Almost every article or discussion dealing with the legal aspects of integrated-project-delivery contracts raises the notion that IPD contracts have not been tested in court and that this untested status elevates the legal risk to the IPD participants. While it is true that, as of this date, there is little, if any, case authority dealing with the legal merits of IPD contracts, that does not tell the whole story.
The first challenge to this idea is determining whether IPD contracts really are new. Those of us who were around in the early 1980s will remember the “partnering” agreements that, along with other contract documents, were circulating and will recognize some of the “fluff” language inserted in IPD contracts in an obvious effort to engender a spirit of cooperation.
The language is really not all that new, but the same enforceability issues prevail. What is new about IPD contracts is that they have emerged with BIM technology. New technology, by itself, is not reason enough to avoid a project delivery method. New isn’t necessarily bad.
Contracts that are new and untested give most of the legal community a stomach ache because there are no legal authorities or precedents to provide assurances as to legal risk assessment. However, the lack of judicial precedent on a particular subject matter will give a skilled and savvy attorney a clear slate to educate the judicial community on what the language means or should mean.
Further, even though there may not be a long line of cases that lawyers can read to find the meaning of specific clauses in IPD contracts, we are dealing with contract law, and we have well over 100 years of well-defined rules of contract interpretation to guide us. While there may not be a lot of judicial history on IPD contracts, this may turn the unwary away but also may create opportunity for innovative thinkers. I do not believe the uncertainties are enough of a reason to avoid IPD contracts.
It is often said that the players in an IPD contract will be assuming risk they are not accustomed to undertaking. Yet any contractor or subcontractor who never has signed a design-build contract before does the same thing—and so does a designer who, generally, never has assumed any role in means and methods before.
Design and Financial Risk
The contractors in an IPD environment run the risk of assuming some design responsibility, and, at a very minimum, the contracts usually are set up to share financial risk of the project; this risk could include, to some extent, design deficiencies. In addition, contractors may, depending on the language of the contract, absorb liability for the design they contribute as well as the liability for the design contributions of their subcontractors.
While most commentators and proponents of IPD seem to think the problems associated with design will be discovered through the use of BIM, the sleeping dragon may very well be the overreliance on computer models and not enough human input.
Here are some of the most important risks.
Loss of the Spearin Doctrine
The Spearin Doctrine is a time-honored rule that came from the U.S. Supreme Court’s decision in U.S. vs. Spearin (1918), adopted in some form by most states, which stood for the proposition that a contractor under a traditional design-bid-build contract could assume that the plans and specifications provided by the owner’s design team were buildable. Thus, if the design documents were not buildable or if the design did not work or function the way the designers or owners intended, the contractor was exonerated from liability as long as the contractor built the project in accordance with those contract documents. This precedent has been adopted in some form by most states.
With the advent of design-build construction, this principle disappeared because contractors were providing the design services. With IPD, the lines between design and construction definitely are blurred.
The contracting community risks losing the Spearin Doctrine defense in an IPD setting depending upon how the IPD contract is drafted and what specific input or design liability the contractor has undertaken for itself or its subcontractors. This potential loss is mitigated somewhat by the fact that contractors already have been operating without Spearin Doctrine protection under design-build contracts.
Sharing in Means and Methods
In design-build construction, designers do not absorb means-and- methods responsibility because, in theory, design and construction are provided through a single contracting entity. That may change with IPD contracts. Designers likely will absorb some of the financial risks of mistakes in means and methods simply because they share in the risk of the overall profitability of the project. However, depending on how the IPD contracts are drafted, designers may also absorb some liability for means- and-methods decisions based on their input, just as a contractor may absorb liability for design.
That’s what is new: IPD blurs the boundary between design and construction.
Losing the Economic Loss Doctrine
The Economic Loss Doctrine is alive and well and living in most state court jurisdictions. It is a legal defense that typically is raised by contractors to eliminate broad categories of tort-based claims and generally stands for the proposition that, if two parties are joined together by contract and there is a breach, the courts will follow the contract remedies, not the tort remedies, in the absence of (1) personal injury, (2) third-party property damage or (3) facts giving rise to the breach of a legal duty owed independently of the contract.
Generally, the Economic Loss Doctrine is not applied to designers because courts view their liability as arising out of both the contract and the professional relationship. With the blurred line between design and
construction, the IPD relationship may subject contractors to an increased risk of tort liability; previously, there was little or none. This risk could be significant and needs to be addressed in the contract as well as with suitable insurance.
