Liability of Design-Builders for Design, Construction, and Acquisition Claims (2015)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

12 The rights to sue go beyond design services alone. They also relate to the designer’s other activities. In Shoffner Indus., Inc. v. W.B. Lloyd Constr. Co.,42 the court found that a contractor had a right of action against the design professional for negligence in approving the work of a supplier who furnished defec- tive trusses. The plaintiff alleged that the architect had inspected and approved the trusses before they were incorporated into the roof structure and that the contractor had relied on that approval. The contrac- tor further argued that the architect, as an expert, should have known that the trusses were defective and not installed in a workmanlike manner. In reject- ing the architect’s argument that it did not owe a duty of care to the contractor, the court stated: The [architect] here entered upon performance of an under- taking and, by doing so, entered into a relationship with the contractor and others giving rise to a duty to those who must reasonably rely upon his professional performance. The arrangement presented here of an architect having general supervisory responsibility over the contractor and other subcontractors on a construction project of this nature is a normal one in this commercial age. Each of the various participants must, to some degree, rely upon the profes- sional performance of the other and each therefore has the responsibility of performing his task with due care. Clearly, the incidental fact of the existence of the contract between the architect and the property owner should not negative [sic] the responsibility of the architect when he enters upon a course of affirmative conduct which may be expected to effect the interest of third parties.43 As a result, the case was reversed and remanded for retrial on the merits as to whether the architect breached its duties of supervision and inspection. Another activity related to contract administra- tion is the use of items considered to be the “equals” to those specified in the contract documents. Con- sider Waldinger Corp. v. CRS Group Eng’r, Inc.,44 which involved an action by a mechanical contractor against an engineer on a wastewater treatment facility. The mechanical contractor claimed that the engineer was negligent in drafting restrictive speci- fications for filter presses required on the project. The specifications for these presses detailed perfor- mance capabilities and mechanical components, which the mechanical contractor’s original supplier believed it could meet. The engineer refused to accept the original supplier’s product and insisted that another supplier be used. The trial court concluded that the engineer intentionally prepared exclusionary specifications and insisted without justification that the original supplier and mechanical contractor comply literally with the specifications. It further found that only one manufacturer could literally comply with the specifi- cations as interpreted by the engineer and that the engineer intended to use such equipment in disre- gard of the U.S. Environmental Protection Agency’s requirements for free and open competition. A similar issue arose in Waldor Pump and Equip. Co. v. Orr-Schelen-Mayeron & Assoc., Inc.,45 where the engineer prepared specifications for a municipal project and rejected Waldor’s pumps as not conform- ing to the specifications. As a result, Waldor brought an action against the engineer alleging negligence in drafting and interpreting the specifications. The project specifications required that the gen- eral contractor supply eight sludge pumps and that they be “self-priming” and use a “coil spring.” Waldor claimed that the only functional purpose of a coil spring was to render the pump self-priming and that the salient characteristic of the pump was that it was “self-priming.” The trial jury agreed and found the engineer to be negligent, having violated the municipal public bidding laws regarding restrictive specifications. The appellate court affirmed the judg- ment of the trial court and concluded that the engi- neer would be liable in negligence to Waldor, a third party who foreseeably relied upon the engineer’s professional obligation to reasonably draft and interpret the project specifications. III. DESIGN–BUILD CONTRACT CLAUSES AFFECTING LIABILITY One of the most important functions of any con- tract is to address what happens if something goes wrong. This section provides an overview of five topics commonly addressed in transportation- related design–build contracts that will affect lia- bility for design, construction, and acquisition issues: 1) disclaimers associated with owner-furnished information, 2) design development, 3) standard of care and warranty, 4) indemnification, and 5) limi- tations of liability.46 Section VI discusses some of the common disputes associated with these topics and how courts and boards of contract appeals have resolved those disputes. To illustrate the type of contract language used on the topics in this section, this digest cites to provi- sions taken from specific contracts. Unless stated otherwise, these provisions are not presented as being representative of the transportation agency’s 42 42 N.C. App. 259, 257 S.E.2d 50 (1979). 43 Id. at 272, 257 S.E.2d at 59. 44 775 F.2d 781 (7th Cir. 1985). 45 386 N.W.2d 375 (Minn. Ct. App. 1986). 46 Although many other contract clauses affect liabil- ity—such as safety, site inspection, and environmental remediation—the topics addressed in this section were chosen because they create some unique concerns and challenges under design–build relationships. Right-of-way acquisition contract issues will be addressed in Section V.

