In any commercial agreement, rules by which the parties will abide are determined by the contract.
With client/architect agreements, this includes not just the scope of service provided and remuneration payable but also the extent to which they are responsible for risks and are exposed to liability when things go wrong.
This has become particularly important amid a long-standing trend for risk to be allocated away from clients and toward contractors and consultants. Such a push has increasingly seen architects being presented with contracts prepared by the legal team of the client (or, in the case of a design/build contract, the head contractor). Having been drafted with the interests of the client in mind, these agreements almost invariably seek to redistribute risk away from the client and toward the consultant.
That raises questions regarding the types of clauses about which they need to be aware. According to Wendy Poulton, Manager Risk Services at informed (the education and risk management arm of insurance broker Planned Cover), these fall under several categories.
Arguably the most prominent area, she said, are contractual clauses which essentially require architects to guarantee perfection in respect of the final project outcome. Under these types of clauses, clients generally expect a faultless outcome to be delivered within agreed time frames and budgets, with the final product meeting all of their needs.
This, Poulton says, is problematic. For instance, on a number of occasions, she has seen clauses which required the architect to guarantee that the project will be delivered within budget without the client even having decided what that budget was. Moreover, building completion dates could be months or years after the design is completed – in which time costs associated with materials, equipment, energy or trades and labour could all have fluctuated.
A second example are clauses which require architects to guarantee that products they specify are fit for purpose. Whilst a desire on the part of clients for this type of guarantee is not unreasonable, Poulton says architects are not manufacturers and are thus not able to individually test each and every type of product. Expecting architects to provide an ultimate guarantee about all products is not realistic notwithstanding that they do have a duty of care to take reasonable steps in this area, she said.
The bottom line, Poulton says, is that whilst expectations that architects will apply reasonable care and skill are reasonable, those that they will guarantee a perfect outcome are not.
Another area which Poulton says is not seen often in architecture contracts but is problematic when it occurs is liquidated damages, which typically enable clients to obtain compensation whereby the services are not completed on time. Whilst not common in architectural contracts, Poulton says these are commonly excluded from coverage in respect of professional indemnity insurance and may thus need to be paid for out of the architect’s own pocket where they do occur.
A third area is indemnity clauses. Essentially, these require the architect to compensate the client where certain events occur which cause loss for the client. In some cases, these clauses simply require compensation for losses incurred in respect of the architect’s own negligence – a less objectionable expectation. On some occasions, however, clauses will specify that the architect must pay compensation in respect of the entire amount of any loss suffered which in any way relates to the services provided. This is the case even if responsibility for the loss lies wholly or partly with another party, such as a sub-consultant, builder, trade contractor, manufacturer or even the client themselves. Indeed, some clauses do not even require the client to prove that the architect did anything wrong.
There are two problems with this. First, where the loss in question was fully or partially attributable to one or more of the aforementioned parties, the architect is left in a position of needing to pay the entire amount at first instance and then attempting to recoup this by countersuing the other party or parties. Where these parties become insolvent, the architect is left holding the can for the entire damages even though they may have been either not responsible at all or alternatively only partially responsible.
Furthermore, this may not be covered under professional indemnity insurance. Whilst PI insurance covers architects for liability for which they are responsible under relevant legislation, it very commonly excludes contractually assumed liability – an amount of liability to which the architect is exposed over and above their statutory liability by virtue of them having agreed to assume responsibility for this through the contract.
Similar problems may occur where architects agree to contracts which require them to contract out of proportionate liability – a practice which is specifically allowed in New South Wales, Western Australia and Tasmania and is expressly prohibited only in Queensland (the law in other states and territories is silent as to whether or not contracting out is allowed.)
In place via legislation throughout all state and territories, proportionate liability is a system whereby individual parties within a damages claim involving more than one party are liable only for the portion of the damages for which they themselves are responsible. For example, if an architect was 10 per cent at fault for a damages award of $1 million, they would only be liable for damage of $100,000. Where the parties agree to ‘contract out’ of proportionate liability, however, they stipulate through the contract that the proportionate liability regime will not apply to that particular project.
Where that happens, the architect could potentially be liable for the entire amount of the claim in a multi-party damages suit. The only way to recover the portion of the damages for which they are not responsible would be to counter-sue other parties.
As with indemnity clauses, liability which is incurred by way of contracting out of proportionate liability is contractually assumed liability and may not be covered under PI insurance. Thus if an architect was held to be 10 per cent responsible for the loss in question, the insurer might well cover only that 10 per cent. In respect of the remainder of the liability which the architect had assumed by virtue of the contract, they themselves would be left to pay for this on their own.
Beyond these insurance related risks, Poulton says there are other areas where architects should take care to protect their own commercial interests.
First, there are ‘set-off’ clauses, which create or limit the ability of parties to a contract to set off monetary cross-claims against each other. A particularly malign clause from an architect’s viewpoint would be one which enables a client to avoid paying the architect’s fees on the basis that the architect had allegedly committed a wrongdoing which would cause financial detriment to the client. With some clauses, the client does not need to prove that the architect was at fault, essentially enabling the client to withhold the fees on the basis of spurious allegations.
Not surprisingly, Poulton urges caution before agreeing to contracts which contain set-off clauses. These, she said, should either be deleted altogether or should at least clearly specify the range of circumstances in which these clauses can be used (which should be restricted) along with the procedure for resolving the dispute promptly so that the architect’s fees can be paid.
Second, where possible, Poulton urges architects to avoid engaging sub-consultants. Oftentimes, Poulton says, architects are asked to engage their own sub-consultants ranging from structural engineers, civil engineers, mechanical engineers, interior designers or building surveyors/certifiers. Where this happens, Poulton says the architect essentially ‘owns’ the sub-consultant in question and assumes responsibility for risks in respect of any mistakes made by the sub-consultant as well as their own mistakes.
Poulton says architects should seek to use industry standard contracts wherever possible. Australian Standard 4122 2010 is the Australian standard consultancy agreement, whilst both the Australian Institute of Architects and the Association of Consulting Architects produce their own standard form of client/architect agreements. These will generally deliver a more favourable outcome from the architect’s point of view compared with client drafted contracts – which as mentioned above typically protect the client rather than the architect.
Particularly on larger projects, meanwhile, Poulton says it is important for architects to seek independent legal advice.
Around Australia, architects need to be wary about traps in contracting which can see them exposed to unfair amounts of liability.
By being aware of these, they can understand the risk they are taking on and can ensure they are not subjecting themselves to areas of liability which are unreasonable or unfair.