bona fide bidder can potentially cause legal action. To minimize this risk, the architect should advise the client to obtain legal advice in respect to awarding a contract to anyone other than the lowest bidder. Providing any sort of legal advice is typically excluded from coverage under the professional liability insurance policy. Sources of Project Risk: Contract Administration The contract administration phase is a critical phase of project delivery. See Chapter 6.6 – Contract Administration for more detailed information. This phase is prone to many risks that expose the architect to potential claims. The person(s) assigned to the contract administrator (CA) role must possess the necessary experience relative to the characteristics of the project. Oftentimes, the firm might assign a junior person to this task who lacks the requisite skill set. Sometimes this is done because by the time construction is underway, insufficient fees remain to assign an experienced person. The architect can reduce risks by rigidly adhering to standard routines, forms and policies. Some of these include: pre-construction meeting procedures; a pre-packaged kit for field reviews; proper safety equipment; https://chop.raic.ca/chapter-3.8 10/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC a checklist for field review; pre-determined format for field review reports; pre-set notes of site meetings; timely response to all contractor requests, to avoid potential delays; timely review and processing of shop drawings, samples or mock-ups; recognition and understanding of the roles of all participants in the project: avoid assuming issues or problems that do not fall within the architect’s scope of work, as otherwise the contractor will readily assign responsibility to the architect; exercise care not to give advice to the contractor in terms of construction means and methods. adequate assessment of the contractor’s application for payment (experienced contract administrators will review the application with the contractor on the site before the application is finalized by the contractor); care in issuing the Certificate of Substantial Performance: once issued, these documents cannot be rescinded, and they activate the timing for the release of holdback and other lien rights; exercised impartiality between the client and the contractor; documentation of all communications, findings and observations, in part to support future defense of any claim. Substitutions There should be procedures in place and followed in relation to substitutions. Substitutions are a potential source of claims against architects. All substitutions need to be carefully documented. Appropriate due diligence is required in the review of all substitution requests. In many construction projects, the contractor will advance claims for extension of time, delay, change orders and extras. While one would expect claims in this category to be resolved between the owner and the contractor pursuant to the terms of their agreement, it is not unusual for the architect and other consultants to become a party to these disputes. The typical allegations will include: insufficient detail in the tender design documents to allow for a proper bid; ambiguities in the specifications; design discrepancies among the various disciplines which were not apparent to the contractor; slow or inappropriate shop drawing review; slow responses to submittals and RFIs; lack of impartiality on the part of the consultant. In addition to claims advanced by the contractor, there may be claims from the clients, who seek to find the architect and others responsible for increased construction costs due to design “errors and omissions.” The persons assigned to the CA function must be privy to the contract terms that set out the expectations of the parties in terms of response times, as well as any scope restrictions. In addition, they must be aware of the obligations of the consultant that are included in the construction contract. Although in many instances the owner will issue a CCDC standard document, there may be supplementary conditions which constitute a change to the consultant’s role and responsibilities. Client-prepared agreements may include inaccurate descriptions of the contract administration obligations, imposing a higher standard of review. An example of this is the use of the words “inspection” and “supervision.” Other examples include obligations to “guard against defects” or a requirement of “complete conformance.” This terminology should be deleted. Failing deletion, the terms should be defined so as to appropriately describe the CA role, as well as its limitations. The architect and CA team members should also be generally familiar with and aware of the nuances that are included in the lien legislation of the province or territory where the project is being undertaken. There have been recent changes in at least one province (Ontario) which have introduced principles of prompt payment and adjudication. It is believed that these changes will have a dramatic impact on the architect’s role in a construction project. It remains to be seen as to whether other provinces will adopt similar changes in the future. Under the CCDC documents, the consultant has a wide range of obligations, including: review applications for payment; interpret the contract documents; review claims for changes in contract price; uphold authority to reject work; review shop drawings; prepare change orders; determine date of substantial performance; review requests for extension of time; provide opinion to owner on contractor failure to perform so as to support potential default notice being issued by owner to contractor. https://chop.raic.ca/chapter-3.8 11/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC Those responsible for the CA function should be aware of these responsibilities, as well as others that may be imposed by supplementary conditions. The architect must be careful to undertake this role, showing