13 philosophy relative to this issue on all of its projects. Readers should further note that design–build con- tracts are lengthy and often contain multiple cross- references among clauses. As a consequence, the ultimate contractual intent and interpretation of a provision may be influenced by other language in the contract. A. Disclaimers of Responsibility for Owner- Furnished Information Owners typically provide a substantial amount of information to proposers during the design–build procurement process, including geotechnical reports, site and survey data, and preliminary design infor- mation. Consistent with their approach on design– bid–build and other project delivery systems, most owners attempt to absolve themselves from liability for such information. They do this by using contrac- tual disclaimers that, among other things, warn bid- ders that their use of such information is “at their own risk,” “without any liability to the owner,” and that the bidder “should independently determine the accuracy of the information.” On design–bid–build procurements, it is common to see these types of disclaimers used for geotechni- cal reports, as-built drawings, and other background and reference information. On design–build pro- curements, disclaimers are used not only for back- ground and reference information but also for the preliminary design documents provided by owners as part of the Request for Proposals (RFP). An example of how disclaimers are used is found in the following excerpts from the design–build con- tract released by Washington State Department of Transportation (WSDOT) on its State Route (SR) 99 Alaskan Way Viaduct Replacement Project.47 This contract makes it clear that, except for some limited exceptions, 1) reference documents are informa- tional and will not form a basis for a claim by the design–builder; and 2) the design–builder is not entitled to a change order for errors in the concep- tual documents provided as part of the RFP. Section 3.1.2 (Obligation to Correct Errors) states: Design–Builder agrees that it has full responsibility for the design of the Project, regardless of the fact that certain con- ceptual design work occurred and was provided to Design– Builder prior to the date of execution of the Contract. Design–Builder specifically acknowledges and agrees that: (a) Design–Builder is not entitled to rely on and has not relied on (i) the Reference Documents or (ii) any other documents or information provided by WSDOT, except to the extent specifically permitted in the Contract Documents. (b) The Conceptual Design, including the Basic Configura- tion, is preliminary and conceptual in nature, may contain errors, and may not be suitable as the basis for the final design. (c) Design–Builder is responsible for providing Released for Construction Documents that comply with the require- ments of the Contract Documents, regardless of any errors, omissions, deficiencies or other defects in the Conceptual Design, without any increase in compensation or extension of a Completion Deadline, subject only to the right to a Change Order for Necessary Basic Configuration Changes. Section 3.3 (Reference Documents)48 reinforces these disclaimers by stating, in relevant part: …Design–Builder understands and agrees that WSDOT shall not be responsible or liable in any respect for any loss, damage, injury, liability, cost or cause of action whatsoever suffered by any DB-Related Entity by reason of any use of any information contained in the Reference Documents or any action or forbearance in reliance thereon, except to the extent that WSDOT has specifically agreed herein that Design–Builder shall be entitled to an increase in its com- pensation and/or extension of a Completion Deadline with respect to such matter. Design–Builder further acknowl- edges and agrees that (a) if and to the extent Design– Builder or anyone on Design–Builder’s behalf uses any of said information in any way, such use is made on the basis that Design–Builder, not WSDOT, has approved and is responsible for said information, and (b) Design–Builder is capable of conducting and obligated hereunder to conduct any and all studies, analyses and investigations as it deems advisable to verify or supplement said information, and that any use of said information is entirely at Design– Builder’s own risk and at its own discretion.49 On WSDOT’s Interstate 405 (I-405)/Northeast 6th Street to Interstate 5 (I-5) Widening and Express Toll Lanes Project, it articulated the design–build- er’s responsibility for design work as follows: It is the intent of the Contract Documents that Design– Builder undertake full responsibility for delivery of the Project. The Contract Documents do not provide details of the design necessary to carry out the intent of the Contract Documents. Such detailed designs are the sole responsibil- ity of the Design–Builder to develop. If the Contract Docu- ments omit or mis-describe the Work necessary to be per- formed in order to deliver the Project in accordance with the intent of the Contract Documents and the standards and criteria for performance of the Project, the Design–Builder 47 SR 99 Bored Tunnel Alternative Design–Build Project Request for Proposal, Washington State Dep’t of Transp. (2010), available at http://www.wsdot.wa.gov/ biz/contaa/DESIGNBUILDCONTRACTS/SR99AWV Boredtunnel/WSDOTAWVDBContractAppendices5. 25.10.pdf (last visited June 29, 2015). 48 This contract defined the term “Reference Docu- ments” to include Geotechnical Memoranda for Design, which were defined as those Reference Document(s) “pro- viding an interpretation of available geologic data that shall not be used to determine differing site conditions, resolve contractual disputes, or in any way interpret the contract, intents, or obligations of the parties.” 49 SR 99 Bored Tunnel Alternative Design–Build Project Request for Proposal Section 3.3, Washington State Dep’t of Transp. (2010), available at http://www. wsdot.wa.gov/biz/contaa/DESIGNBUILDCONTRACTS/ SR99AWVBoredtunnel/WSDOTAWVDBContract Appendices5.25.10.pdf (last visited June 29, 2015).

14 shall not be excused from performing such omitted Work (no matter how extensive) or mis-described details of the Work, and such Work shall be performed as if fully and cor- rectly set forth and described in the Contract Documents, without entitlement to a Change Order hereunder except as specifically allowed by the Contract Documents. Design– Builder specifically acknowledges and agrees that: (a) The Conceptual Design is preliminary and conceptual in nature and has not been signed or sealed. (b) The Design–Builder is responsible for correcting any errors, omissions, inconsistencies and other defects in the Conceptual Design through the design and/or construction process. There will be no increase in the Contract Price or extension of the Contract Time for correcting any errors, omissions, inconsistencies and other defects in the Concep- tual Design, except as provided herein with respect to Nec- essary Basic Configuration Changes.50 Texas Department of Transportation (TxDOT) offers a similar provision on its Loop 1604 Western Extension Project. This design–build contract has several clauses that shift risk away from TxDOT relative to liability for reference documents and the RFP’s preliminary design information.51 For exam- ple, Section 1.7 (Reference Information Documents) states as follows: 1.7.1 TxDOT has provided and disclosed the Reference Information Documents to DB Contractor. Except as pro- vided in Section 1.2.3: (a) the Reference Information Docu- ments are not mandatory or binding on DB Contractor, and (b) DB Contractor is not entitled to rely on the