Monday, October 28, 2013

Consultants design / specification mistakes – Who should pay for them?

That was a question that someone asked on a LinkedIn website. Since I was surprised with the wide variety of responses (many of which were wrong) I decided to write a post as it involves a couple of key points.

First from a common sense perspective you need to ask the question if there was no error and the work cost more to construct, who would have paid the bill? The answer to that is the employer. While one never likes getting a large additional charge to complete the work correctly, you can't expect to get additional value added for free. If you wanted the consultants to pay the added costs required because of their mistake, you probably couldn't afford their services. It probably would also not be enforceable.

From a contracts perspective there is a concept under equity law where “unjust enrichment” is not allowed. Unjust enrichment is an equitable principle that no person should be allowed to profit at another's expense without making restitution for the reasonable value of any property, services, or other benefits that have been unfairly received and retained. In many jurisdictions that principal in equity has carried over to contract law. In those locations unjust enrichment in the form of penalties are not allowed. You can collect damages, but you cannot profit off the others breach and language that would create a penalty would not be enforceable in their jurisdictions.

If there is a mistake by the design consultant, you can't simply expect that you will get all of the cost to correct that mistake for free, especially if the correction of that mistake provides you with additional value. What you can expect is if the mistake causes you an additional cost over and above what it would have cost you if it had been done right, you might have a potential claim against the design consultant. The key in your success on that damages claim because of the mistake or error is what duty do they have to you? Are they obligated to produce an error free design? The answer to that is no. Are they expected to use ordinary and reasonable care for someone of that experience and skill level? The answer to that is yes. If you want to increase the standard of care they must provide you would want to have the designer represent that they are an “expert” and agree that in spite of any knowledge you may have, you are relying upon their expertise. That provides you with a highest standard of care.

If a design consultant is negligent and makes a mistake in locations that do not allow for penalties, the most you could collect are damages you sustained. Damages include the cost of work that needs to be removed, not the cost of what should have been there in the first place if not for the error. Here’s an example. A concrete floor was specified to be 5 inches deep by the design consultant. Based on the loading it is later determined that the floor depth needed to be 6 inches. If you could simply pour that additional inch without any other impact, should the consultant have to pay for that additional inch? In my thinking that would be a penalty and a form of unjust enrichment or penalty, as the owner would have paid for it in the first place if it was designed correctly. Using the same example but in this case the floor had to be demolished and re-poured. In that situation I think that the designer's potential liability could be for the cost of demolishing, the cost of the 5" floor that had been poured and demolished, but not the additional inch. To have the designer pay for that extra inch would constitute a penalty.

There are different standards of care between the designer and employer versus the standard of care that the designer has with respect to third parties. They have the responsibility to design safe buildings and if they don't not only may they be subject to employer claims for damages, they can also be subject to third party claims for personal injury (including death) and property damage sustained as a result of their negligence. As an employer to protect your company against third party claims you want general indemnifications and insurance from both the designer and the contractor. From the contractor you want "all perils" insurance, and from the designer you want errors and omissions coverage.

Have I every asked a design consultant to contribute a portion of the extra cost when their error cost me more than what it would have originally cost me if it had been done right (because work needed to be redone)? Sure, especially when I paid them for site supervision to prevent that. Have I ever had a contractor and designer get together and tell them that there is a problem, but it's not the employer’s problem. Both failed to identify an obvious error or were negligent. Do I look to them to determine how they will pay for the additional cost? Sure. In negligence there is a latin term “res ipsa loquitor”, which means "the thing speaks for itself".) One is presumed to be negligent if they had exclusive control of whatever caused the injury. There needs to no specific evidence of an act of negligence. However without negligence the accident would not have happened. If as the employer I had no involvement, I look to the companies that had control of the site to work to sort out responsibility.