Articles|May 27, 2021
Project Owner and Lender Certifications
"I guarantee it!"
Those three words, or their equivalent, have been the bane of many architects, engineers, and other design consultants when spoken to clients or written into their contracts.
Certifications, guarantees, and warranties are commonly sought by clients and other parties to a construction project seeking certainty in their uncertain world. For instance, clients may want certainty in the fact that jobsites are free of pollutants or other subsurface conditions that may stall construction and increase costs. Or, clients may seek certainty that their projects will be completed by a specific date and at a set cost so they can start earning income and profits as anticipated. They may also seek a promise from the designer that the project will meet ADA and other code compliance or achieve LEED certification.
In making an argument for certifications, guarantees and warranties, clients often point out that vendors of materials, systems and equipment routinely provide guarantees on their goods. So why won't designers offer similar guarantees?
The problem is that a design consultant cannot guarantee, warrant, or certify their services, nor conditions, on the jobsite. There are simply too many unknowns in any project to provide absolute certainty about project outcomes.
Design consultants who do provide certifications, guarantees, and warranties regarding the delivery of their professional services and project unknowns open themselves up to significant liabilities. That is because such promises go beyond the standard of care to which design firms are normally held.
For instance, suppose a consultant performs a subsurface survey of the jobsite, and then certifies that there are no pollutants or obstacles present. Later on, it is discovered that there is an old leaky storage tank deep below ground that must be removed, along with 50 gallons of seeping petroleum.
Ordinarily, the consultant would not be held liable for the cost of remediation as long as he or she had performed the subsurface site inspection in accordance with the prevailing standard of care for delivering such services – i.e., in the same manner that any reasonable consultant would have performed such services under similar circumstances in a similar locale.
However, if the consultant had signed a contract guaranteeing there was no subsurface pollution on the jobsite, the consultant would likely be held liable for the remediation costs. That is because the contract language raised the standard of care above that ordinarily applied. Any subsurface conditions that resulted in delays, or added costs would now be a breach of the contract that promised no such problems. What is worse, the cost of the remediation likely would not be covered by the design firm's professional liability policy since, absent the contractual promise, the activity performed to the prevailing standard of care would not be considered an error or omission.
However, that is not to mean that you can't guarantee, warrant, or certify certain known facts. For instance, you can certify to a client that you are currently a design professional licensed to operate in a given state or province – assuming, of course, that you are currently licensed and can provide proof of such. You could also certify that you were on the jobsite on a particular day performing particular services. But if you do decide to guarantee, warrant, or certify known facts to a client or other party to the project, you better be certain that these are all provable facts.
So how do you handle situations where a client or other party to a project asks you to certify, guarantee, or warrant your work or the existing conditions on a jobsite? The best defense against such requests is a good offense. Early on in project negotiations, make it clear to the client that you cannot and will not certify, guarantee, or warrant any conditions related to the project that you cannot be 100% certain about. Explain to the client that giving such certifications will raise your standard of care above that of the prevailing design industry, and threaten your professional liability insurance coverage should something on the project go wrong.
Provide the client with language you and your attorney would like to have added to the contract, stating that you will not be required to sign any documents demanding a certification, guarantee, or warranty of conditions that cannot be fully known. Also note that you have the right to refuse to sign any subsequent project documents that include requests for certifications, guarantees, and warranties of project conditions that cannot be fully known.
What if the client is insistent that you must provide some form of certification, guarantee, or warranty regarding your work in order to get the project? You might try modifying the contract language to make it less onerous. For instance, you might replace certification language with language such as "to the best of my knowledge" or "in my professional opinion." You should certainly be able to render your professional opinion regarding project conditions without the liability that would ensue by guaranteeing that your opinion is correct.
If the client insists on having contract language that specifically includes the words certification, guarantee, or warranty of project conditions, then see if you can add an acceptable definition of these terms. For instance, include language in the contract that defines certification as "an expression of your professional opinion that does not constitute a certainty of conditions."