Reference Information Documents as presenting design, engineering, operating or maintenance solutions or other direction, means or methods for complying with the requirements of the DBA Documents, Governmental Approvals or Law. 1.7.2 TxDOT shall not be responsible or liable in any respect for any causes of action, claims or Losses whatso- ever suffered by any DB Contractor-Related Entity by rea- son of any use of information contained in, or any action or forbearance in reliance on, the Reference Information Docu- ments, except any schedule or monetary relief available hereunder as set forth in Section 13 of this DBA.52 The definition for “Reference Information Docu- ments” states that such documents were provided to the design–builder “for informational purposes only and without representation or warranty by TxDOT.” Importantly, Section 3.3 (Responsibility for Design), reinforces that the design–builder is, with certain limited exceptions, unable to rely upon the design documents furnished by TxDOT with the RFP: DB Contractor agrees that it has full responsibility for the design of the Project and that DB Contractor will furnish the design of the Project, regardless of the fact that prior to the date of the execution of this DBA certain conceptual design work occurred and was provided to DB Contractor as part of the Schematic Design as a preliminary basis for DB Contractor’s design. DB Contractor specifically acknowl- edges and agrees that: (a) DB Contractor is not entitled to rely on: (i) the Schematic Design except as specified in Section 3.3.2, (ii) the Reference Information Documents, or (iii) any other documents or information provided by TxDOT, except to the extent spe- cifically permitted in the DBA Documents. (b) DB Contractor is responsible for correcting any Errors in the Schematic Design through the design and/or construc- tion process without any increase in the Price or extension of a Completion Deadline, subject only to the right to a Change Order with respect to Necessary Basic Configura- tion Changes to the extent permitted by Section 13.8.5. (c) TxDOT’s liability for Errors in the Schematic Design is limited to its obligations relating to Necessary Basic Con- figuration Changes as set forth in Section 2.1.3.3 and provi- sion of access to parcels within the Schematic ROW limits, and is subject to the requirements and limitations of Sec- tion 13.53 The foregoing shall not be deemed to limit TxDOT’s obligations with respect to Differing Site Condi- tions as set forth in Section 13.8. This contract contains a specific disclaimer that reinforces the notion that (with some limited excep- tions) the design-builder is unable to claim for dam- ages caused by defective owner-furnished informa- tion. Section 3.4 (Disclaimer) reads as follows: 50 I-405/NE 6th St. to I-5 Widening and Express Toll Lanes Project Request for Proposal Section 1-02.1, Washington State Dep’t of Transp. (2011), available at http://www.wsdot.wa.gov/biz/contaa/DESIGNBUILD CONTRACTS/NE%206TH%20ST%20TO%20I-5/ RFP%20CHAPTER%201.pdf (last visited June 29, 2015). 51 Loop 1604 Western Extension Project Design–Build Agreement Request for Proposals, Texas Dep’t of Transp. (2013), available at http://ftp.dot.state.tx.us/pub/txdot- info/sat/ loop1604_western/rfp/addendum4/dba- addendum4.pdf (last visited June 29, 2015). 52 Id. § 1.7. 53 Section 2.1.3.3 of the Contract explains the limited remedy that the design–builder has in the event TxDOT’s schematic design has errors: DB Contractor shall be responsible for any cost increases and/or delays which affect the duration of a Critical Path resulting from changes in requirements and obligations of DB Contractor relating to the Project due to inaccuracies in the Schematic Design. Notwith- standing the foregoing, DB Contractor shall be entitled to a Change Order to account for any additional costs incurred as a result of required modifications to any Environmental Approval due to any Hazardous Materi- als Management on and any additional Utility Adjust- ment Work on Additional Properties required due to a Necessary Basic Configuration Change to the extent set forth in Section 13.8.5. Further, any right, title or inter- est in real property DB Contractor must acquire as a result of such Necessary Basic Configuration Change shall be considered Additional Properties, and TxDOT shall be responsible for the purchase price therefor. Any changes in the Basic Configuration, including a Neces- sary Basic Configuration Change due to an Error in the Schematic Design that does not require the acquisition of Additional Properties, shall be the responsibility of DB Contractor with the exception of a TxDOT-Direct- ed Change involving more than $10,000 in additional direct costs or involving a delay to a Critical Path.

15 DB Contractor understands and agrees that TxDOT shall not be responsible or liable in any respect for any Losses whatsoever suffered by any DB Contractor-Related Entity by reason of any use of any information contained in the Schematic Design or Reference Information Documents, or any action or forbearance in reliance thereon, except to the extent that TxDOT has specifically agreed in Section 13 that DB Contractor shall be entitled to an increase in the Price and/or extension of a Completion Deadline with respect to such matter. DB Contractor further acknowledges and agrees that: (a) if and to the extent DB Contractor or anyone on DB Contractor’s behalf uses any of said information in any way, such use is made on the basis that DB Contractor, not TxDOT, is responsible for said information, and (b) DB Contractor is capable of conducting and obligated hereunder to conduct any and all studies, analyses and investigations as it deems advisable to verify or supplement said informa- tion, and that any use of said information is entirely at DB Contractor’s own risk and at its own discretion. The preceding clauses are examples of the com- peting goals that occur when an agency attempts to broadly disclaim responsibility for information it provides during the bidding process. Although the agency’s primary goal is to avoid claims arising from this information, its secondary goals are to encour- age marketplace competition and avoid excessive bid contingencies. As a consequence, even the most one-sided contractual disclaimers generally provide design–builders with some limited relief for differ- ing site conditions and major changes in alignment from that shown in the RFP design. This can lead to confusion, as the contract may not clearly establish what remedies are available to the design–builder for errors in owner-furnished information. As discussed in detail in Section VI, there is some question as to whether the type of disclaimers dis- cussed in this section are enforceable. Substantial design–bid–build case law supports the view that broad disclaimers of geotechnical information are generally not effective, particularly when the dis- claimer is in direct conflict with the purpose and language of a differing site conditions clause.54 Those cases that have enforced the disclaimers generally have done so when the disclaimer is narrowly drafted to cover only specific site conditions.55 Confronted with any major flaw in the owner’s RFP documents that increases their time or cost of perfor- mance, design–builders will almost certainly argue that the disclaimers should not be construed to shift the consequences of these flaws away from the owner. If the owner disagrees, an impasse will develop and relations will likely be negatively impacted. Although only a few of these disputes have resulted in reported decisions, the case law to date has generally found in favor