Some of the new language in an IPD contract is designed to inspire cooperation among team members. One often-stated criticism of the IPD contracts is that they contain this “Go, team, go!” type of language. Examples from actual IPD contracts include “members shall act as a team,” members “affirm their commitment,” members agree to “pursue the Owner’s objectives,” “collaborating with all members of the design team,” agreeing to make “reliable promises,” “promissor shall accept the reasonable legal consequences,” the IPD members will “be expected to reasonably share information and actually promote harmony, collaboration and cooperation,” and the like.
It wasn’t lawyers who elected to include this type of language.
Many homegrown IPD contracts began with a traditional platform in which the “fluff” language was edited into the document. This fluff does not make the contracts unenforceable, but it does make portions of the contract difficult to enforce. Fluff language muddies issues that would otherwise be clear and makes portions of the contract difficult to enforce. Courts are required to look at a contract as a whole.
A court will have more difficulty interpreting what used to be clear and unambiguous because, to consider the contract as a whole, the fluff language must be considered. This means the uncertainty factor applies not only to the new fluff language but also to the provisions which have developed time-honored meanings. Fluff language is therefore a legitimate concern.
Another concern with fluff language is it may create an ambiguity in the contract; that is, it may create a condition in which a particular term or clause is susceptible to two legitimate meanings. So, well-intended fluff language may provide some very real but unintended consequences.
Some of the fluff language may not be needed. What many people do not know is that, in most jurisdictions, most contracts carry an implied covenant of good faith and fair dealing, regardless of whether or not such language is written into the contract.
The solution to the problem with fluff language is really simple: get rid of it. It isn’t needed for an IPD contract to be successful.
Third-Party Design Liability
Another major issue that does not appear to be getting much air time is third-party liability for defective design.
What if a hotel pedestrian bridge, designed and built under an IPD contract, collapsed and caused personal injury and property damage. Under IPD, with various contributions and levels of cooperation in the design process, the blurred IPD lines of responsibility may mean that both the contractor and the design team will share culpability. Furthermore there may be gaps in the insurance coverage, meaning that both the contractor and the design team may incur risks not covered by current insurance products.
Along these lines, in any third-party negligence suit for personal injury or property damage, the issue always arises as to what is the standard of care. With IPD contracts, this remains an unanswered question.
IPD Team Members Can’t Be Sued
Some notable IPD contract platforms have a process wherein IPD members may not sue each other.
This noble and creative idea no doubt originated from the parties, not their lawyers. However noble, its enforceability is questionable.
If a state statute imposed a law preventing parties from suing each other, it may be an unconstitutional denial of access to the court system. While the Constitution does not play a large role in private contracts, the theories carry over. These provisions may be viewed as a waiver of rights in advance, which are generally unenforceable.
Courts may find these clauses invalid because a court believes they are against public policy, which is the contract version of unconstitutional.
If you look closely at many of the “no sue” provisions, they directly conflict with the default provisions. Also, some states have laws indicating that a party may not be required to waive lien rights in advance.
These IPD “no sue” clauses have the same material effect. There is also a question about the impact these clauses have on waivers of subrogation. Some of these problems may be partially solved by placing a limitation or cap on damages—with a reasonable basis for the cap—coupled with a waiver of consequential damages.
Some courts will enforce these no suit clauses. Some will not. It will depend on the court, what the laws of the jurisdiction are, and how the clauses are written—and even possibly what the judge had for breakfast.
Impact on Indemnity Clauses
Indemnity clauses must be closely examined in every contract. In a very general and oversimplified way, indemnity provisions can be divided into three groups: those in which the indemnitor indemnifies the indemnitee for everything including the indemnitee’s sole negligence, which is known as “broad form” indemnity; a second group in which the indemnitor is not responsible for the indemnitee’s sole negligence; and a third type in which each party is responsible for its share of comparative fault.
Most owners and contractors use the second type; many of the commercially available families of documents use the third. With IPD contracts, the second type is no longer available, partly because of the no-sue clauses.
Making It Work
These are only a few of the most important points regarding an IPD contract. A risk-reward evaluation of any IPD contract must start with the negotiated deal and how it is formalized in writing. The “risk-sharing” notion of an IPD contract has worked in the past, and it will work in the future.
Don’t let the new risks posed by IPD contracts scare you away. People at one time thought the world was flat until pioneering sailors went over the edge—and returned. If you evaluate your risk and draft your contracts accordingly, the success of an IPD project may be very rewarding.