no partiality to either party in the construction contract. The architect must be sensitive to any undue influence as they fulfill these obligations. Sources of Project Risk: Post-construction Most client-architect agreements provide for the termination of the agreement one year following the date of substantial performance. The architect should maintain contact with the owner and should bring warranty items to the contractor’s attention promptly for rectification. Provide a list of warranty items for correction by the contractor, following a final on-site review scheduled shortly before expiry of the warranty period. Ensure that the critical date is logged in calendars or in a “bring-forward” system to avoid the risk of missing this final field review prior to the expiration of the warranty period. See also Chapter 6.7 – Take-over Procedures, Commissioning, and Post-occupancy Evaluations. Some clients may insist that the architect complete various forms and certifications at the conclusion of a project. This is over and above what might be mandated by local, provincial/territorial and federal authorities. The language of these documents can be over- reaching and should be carefully reviewed before execution. Architects should likely consult with external advisors (legal counsel, insurer and association) prior to agreeing to sign these documents. Architects do not want to assume any unreasonable liability that may be imposed by these documents. Other Sources of Risk Replacing Another Consultant and Being Replaced by Another Consultant There may arise situations where an architect will be asked to replace another during the life of a project. This is unusual and is generally a red flag that requires investigation and due diligence on the part of the replacement architect as well as the architect being replaced. If an architect is asked to replace another architect, the replacing architect should insist on being able to communicate with the original replaced architectural firm. There may be legitimate reasons for the cessation of the relationship on the part of both the original client and the replaced architect. Due diligence is essential. The replacing architect will also need appropriate language in their agreement with the client such that they are not assuming any liability for the services performed by the previous professional. There are legal issues to be concerned with regarding copyright and the professional requirements of the governing body. It is recommended that an architect retain legal counsel to assist in the preparation of an appropriate agreement to address this scenario. The architect may also decide to involve their professional liability insurer. Similarly, if a firm is being replaced as the architect of record, it will need to take appropriate steps, which may include notifying the authorities having jurisdiction. The replaced firm will also need to determine the status of payments and, if not paid in full, consider the time requirements for any lien rights or collection proceedings. Records Irrespective of the phase of the project underway, it is critical to maintain proper and complete documentation. In many cases, litigation is commenced several years after project completion and the individuals involved have retired or otherwise left the practice. The written records are the sole source of reference to the project and activities at the time. The importance of document creation and retention cannot be overstated. See Appendix A – Record Keeping at the end of this chapter. Statute of Limitations Depending on the provincial statute of limitations or other regulations regarding an architect’s archives, it may be necessary to store the large quantities of documentation, files and drawings that a practice will accumulate over time. Accurate and comprehensive records can be invaluable when mounting a defense against a claim. Because a long period of time can elapse between the filing of records and the need for retrieval, it is important to establish and follow a retrieval system that can be easily understood and accessed. “How long?” and “What type of documentation to keep?” remain a dilemma for most architects. Advice should be sought from a lawyer and the professional liability insurer. See also Chapter 3.5 – Office Administration. Finally, it needs to be understood by all members of the firm that all written communications (internal or with others) are subject to production in any subsequent legal proceeding. Therefore, any and all communication needs to be professional and carefully considered. Informal and inappropriate communication must be avoided, including social media communication. All firms should have in place a policy that addresses these issues. Getting Paid https://chop.raic.ca/chapter-3.8 12/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC One of the risks an architect faces is a client who, for whatever reason, is delinquent in honouring a contractual obligation to pay invoices in a timely manner. The following tips help to reduce the risk of late payment or non-payment of invoices: Obtain a retainer representing 5% to 10% of the total fee at the execution of the contract. Advise the client that the retainer will be applied against the final invoice. A retainer is especially important if the client is unknown to the architect or has a reputation for withholding payment, perhaps indefinitely. Ensure that the terms and conditions of the agreement have been discussed with the client, including the right to stop rendering services in the event of non-payment of fees. Issue invoices twice a month, every second week, or weekly, in some cases. Although invoicing is typically a monthly operation, there is no obligation to be bound to a monthly policy. More frequent invoicing will not only improve cash flow but will be an early alert of a delinquent payer. Payment terms and frequency can be set out in the agreement with the client. Include a statement of interest