of the design–builder, as discussed in Section VI. The Virginia Department of Transportation (VDOT) has developed a thoughtful way to address this issue. VDOT recognized that if the risk of defec- tive owner-furnished information was shifted to the design–builder, design–build proposal prices would be higher because bidders would put in contingen- cies to cover this risk. Because of the uncertainty over whether a court would enforce the disclaimer, however, VDOT believed it could still be obligated to pay the design–builder if the risk materialized, and relations on the project could be jeopardized. VDOT decided to confront this issue directly by balancing its need for effective risk transfer and price certainty with the reality that pre-award dis- claimers may not be fair to design–build proposers or enforceable. VDOT’s process is called “scope vali- dation.” It establishes a period of time (“scope vali- dation period”) where the design–builder can, dur- ing the design development process, present claims that relate to deficiencies in owner-furnished infor- mation. The scope validation period is generally 120 days after contract award, although this can be adjusted for more complicated projects. After the end of the scope validation period, the design–build- er’s claim rights are waived for items not previously raised. VDOT’s standard design–build contract tem- plate now includes the following clause:56 2.2 Scope Validation and Identification of Scope Issues 2.2.1 Scope Validation Period. The term “Scope Validation Period” is the period of time that begins on Design–Build- er’s receipt of Department’s Notice to Proceed and extends for one hundred twenty (120) days from such date of receipt, unless otherwise stated in Exhibit 1. During the Scope Vali- dation Period, Design–Builder shall thoroughly review and compare all of the then-existing Contract Documents, including without limitation the RFP Documents and the Proposal, to verify and validate Design–Builder’s proposed design concept and identify any defects, errors, or inconsis- tencies in the RFP Documents that affect Design–Builder’s ability to complete its proposed design concept within the Contract Price and/or Contract Time(s) (collectively referred to as “Scope Issues”). The term “Scope Issue” shall not be deemed to include items that Design–Builder should have reasonably discovered prior to the Agreement Date. 54 DouglAs D. grAnsberg & michAel c. loulAkis, geo- TechnicAl informATion prAcTices in Design–builD proJ- ecTs (National Cooperative Highway Research Program Synthesis 429, Transportation Research Board, 2012) available at http://onlinepubs.trb.org/onlinepubs/nchrp/ nchrp_syn_429.pdf (last visited June 29, 2015), referenc- ing michAel c. loulAkis, b. p. wAAgner, & h. c. splAn, Dif- fering Site Conditions in consTrucTion clAims Deskbook (John Wiley & Sons, Inc., 1996). 55 Id. 56 VDOT Design–Build, Innovative Project Delivery Division, Design–Build Standard Template Documents, Part 4, General Conditions of Contract between Depart- ment and Design–Builder (2010) (hereinafter VDOT Design–Builder General Conditions) available at http:// www.virginiadot.org/business/resources/ipd/2010_ TemplateDocuments_100511.pdf (last visited June 29, 2015).

16 2.2.2 Scope Validation Period for Non-Accessible Areas of the Site. The Parties recognize that Design–Builder may be unable to conduct the additional geotechnical evaluations contemplated by Section 4.2.2 below because it will not have access to certain areas of the Site within the Scope Validation Period set forth in Section 2.2.1 above. Design– Builder shall notify Department at the meeting set forth in Section 2.1.2 of all such non-accessible areas and the dates upon which such areas are expected to become accessible. If Department agrees that such areas are non-accessible, then, for the limited purpose of determining Scope Issues that directly arise from geotechnical evaluations for such areas, the term “Scope Validation Period” shall be deemed to be the thirty (30) day period after the date the specified area becomes accessible for purposes of conducting the geotech- nical evaluation. 2.2.3 Submission Requirements for Scope Issues. If Design–Builder intends to seek relief for a Scope Issue, it shall promptly, but in no event later than the expiration of the Scope Validation Period, provide Department in writ- ing with a notice (“General Notice”) of the existence of such Scope Issue, which General Notice shall generally explain the basis for such Scope Issue. Within twenty-one (21) days of the General Notice of a Scope Issue, Design– Builder shall provide Department with documentation that specifically explains its support for the Scope Issue (“Supporting Documentation”), which Supporting Docu- mentation shall include, among other things: (a) the assumptions that Design–Builder made during the prepa- ration of its proposal that form the basis for its allegation, along with documentation verifying that it made such assumptions in developing its proposal; (b) an explanation of the defect, error or inconsistency in the RFP Documents that Design–Builder could not have reasonably identified prior to the Agreement Date: and (c) the specific impact that the alleged Scope Issue has had on Design–Builder’s price and time to perform the Work. For the avoidance of doubt: (1) Design–Builder shall not be entitled to raise in its Supporting Documentation any Scope Issues that were not previously addressed in a General Notice; and (2) Design–Builder shall have no right to seek any relief for any Scope Issues that have not been specifically identified in a General Notice provided to Department during the Scope Validation Period. 2.2.4 Resolution of Scope Issues. Within a reasonable time after Department’s receipt of the Supporting Documenta- tion described in the Section 2.2.3 above, the Parties shall meet and confer to discuss the resolution of such Scope Issues. If Department agrees that Design–Builder has iden- tified a valid Scope Issue that materially impacts Design– Builder’s price or time to perform the Work, a Work Order shall be issued in accordance with Article 9 hereof. If Department disagrees that Design–Builder has identified a valid Scope Issue that materially impacts Design–Builder’s price or time to perform the Work, then Design–Builder’s recourse shall be as set forth in Article 10. Notwithstanding anything to the contrary in the Contract Documents or as a matter of law, Design–Builder shall have the burden of proving that the alleged Scope Issue could not have been reasonably identified prior to the Agreement Date and that such Scope Issue materially impacts its price or time to per- form the Work. 2.2.5 Design–Builder’s Assumption of Risk of Scope Issues. The Parties acknowledge that the purpose of the Scope Validation Period is to enable Design–Builder to identify those Scope Issues that could not reasonably be identified prior to the Agreement Date. By executing this Agreement, Design–Builder acknowledges that the Scope Validation Period is a reasonable time to enable Design– Builder to identify Scope Issues that will materially impact Design–Builder’s price or time to perform the Work. After the expiration of the Scope Validation Period, with the sole exception of those Scope Issues made the subject of a General Notice during the Scope Validation Period and subject to valid requests for Work Orders in accordance with Section 2.2.3 above, the Parties agree as follows: .1 Design–Builder shall assume and accept all risks, costs, and responsibilities of any Scope Issue arising from or relating to the Contract Documents, including but not limited to conflicts within or between the RFP Documents and Proposal; .2 Design–Builder shall be deemed to have expressly war- ranted that the Contract Documents existing as of the end of the Scope Validation Period are sufficient to enable Design–Builder to complete the design and construction of the Project without any increase in the Contract Price or extension to the Contract Time(s); and .3 Department expressly disclaims any responsibility for, and Design–Builder expressly waives its right to seek any increase in the Contract Price or extension to the Contract Time(s) for, any Scope Issue associated with any of the Contract Documents, including but not limited to the RFP Documents. 