Finally, if a client refuses to budge on their insistence in having you certify, guarantee, or warrant unknown project conditions, you have a difficult business decision to make. You can explain once again why you cannot in good faith certify, guarantee, or warrant things that are unknown and, by doing so, weaken your professional liability coverage. If this final plea falls on deaf ears you may be forced into a position where you have to consider the certification, guarantee, or warranty a deal-breaker and refuse the project. That is a business decision only you can make.
A number of our architect clients have reported an increase in lenders who are asking them to certify project conditions as a prerequisite of funding the project. We are not talking about the architect's lender, but the project owner's lender. They want the project's lead designer to, among other things:
- Certify, guarantee, or warrant facts about the project that the architect cannot know for certainty.
- Agree to execute any and all documents that the lender demands.
- Cooperate in all respects with the lender.
Oftentimes, these stipulations are included in "assignment" clauses in project contracts. Assignment clauses typically state that should the project owner violate terms of the loan, the contractual rights of the project owner may be transferred to the lender. This can include the assignment of all plans, specifications, agreements, reports, licenses, permits, and contracts to the lender. In effect, the contract that the design consultant signed with the project owner may now become a binding agreement between the design consultant and the lender.
The liability issues that were discussed earlier regarding a project owner's demands for certifications, guarantees, and warranties apply equally to lender demands. The agreement to execute any and all documents the lender demands and cooperate in all respects are completely open-ended and fraught with liability concerns and other legal dangers.
Be aware that the design consultant may not have to accept an assignment clause presented by the lender as a condition of the loan to the project owner. Your leeway to negotiate will depend on 1) the contract language the lender negotiated with the project owner, 2) any client contract language you agreed to regarding assignment, and 3) any agreements, such as a lender's "Consent of the Architect" clause, presented by the lender and signed by the design consultant.
The Consent of the Architect form typically obligates the design consultant to continue to perform its scope of services on behalf of the lender (as long as the consultant gets paid according to the original or renegotiated contract terms), but gives the lender the right to terminate the contract in the event of a default by the project owner. The design consultant may also be obligated to inform the lender if it receives any information indicating that the project may not be substantially completed by the date indicated in the client contract, or that there have been substantial deviations from the project plans.
If the client contract is silent on the issue of assignment and the design consultant has not signed an assignment consent form, the design consultant likely has room to negotiate an acceptable assignment that could keep the project moving and financing flowing without increasing professional liabilities, insurable or otherwise, through any certifications, guarantees, or warranties.
Better yet would be a contract clause that stipulates that neither party to the client contract can impose assignment of that contract to a lender or any other third party without the written consent of both parties.
Here are some other tips regarding dealing with a project owner's lender that you should discuss with your legal and insurance representatives:
- Include a clause in your contract with the project owner or the lender that gives you the right to refuse signing any contract that could, in your opinion, jeopardize your insurance coverage, increase your insurance costs, and/or increase your liability risks. You could agree to accept this increased risk through increased compensation for your services delivered on the project.
- Include a clause in your client contract that requires the client to append to the contract any other agreements that you will be required to sign during the course of the project, including any assignment consent form. Any other contract amendments or proposed agreements that have not been appended to the primary contract, including those with the lender, could then be refused or amended through negotiations.
- Include a clause in your contract that ensures you have sufficient time to review any documents or requests for certifications given to you by the lender. You should then thoroughly review any such documents and remove any onerous language that you believe could increase your liabilities or cause them to be uninsurable.
We recently heard from an architect who was asked by a lender to certify that the contractor on a large project would meet all construction schedules. This is a prime example of the type of lender demands for a certification, guarantee, or warranty that a design consultant simply cannot accept.
Have your legal representative and insurance agent or broker review any certification, guarantee, or warranty contract clauses presented by the project owner or project lender for your signature. Any assignment clauses should also be carefully reviewed. Typically, clients and lenders will show some leeway and willingness to negotiate if you can clearly demonstrate that their requests present untenable liability risks you cannot accept.
The preceding material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with qualified legal and insurance professionals who can provide guidance that considers your own unique circumstances, including applicable laws.
Articles|May 24, 2021
Damage to Property Under Construction Caused by Construction Defects
By Jeff Cavignac
President CPCU, RPLU, ARM
Posts|May 21, 2021
Maximize Your Surety Program – Minimize Underbillings & Working Capital Issues
By Oliver Craig