on overdue accounts. Because an architectural practice is not a financial institution, the rate of interest should never be more attractive than that charged by those who fund projects. Even if there is no intention to charge and collect the interest, it should be included in the agreement and its impact on overdue accounts demonstrated in a statement of account. Separate the fees for professional services from reimbursable expenses by using two separate invoices. This may reduce the chances that the client may withhold payment of an invoice by questioning one or two small items. Follow up invoices to certain clients with a telephone call, after an appropriate period of time, asking whether payment can be expected within the agreed-to time period. Do not wait until the payment is overdue to make the call. Establish and implement a policy for a sequence of “reminder” calls, perhaps one week apart. Each call should be polite but firm, and after the first two calls, ask for a meeting if payment has not arrived by the due date. Send a letter to the client outlining attempts to receive payment to date, if past-due payment has not been received after three weeks of calls and a meeting. The letter should state that at no time has the client expressed any problem with the invoices. Refer to the clause in the contract providing for the withholding of services for non-payment and express the wish not to have to invoke this, which could seriously affect the success of the project. If the client agrees verbally to some form of payment plan, this should be documented in writing. Be aware of provincial lien legislation, particularly for different time limitations for filing a lien for a “contractor” (prime consultant) or “subcontractor” (subconsultant). Be prepared to initiate lien action within the time periods specified in the legislation. An architect may need to consult with legal counsel for advice on lien rights, as they vary among the provinces. Architects should also be aware of the limitation period in their province or territory to commence legal action to collect unpaid fees. Non-payment and late payment are usually a red flag – either the client is having financial problems OR they are dissatisfied for some reason with the architectural services. The earlier an architect is aware of this, the easier it is to manage. Stopping Work Review the agreement in place with the client insofar as stopping work is concerned. If stopping work is permitted under the agreement, advise the client that non-payment or late payment is a serious matter and that services will be stopped if payment is not received. Architects should consider seeking legal advice before stopping services. Stop work if necessary – if services are not halted at the first instance, there will be no credibility if late payment should re- occur. Consider one or more of the following actions: send a lawyer’s letter to the client; file a lien against the property (see also Chapter 6.7 – Take-over Procedures, Commissioning, and Post-Occupancy Evaluations); attempt to reach an agreement through a mediation process; attempt to reach a decision through an arbitration hearing; turn the collection over to a reputable collection agency; initiate legal action. The final alternative to withholding services may be to resign the commission and terminate the relationship. If this is the decided course of action, it must be properly documented and in accordance with the termination clauses in the contract. Architects should consider retaining legal counsel to assist in this process. In addition, the following steps should be undertaken: Notify authorities having jurisdiction, whether the decision is to withhold services until payment is made, or to resign the commission. These authorities rely on the architect to provide a general review of the project, and in some jurisdictions, “letters of assurance” at the completion of a project. https://chop.raic.ca/chapter-3.8 13/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC Be prepared to defend a counterclaim from the client, whatever course of action is selected (mediation, arbitration, lien action or litigation). The client may make a variety of accusations, including poor performance and negligence. For this reason, an architect should likely consider reporting the issue to their professional liability carrier. Take care not to issue idle threats: if legal action has been threatened for non-payment of an invoice by a certain date, be prepared to initiate the action in a prompt manner. Record all communications regarding collection, including all attempts at contact for purposes of payment (faxes, e-mail, phone calls, letters, memos, conversations). These records will be important in formal hearings on resolving the matter of collection. Projects in Other Jurisdictions Architects working outside their base jurisdictions should learn about the differences in construction practices and professional services in other jurisdictions that may increase risks. The further from home, the greater the differences. Some differences to watch for include: In other municipalities within the same province: different zoning, land-use, and other bylaws; different building code interpretation; different processes in applications to authorities having jurisdiction; local customs and laws. In other provinces or territories within Canada: different legislation (such as lien legislation); architectural registration/licensing and provincial policy with respect to seeking work in another province without a licence; applicable provincial law (for example: Civil Code in Québec vs. common law in other provinces); local customs; bylaws in specific municipalities. Outside Canada: different laws: whether the architect can legally provide services in the jurisdiction; whether the architect can hold themselves out as an architect in the jurisdiction; liability laws; tax laws which may affect profitability; laws respecting travel, visas, and