2.2.6 Waiver of Rights. The failure of Design–Builder to meet the submission requirements required under Section 2.2.3 above for a Scope Issue, including but not limited to the times for providing notice and documentation of the Scope Issue, shall conclusively constitute a waiver of Design–Builder’s rights to seek relief for such Scope Issue. To date, VDOT has experienced a number of scope validation claims on its design–build proj- ects, including inaccurate survey information on a railroad line and subsurface conditions that differ from those in the RFP documents. There has yet to be any litigation arising out of this clause that is the subject of a reported decision, although there is at least one dispute that is at the formal dispute resolution stage. The American Association of State Highway and Transportation Officials (AASHTO) Guide for Design–Build Procurement (2008) notes that the approach used by VDOT has also been used by other agencies: Some agencies, including the U.S. Army Corps of Engineers, use a contractual scope validation period. With such provi- sions, the agency retains the risks of differing site condi- tions/changed conditions until the design–builder has had the appropriate opportunity to validate the information provided in the request for proposals and to further define the scope of the project. The risks of differing site condi- tions/changed conditions are then shifted to the design– builder following such scope validation period. It is sug- gested that agencies conduct initial investigations necessary

17 to prepare an appropriate scope, schedule and price esti- mate for the work.57 VDOT’s original (2006) scope validation clause is included as an example in the Guide.58 B. Design Development Among the most important and unique features of a design–build contract are the provisions addressing the design development process. These provisions not only serve as a contract administra- tion guideline for the parties, but also have legal implications relative to the potential transfer of liability to the owner of design deficiencies. This section will discuss some typical clauses that address these issues. Section VI’s case law review offers several reported decisions that elaborate on the rights and responsibilities of the parties during design development. 1. Impact of Owner’s Involvement in Design Review A common concern of owners is that their involve- ment in the design review process could shift liabil- ity away from the design–builder if there is a flaw in the design. To address this issue, most design–build contracts include a clause similar to the following example from VDOT’s standard design–build con- tract, which attempts to absolve the owner from liability for design errors: Department’s review, comment and/or approval of interim design submissions and the Construction Documents are for the purpose of establishing Design–Builder’s compli- ance with the requirements of the Contract Documents and mutually establishing a conformed set of Contract Documents compatible with the requirements of the Work. Department’s review, comment and/or approval of any interim or final design submission (including but not limited to the Construction Documents) shall not be deemed to transfer any liability from Design–Builder to Department.59 This clause is virtually identical to those spon- sored by the Design–Build Institute of America (DBIA) and EJCDC.60 Because the design–builder is the designer-of- record, and the owner performs only a review func- tion, it would seem inappropriate to implicate the owner if the design contained calculation errors (e.g., undersized structural elements) or other details that are not readily observable. The answer might be different if the drawings specifically showed the design–builder’s interpretation of a design element (e.g., location of stairways that are compliant with code but not compliant with the RFP’s design documents), and the owner did not object to this element during the design review. The case law discussed in Section VI seems to support these views. Contract documents often contain a clause that requires the design–builder to develop a design that meets the requirements of the contract. Consider the following clause from the Tappan Zee Hudson River Crossing Project design–build contract: It is the Design–Builder’s sole responsibility to provide Design Plans, Project Specifications and Working Plans enabling development of a finished product in accordance with the Contract requirements. The Design–Builder shall verify pertinent dimensions in the field prior to the develop- ment and preparation of Design Plans, Project Specifica- tions and Working Plans. Review and/or approval of the Design–Builder’s Design Plans, Project Specifications and/ or Working Plans by the Agencies shall not relieve the Design–Builder of the responsibility for the completion of the Work in accordance with Contract requirements.61 The TxDOT Loop 1604 Western Extension Proj- ect discussed in the preceding section has similar language: DB Contractor agrees that it has full responsibility for the design of the Project and that DB Contractor will furnish the design of the Project, regardless of the fact that prior to the date of the execution of this DBA certain conceptual design work occurred and was provided to DB Contractor as part of the Schematic Design as a preliminary basis for DB Contractor’s design.62 This design responsibility is also contained in indemnity clauses, as is evident from the WSDOT Alaskan Way Viaduct Replacement Project clause set forth in Section D later in this section. Note that these clauses address a very different issue from that of a design–builder discovering errors during the design development process, cor- recting the errors, and then seeking recovery for the consequences of the errors. As discussed in Section VI, there is case law favoring the design–builder in 57 AASHTO, AASHTO guiDe for Design–builD pro- curemenT 33 (2008). 58 Id., App. C, Example 18. 59 VDOT Design–Builder General Conditions. 60 See, e.g., DBIA Standard Form of General Conditions of Contract Between Owner and Design–Builder § 2.4.3 (2d ed. 2010): Owner’s review and approval of interim design submissions, meeting minutes, and the Construction Documents is for the purpose of mutually establish- ing a conformed set of Contract Documents compatible with the requirements of the Work. Neither Owner’s review nor approval of any interim design submis- sions, meeting minutes, and Construction Documents shall be deemed to transfer any design liability from Design–Builder to Owner. 61 Tappan Zee Hudson River Crossing Project, DB Con- tract Documents Part 2, Addendum No. 9, § DB-111-0, New York State Thruway Authority (2012). 62 Loop 1604 Western Extension Project Design–Build Agreement Request for Proposals, § 3.3.1, Texas Dep’t of Transp. (2013), available at http://ftp.dot.state.tx.us/pub/ txdot-info/sat/loop1604_western/rfp/addendum4/dba-ad- dendum4.pdf (last visited June 29, 2015).

18 these circumstances, notwithstanding disclaimer language. The intent of the preceding clauses is to ensure that the design–builder can stand behind the design it develops as meeting the contract’s requirements. Given that the design–builder is responsible for the efficacy of the design, the design–builder would likely have difficulty in claiming that it developed its design based on the owner’s defective RFP or preliminary design, as might be the case if the preliminary design had a code or permit violation and the design–builder failed to verify that its design was code or permit compliant. The authors are unaware of any case precedent where the design–builder has ever pre- vailed on this argument. C. Standard of Care and Warranty Two major, interrelated topics in any design– build contract pertain to the design–builder’s stan- dard of care and its warranty on that performance. Although warranty clauses are typical for any con- struction contract, these warranties generally relate to the contractor’s obligations to furnish 1) materi- als and equipment that are new; and 2) construction that is of good quality, in conformance with the con- tract documents, and free of defects in materials and workmanship. As discussed in Section II, a contrac- tor working on a design–bid–build project does not warrant that its work will meet the owner’s needs, as it has no responsibility for the design. As also dis- cussed in Section II, a designer does not warrant that its work will meet the owner’s needs either—it simply agrees to provide a design that meets the ordinary industry standard of care. Design–build contracts offer an owner an ability to shift greater responsibility to the design–builder than it can under other delivery systems. Although standard form contracts developed by trade and pro- fessional associations (e.g., American Institute of Architects (AIA), EJCDC) express this in different ways, they all have separate design and construc- tion standards of care and do not expressly have warranties that cover design. For example, DBIA’s standard of care for design services states, “The standard of care for all design professional services performed to execute the Work shall be the care and skill ordinarily used by members of the design pro- fession practicing under similar conditions at the same time and locality of the Project.”63 As noted in Section II, this standard is no differ- ent than what one might expect from a designer on a typical design–bid–build project. DBIA, however, offers the owner an ability to require a higher stan- dard of care if performance specifications are used, based on the following “check-box option” in the con- tract, “Notwithstanding Section 2.3.1 of the General Conditions of Contract, if the parties agree upon specific performance standards in the Basis of Design Documents, the design professional services shall be performed to achieve such standards.”64 By exercising this “check-box option,” an owner would eliminate a design–builder’s potential argu- ment that its failure to meet an agreed-upon perfor- mance standard was caused by the need for a design that was higher than the “ordinary” design standard of care. As discussed in Section VI, the language from DBIA’s “check-box option” was specifically used to hold the design–builder liable for breaching its performance obligations to the owner in Appeal of ECC, International.65 As for warranty, the DBIA does not specifically call for the design–builder to warrant the design, but only requires that it warrant construction- related services: Design–Builder warrants to Owner that the construction, including all materials and equipment furnished as part of the construction, shall be new unless otherwise specified in the Contract Documents, of good quality, in conformance with the Contract Documents and free of defects in materi- als and workmanship. Design–Builder’s warranty obligation excludes defects caused by abuse, alterations, or failure to maintain the Work in a commercially reasonable manner. Nothing in this warranty is intended to limit any manufac- turer’s warranty which provides Owner with greater war- ranty rights than set forth in this Section 2.9 or the Contract Documents. Design–Builder will provide Owner with all manufacturers’ warranties upon Substantial Completion.66 Design–build contracts developed by state trans- portation agencies widely vary in terms of how they express standards of care and warranty on design services. VDOT’s approach broadens the standard of care by requiring that the work (which includes design services) be performed to the greater stan- dards required by the contract documents, applica- ble law, and the “ordinary” standard of care: Design–Builder shall perform the Work in accordance with: (a) the Contract Documents; (b) applicable Legal Require- ments and Governmental Approvals; and (c) the degree of skill and judgment prevailing on the Agreement Date that is expected to be exercised by prudent, skilled and experi- enced contractors and design professionals on similar projects in the Commonwealth of Virginia, taking into 63 DBIA Standard Form of General Conditions of Con- tract Between Owner and Design–Builder, Art. 2, § 2.3.1, Document 535 (2d ed. 2010). 64 DBIA Standard Form of Agreement Between Owner and Design–Builder—Lump Sum Section, Art. 11, § 11.1, Document 530 (2d ed. 2010). 65 ASBCA No. 55781, 2013-1 B.C.A. ¶ 35207, 2012 ASBCA LEXIS 106 (Dec. 28, 2012). 66 DBIA, Standard Form of General Conditions of Con- tract Between Owner and Design–Builder, Art. 2, § 2.9.1, Document 535 (2d ed. 2010).

19 consideration safety, operational requirements, level of ser- vice, and life cycle costs. Notwithstanding the above, if any of (a), (b) or (c) in the preceding sentence conflict, Design– Builder shall be obligated to perform the Work in accor- dance with the more stringent standard.67 VDOT’s warranty provision is essentially identi- cal to the DBIA clause cited above and does not address design whatsoever. Contrast this with WSDOT’s warranty clause on the I-405/Northeast 6th Street to I-5 Widening and Express Toll Lanes Project, where the design– builder provided a comprehensive warranty associ- ated with the project’s design:68 The following general Warranty is in addition to any express Warranties provided for elsewhere in the Contract Docu- ments. The Design–Builder shall represent and warrant the following: • All design work performed pursuant to the Contract, including work performed by Subcontractors and manufac- turers, conforms to all professional engineering principles generally accepted as industry standard in the state of Washington. • The Project is free of defects, including design errors, omissions, inconsistencies, and other defects. • Materials, plants, and equipment furnished under the Contract are of good quality, and were new when installed, unless otherwise approved by WSDOT. • The work meets all of the requirements of the Contract. • The specifications and/or drawings selected or prepared for use during construction are appropriate for their intended use. • The Project has been constructed so that it can be used for the intended function. These warranties impose substantially more lia- bility on the design–builder than the VDOT exam- ple, as they require that: 1) the project be free of defects, and 2) the specifications and drawings be appropriate for their intended purpose. Warranties such as those required in the WSDOT example have the potential for creating a strict liabil- ity standard on the design–builder, where it will be responsible for any problem, even if it followed indus- try design standards and the contract documents. This has the potential to trigger specific remedies for the benefit of the owner—such as the right to termi- nate the design–builder for default and the award of attorney’s fees. It can also create some major chal- lenges for designers working on design–build teams. It would not be unusual for terms like this to be “flowed-down” in the designer’s subcontract so that the warranty becomes the designer’s obligation. D. Indemnification Indemnification clauses obligate one party to compensate another party for losses or damages set out in the indemnity provision. Because this obliga- tion is separate and distinct from other contractual obligations and damages, it is among the most important liability-related provisions in any con- tract, including design–build contracts. In addition, because most indemnity clauses require the indem- nitor