freedom of movement; international agreements and treaties; applicable building codes; differences in the statutes of limitations that will impact record retention practices; insurance requirements which may differ: Some jurisdictions may not accept the policies issued to the architect in Canada. Some insurers will not provide coverage for services performed in certain countries. These issues should be brought to the attention of the insurer and insurance broker before agreeing to the commission. Special policies may need to be procured or endorsements added to the existing policies. different customs: cultural differences; language which may govern contracts; payments to “sponsors” for the privilege of working in the jurisdiction; political alliances (allies, neutral parties, and enemies); local trade practices. political issues: potential for violence and/or civil unrest; sanctions by the Government of Canada; anti-corruption laws in Canada and the foreign nation. forms of contract: standard international contracts; for example, the contract of the International Federation of Consulting Engineers (FIDIC); uninsurable clauses such as guarantees, warranties, higher standards of performance than in Canada, greater indemnification of owner than Canadian architects are accustomed to; acceptance of laws of foreign jurisdiction for dispute resolution; unusual clauses (for example: “if there is a discrepancy in the documents, that which best suits the client will govern”). payment: make payment terms very clear; be aware of exchange rate fluctuations if payment will be in a foreign currency; https://chop.raic.ca/chapter-3.8 14/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC make arrangements for transfer of funds before accepting the commission because many countries forbid local currency leaving the country; be aware that some foreign jurisdictions require fees to be either held for performance holdbacks or guaranteed by letter of credit; other differences: different time zones between the main office and the overseas location mean that there may be little or no time in which both offices are operating simultaneously; increased communication costs; collaboration – many foreign clients want to deal with a firm that has a strong local presence; this could entail an alliance with a foreign architectural practice, or the opening of an office in the jurisdiction, either of which will require review of the architect’s status with both local and foreign associations, as well as with the professional liability insurer. Disputes and Dispute Resolution A construction project is a complex undertaking involving many different entities, each with a unique role to play. Owners, contractors, suppliers and design consultants have separate interests and motivations before, during and after a project is delivered. Disputes and conflicts are almost inevitable. Therefore, an important part of an architect’s risk management strategy relates to the handling of disputes. Such a plan should be both internal to the practice (procedures to report and share issues with others in the firm) and externally influenced, in contract documents as well as through procedures to report disputes to the professional liability insurer. The architect should also be mindful of the requirements of their insurance policy not to admit liability and not to volunteer any payments to claimants without notifying the insurer and obtaining their consent to do so. TABLE 1 Dispute Resolution Steps. Reprinted with permission from: DPIC - Security Insurance Company of Hartford. Alternative Dispute Resolution (ADR) In the event of a dispute, the architect may be requested by the client, or perhaps others, to participate in some form of alternative dispute resolution (ADR) such as mediation or arbitration. ADR is a conflict management strategy that seeks to avoid the very costly and lengthy process of litigation. This approach is usually proposed when amicable negotiations fail to achieve a mutual agreement to resolve a matter under dispute. Always discuss a proposal for ADR with a lawyer and the professional liability insurer prior to agreeing to participate. The insurer or their legal counsel may wish to represent the architect in these circumstances. https://chop.raic.ca/chapter-3.8 15/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC In many instances there will be a dispute resolution provision section in the agreement with the client. RAIC Document Six mandates amicable negotiations, followed by mediation or arbitration as per CCDC 40 – Rules for Mediation and Arbitration of Construction Disputes. Whatever is agreed to in the prime agreement should be passed along to all subconsultants, so all parties are bound by the same dispute resolution proceedings. The ideal, of course, is to avoid disputes in the first place. Clear, concise, correct, well-coordinated and well-checked contract documents will reduce the likelihood of a dispute but cannot totally eliminate the possibility. Equally important is regular and properly documented communication with all project participants. Table 1 shows a sequence of dispute resolution techniques. These methods of alternative dispute resolution (ADR) are ranked in ascending order from low to high escalation of adversity and of costs for the parties in dispute. Partnering Developed as a method of dispute avoidance, partnering has the following objective: to solve problems as they arise, in a manner that will best achieve agreed-upon collective goals rather than trying to affix blame. Partnering involves a team comprised of owners, design professionals, and contractors (prime contractors and subcontractors). Each participant in the process earns the trust, respect and understanding of the others concerning the expectations, goals and objectives in implementing a construction project. This is often accomplished through a facilitated working session or meeting. Partnering typically involves a few days of meetings which culminate in the issuance of a “charter” stating the mutual acceptance by the partners of the project’s common goals. As with all contractual relationships, the “chemistry” among the participants must be compatible; partnering can enhance the chemistry but will not likely replace it. Negotiation In the event of a dispute, the parties may initially attempt to resolve the matter by negotiation. A negotiation based on strict interpretation of the terms of a contract or issue in dispute is generally less successful than one which focuses on the underlying interests and common objectives of the parties. Mediation When two or more parties mutually agree to refer their dispute to mediation, a neutral person is usually selected to act as a mediator. The mediator acts as a facilitator, assisting the parties in their negotiations with one another to resolve or settle the dispute. The mediator: does not impose a settlement; is not a decision-maker; does not act as an expert providing a legal or other expert opinion. Mediation is conducted on a confidential basis, and all discussions and the ultimate settlement agreement(s) also remain confidential to the parties. Anything disclosed during this process cannot be used later in subsequent or ongoing legal proceedings. Mediation allows for creative solutions not available in the traditional litigation process. In many cases it also allows relationships between the parties to be preserved. Although the mediator does not need to have special expertise in the matter under dispute, in many cases it is indeed warranted. There are mediators in all major cities across Canada with extensive experience in construction litigation. Typically, the expense of this process is borne by all participating parties on an equal basis. In many jurisdictions across Canada, mediation is mandatory, required by the rules of court. It has proven to be an effective method to resolve disputes, and much more efficient in terms of both time and expense. Once a settlement is reached, appropriate written documentation, which releases someone from an obligation or from further legal action, is necessary. These releases should be prepared with the assistance of legal counsel. Arbitration In arbitration, two or more parties submit a dispute to an independent and impartial arbitrator or arbitration panel, mutually agreed upon by the parties in dispute. The arbitrator makes a final and binding determination in a quasi-judicial manner. This process is much more formal than mediation. Mandatory and binding arbitration might be mandated under the client-drafted agreement, and to the extent that this can be modified (stipulate that the agreement of both parties is required), it is recommended. https://chop.raic.ca/chapter-3.8 16/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC The experience and qualifications required for an arbitrator are similar to those required for a judge; in fact, many arbitrators are retired judges. An arbitrator must have knowledge of: statutory procedures applicable to conducting a hearing; relevant legislation, relating to arbitration and judicial procedures. Although specific expertise may not always be required, this will depend on the nature and magnitude of the dispute. The parties must pay for the arbitrator or arbitration panel as well as the venue and other costs. The arbitration process can be both expensive and time consuming. There are legal and professional liability insurance implications in arbitration, whether participating as a witness or as a party; therefore, legal and insurance advice should always be obtained before agreeing to participate in any arbitration. Most professional liability insurers for architects prefer to avoid mandatory binding arbitration. Professional Liability Insurance One method of transferring project risk is through professional liability insurance (sometimes referred to as errors and omissions insurance). This type of insurance is mandatory in most provinces. See “Comparison of Provincial or Territorial Requirements regarding Professional Liability Insurance” in Chapter 1.6 – The Organization of the Profession in Canada. All architects are required to perform their services to a “professional standard of care.” This means that architects are required to provide service with the degree of care and skill that would be rendered by reasonably competent architects under the same circumstances and in the same geographic location. An architect who does not meet this standard may be found negligent, possibly resulting in a finding of professional misconduct. As mentioned earlier in this chapter, architects should try not to accept any elevated standard of care imposed by a client in an agreement. An architect found liable for a negligent act, error or omission can be held responsible for the damages proven to be attributable to said negligence. Professional liability insurance provides protection from such claims and is intended to cover such liabilities. A professional liability insurance policy does not afford total protection, however, because insurance policies have conditions, limitations and exclusion clauses which void or restrict coverage for certain specific activities, or contractual commitments that go beyond the negligence standard. Common exclusions under a typical policy include (but are not limited to): fraudulent and dishonest acts; contractual liability; products liability; construction activities carried out by the professional; express warranties and guarantees. In addition, the policy will have monetary limits per claim as well as in the aggregate for each policy period. There may also be limits for designated projects. The architect should read and understand the policy and pay attention to exclusions and endorsements that may be added to the policy. These may change from time to time and need to be reviewed on a consistent basis. All firm members should be aware of the coverages and restrictions, especially members who