to 1) defend the indemnified party from third party claims, and 2) pay the indemnified party’s legal fees, it can have major financial consequences on the indemnitor if something goes wrong. Design–build contracts often contain a number of indemnification obligations on the design–builder, including indemnities for patent infringement, tax liability, payment claims, and liens of subcontrac- tors. One of the most significant indemnity provi- sions is often called the “general indemnity” and focuses on the design–builder’s liability for claims, losses, and costs incurred by the agency arising out of the design–builder’s conduct. Section VII has a broader discussion of the legal issues and enforceability of indemnity clauses. From a commercial perspective, suffice it to say that the breadth of the indemnity (e.g., the events triggering the indemnity and the type of damages recoverable) are key points of concern for design–builders. For example, does the indemnity cover only third-party claims or does it also cover economic losses incurred by the agency? Does the design–builder have to be negligent to trigger the indemnity? Does the indem- nity only extend to the “extent” of the design–build- er’s negligence, or will it cover all losses “if the design–builder is negligent in whole or in part?” Most design–builders would prefer an indemnity similar to that used by VDOT, which reads as follows: Design–Builder, to the fullest extent permitted by law, shall indemnify, hold harmless and defend State Indemnitees from and against claims, losses, damages, liabilities, includ- ing attorneys’ fees and expenses, for: (i) bodily injury, sick- ness or death, and property damage or destruction (other than to the Work itself) to the extent resulting from the neg- ligent acts or omissions of Design–Builder, Design Consul- tants, Subcontractors, anyone employed directly or indi- rectly by any of them or anyone for whose acts any of them may be liable; and (ii) any violation of Sections 2.5, 2.6, or 2.8 hereof by Design–Builder, Design Consultants, Subcon- tractors, anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable.69 67 VDOT Design–Builder General Conditions, § 2.1.9. 68 I-405/NE Sixth St. to I-5 Widening and Express Toll Lanes Project Request for Proposal § 1-05.16(1), Washing- ton State Dep’t of Transp. (2011), available at http://www. wsdot.wa.gov/biz/contaa/DESIGNBUILDCONTRACTS/ NE%206TH%20ST%20TO%20I-5/RFP%20CHAPTER %201.pdf (last visited June 29, 2015). 69 VDOT Design–Builder General Conditions, § 7.3.1.

20 This clause is essentially the same as what one might find in a design–bid–build construction con- tract. The indemnity obligations are triggered based upon the “extent” of the design–builder’s negligence, focused on third-party claims, and cov- ered by most commercial general liability insur- ance policies. The three violations referenced in the clause refer to the design–builder’s responsibility for compliance with legal requirements, govern- mental approvals, and safety. A clause that shifts slightly more risk to the design–builder is Florida Department of Transpor- tation’s (FDOT) standard general indemnity provi- sion, which reads as follows: The Contractor shall indemnify and hold harmless the Department, its officers and employees from liabilities, dam- ages, losses and costs, including, but not limited to, reason- able attorney’s fees, to the extent caused by the negligence, recklessness, or intentional wrongful misconduct of the Con- tractor and persons employed or utilized by the Contractor in the performance of the construction Contract.70 This provision does not limit the design–builder’s liability to third-party personal injury or property damage. As a consequence, it could be used by FDOT to recover its economic losses (e.g., administrative costs, claims paid to other contractors) arising from the design–builder’s wrongdoing. WSDOT used a very broad indemnity for the Alaskan Way Viaduct Replacement Project, as it directly addressed any losses (third-party or inter- nal) arising from design defects: Subject to Section 18.1.3,71 Design–Builder shall release, indemnify, defend and hold harmless the Indemnified Par- ties from and against any and all claims, causes of action, suits, judgments, investigations, legal or administrative pro- ceedings, penalties, fines, damages, losses, liabilities, costs and expenses, including any injury to or death of persons or damage to or loss of property (including damage to utility facilities), and including attorneys’, accountants’ and expert witness fees and costs, arising out of, relating to or resulting from errors, omissions, deficiencies or defects in the Design Documents, regardless of whether such errors, omissions, deficiencies or defects were also included in the Basic Con- figuration, Conceptual Design or Reference Documents. Design–Builder agrees that, because the Basic Configura- tion, Conceptual Design and Reference Documents are nec- essarily subject to validation, review and modification by Design–Builder, it is appropriate for Design–Builder to assume liability for errors, omissions, deficiencies or defects in the completed Project even though they may be related to errors, omissions, deficiencies or defects in the Basic Con- figuration, Conceptual Design or Reference Documents.72 This clause reinforces the perspective that the design–builder is fully responsible, as the project’s designer, for the efficacy of the design documents, and cannot shift this liability as a result of defective owner-furnished information. This is consistent with the discussion previously addressed in Section B. It also makes the design–builder potentially responsi- ble for WSDOT’s internal costs, as well as liable for “errors” and “omissions” in the design, regardless of whether the design–builder was negligent. TxDOT’s Loop 1604 Western Extension Project uses a different twist on the design–builder’s indem- nity obligations for design. Although the design– builder is obligated to indemnify TxDOT for “errors, inconsistencies or other defects in the design or con- struction of the Project,” the indemnity does not apply to any third-party loss to the extent caused by: An unsafe requirement inherent in prescriptive design or prescriptive construction specifications of the Technical Provisions, but only where prior to occurrence of the third party Loss: (i) DB Contractor complied with such specifica- tions and did not actually know, or would not have known, while exercising reasonable diligence, that the requirement created a potentially unsafe condition or (ii) DB Contractor knew of and reported to TxDOT the potentially unsafe requirement.73 This is a significant provision. It contemplates that there may be problems associated with the agency’s design about which the design–builder could not have reasonably known, and does not require the design– builder to indemnify TxDOT for third-party claims (e.g., injured drivers) for these problems. E. Limitations of Liability As suggested by the name, limitation of liability (LoL) clauses attempt to limit or eliminate a party’s exposure to financial loss or damages as a result of that party’s conduct. These clauses take many forms and can: 70 FDOT Division 1 General Requirements and Cov- enants § 7.12-1 (2014), available at http://www.dot.state. fl.us/specificationsoffice/Implemented/DesignBuild/ HistoryDB/January15/Default.shtm (last visited June 29, 2015) (follow “The Design–Build Boilerplate” hyperlink). 71 Section 18.1.3 (Losses Due to Negligence of Indemni- fied Parties) contains a typical provision stating that the indemnity does not apply if it is caused by the sole negli- gence or willful misconduct of an Indemnified Party: Design–Builder’s obligation to indemnify, defend, or save harmless an Indemnified Party under Sections 18.1.1 and 18.1.2 shall not extend to any loss, damage or cost to the extent that such loss, damage or cost was caused by the sole negligence or willful misconduct of such Indemnified Party or its agents, servants or independent contractors who are directly responsible to such Indemnified Party. 72 SR 99 Bored Tunnel Alternative Design–Build Proj- ect, Design–Build Contract § 18.1.2, Washington State Dep’t of Transp. (2010). 73 Loop 1604 Western Extension Project Design–Build Agreement Request for Proposals, § 18.1.2, Texas Dep’t of Transp. (2013), available at http://ftp.dot.state.tx.us/ pub/txdot-info/sat/loop1604_western/rfp/addendum4/dba- addendum4.pdf (last visited June 29, 2015).