are entering contracts on behalf of the firm. Insurance premiums are usually proportionate to the volume and type of work in the practice, as well as the firm’s claims experience. It may be necessary or prudent to purchase excess coverage over and above the basic level of protection required by the regulations or legislation of a province or territory. A client agreement may mandate a certain level of insurance which is beyond the limits carried by the firm. This needs to be addressed and the policy should be amended accordingly. Excess insurance coverage for a specific project is typically a reimbursable expense, but the payment for excess insurance needs to be clarified in the proposal or contract documents. The professional liability policy will normally have a deductible, the amount of which will depend on the size of the firm, the risk profile, and the firm’s own preferences. The deductible in many cases will apply to legal fees and other claims expenses. The policy limit may include legal fees and expenses, or may provide that those expenses are in addition to the policy limit. In addition, on some larger projects, an owner may insist on a project-specific professional liability policy which provides coverage for all design professionals. If this is the case, the terms and conditions of that policy should be reviewed and understood. It is recommended that, if several professionals are insured under one policy of insurance, an agreement be in place regarding the responsibility for payment of the deductible obligation. https://chop.raic.ca/chapter-3.8 17/19 10/24/21, 4:17 PM Chapter 3.8 - RAIC Insurance coverage is an important item to be considered if a firm is ceasing to practice. In this scenario, architects should speak with their professional association or insurance broker, who may recommend the purchase of a “run-off” policy for a certain number of years. The issue of insurance should also be part of any discussion between firms who are considering a merger, purchase or sale of the firm. There are several options available and they should be discussed with professionals knowledgeable in this area, including insurance brokers and legal advisors. Architects should pay careful attention to the insurance requirements mandated under their agreement with the client, as some of the coverages or endorsements requested may be unattainable or cost prohibitive. Some examples include: requirement to have the client or other parties named as an additional insured under the professional liability policy; maximum deductible amount; coverage to be in place for an unreasonable number of years following substantial completion. The Canadian Standard Form of Contract for Architectural Services contains a clause, GC 9.1, limiting the architect’s liability to the client to the amount of insurance coverage that is available at the time the claim is made, or an amount agreed upon by the parties. A limitation of liability clause is a “deal-maker” and should be included in all other non-standard, client-architect agreements. The amount of the limitation of liability should be negotiated on a case-by-case basis, depending on the size and complexity of the project, as well as the insurance limits carried by the architect. However, this clause will not limit exposure to third parties; therefore, additional coverage may still be advisable. Questions regarding appropriate limits of insurance should be discussed with an insurance advisor. If a situation arises in which the architect believes that a claim might be made, the architect should discuss the situation with the professional liability insurer to minimize exposure. Notify the insurer at the rst indication of the likelihood of a claim and follow the insurer’s advice to avoid putting the insurance coverage at risk. Professional liability policies are typically written on a claims-made and reported basis, meaning a claim must be made and reported in the same policy period. The architect should always require subconsultants to carry professional liability insurance with the appropriate coverage for each project. The amount of insurance for subconsultants should align with the insurance requirements mandated by the prime agreement. All consultants should be required to verify that they have obtained this coverage when the architect engages consultants for a project. In addition, the architect should follow up on an annual basis with the subconsultants and obtain updated certi cates. Out of an abundance of caution, an architect may want to include a clause in the subconsultant agreement that if the subconsultant ceases its business, it agrees to obtain a run-o errors and omissions policy for a speci ed time period. Every province and territory has di erent statutes of limitations. These statutes of limitations usually provide a time limit within which a claim can be made. These laws indicate the number of years after which no legal proceeding may be undertaken following a date when the damage (or negligent act) was discovered or ought to have been discovered (the “basic limitation period”). In addition to the basic limitation period, several provinces have an “ultimate limitation period.” No lawsuit can be commenced in respect of any claim after this period has expired. There have been instances where clients have included a term in their prepared agreements that seeks to extend the time limitations imposed by statute. This should be deleted. In Québec, the liability of architects is based on the following articles of the Civil Code. Article 1457 – General Liability Article 1458 – Contractual Liability Article 2118 – One Year Liability for workmanship of a contractor Article 2120 – Five Year Liability in the case of loss of work – this is joint and severable with engineers and the contractor with the possibility of release. See Appendix E – Comparison of Statutes of Limitations in Each Province and Territory at the end of this chapter. https://chop.raic.ca/chapter-3.8 18/19