21 • Establish a ceiling on the total amount of damages for which a party will be liable (e.g., 50 percent of the contract price). • Exclude liability for consequential damages. • Establish liquidated damages for certain breaches of contract (e.g., performance guarantees or delays). • Limit recovery for certain events (e.g., no dam- ages for delay). LoL clauses that have a ceiling on total liability are commonly seen in specialty engineering con- tracts, such as those for geotechnical and inspec- tion services. With these contracts, an engineer can face millions of dollars of potential liability if it is negligent but receive only a nominal fee. Although LoL clauses that impose a ceiling on a design–builder’s total liability are not frequently used on public sector projects, exceptions have been seen on very large design–build contracts, where the design–builder faces substantial poten- tial liability. For example, the $3.9-billion Tappan Zee Hud- son River Crossing Project design–build contract has the following LoL clause:74 Subject to the exclusions set forth in Article 9.1(2), the entire liability of Design–Builder for any damages arising from the Design–Builder’s performance or non-performance of any Work under the Contract Documents, regardless of the form of action (whether in contract, tort including negli- gence, indemnification, strict liability or otherwise, and including all liquidated damages assessable under the Con- tract Documents), shall not exceed the caps specified below, and the Authority released Design–Builder from all liabil- ity in excess of the specified caps: a. $ [insert 50% of the Contract Price] with respect to costs incurred by Authority or any Person acting on Authority’s behalf in completing or correcting the Work or having the Work completed or corrected by another Person, including the cost of the work required or arising under the Warran- ties; and b. $350,000,000 with respect to any and all other costs. Section 9.1(2) contains three exclusions to this LoL. They generally relate to: 1) any type of damage or loss covered by insurance; 2) any liability for dam- ages to the extent arising from fraud, willful miscon- duct, recklessness, bad faith, gross negligence, or criminal acts; and 3) damages or compensation pay- able to the employees of the design–builder or its subcontractors. This type of LoL clause is similar to those found in other big-dollar transportation design–build con- tracts, including the Dulles Rail Corridor Project (i.e., the Silver Line) being developed by the Metro- politan Washington Airports Authority (MWAA). Phase One of the Silver Line had an initial contract price of approximately $1.6 billion and a $500 mil- lion liability cap. Phase Two had an initial contract price of approximately $1.3 billion and a $750 mil- lion liability cap. Both liability caps had exclusions similar to those described in the LoL for the Tappan Zee Bridge project. WSDOT’s Alaskan Way Viaduct Replacement Project, which had an initial contract value in excess of $1 billion, did not have any overall contractual liability cap. In addition to LoL clauses that provide an aggre- gate monetary cap on the design–builder’s liability, LoL clauses that provide for waivers of consequen- tial damages are often found in design–build con- tracts, particularly on large projects. For example, on the Alaskan Way Viaduct Replacement Project, the contract’s waiver reads as follows: Under no circumstances will either party be entitled to con- sequential damages arising out of the other’s performance of (or failure to perform) under the Contract Documents, and each party hereby releases the other from such liability, provided that this limitation shall not excuse liability for fraud, gross negligence, intentional misconduct, or criminal acts and shall not limit the parties’ ability to obtain recov- ery for liabilities, costs and losses covered by the insurance required hereunder. The term “consequential damages” shall mean those special, indirect or incidental damages that do not flow directly and immediately from an injurious act but that result indirectly from an action or failure to act, such as revenue losses, loss of use, cost of capital, debt ser- vice, loss of profit on related contracts, administrative costs, loss of bonding capacity, lost opportunity, claims of taxpay- ers and other indirect damage. Liabilities, costs and losses incurred by either party due to failure by the other to pro- cure and maintain insurance policies required hereunder, as well as any amounts that this Contract expressly states are to be reimbursed from one party to the other (including interest, late charges, fees, penalties, and similar charges), shall be considered direct damages. This provision shall apply to limit liability under actions brought under any theory of law, including actions in tort (including negli- gence) as well as in contract.75 This clause provides an excellent description of the type of damages that might be considered “con- sequential damages.” Another example of a consequential damages waiver is found in VDOT’s standard form design– build contract, which reads as follows:76 Notwithstanding anything herein to the contrary (except as set forth in Section 10.4.2 below), neither design–builder nor department shall be liable to the other for any conse- quential losses or damages, whether arising in contract, warranty, tort (including negligence), strict liability or 74 Tappan Zee Hudson River Crossing Project DB Con- tract Documents Part 1, Addendum No. 11, Article 9.1, New York State Thruway Authority (2012). 75 SR 99 Bored Tunnel Alternative Design–Build Proj- ect, Design-Build Contract § 16.2.2.8, Washington State Dep’t of Transp. (2010). 76 VDOT Design–Builder General Conditions, § 10.4.