Contract Risk Management for Airport Agreements (2016)

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3 CONTRACT RISK MANAGEMENT FOR AIRPORT AGREEMENTS By Robert Alfert, Jr., and Douglas E. Starcher, Broad and Cassel, Orlando, Florida INTRODUCTION The operation of airports involves significant risk. Some of the busiest airports in the United States generate annual travelers in excess of 30 million, spawning a multitude of economic activity, construc- tion and expansion, and general maintenance and operational needs. With safety and security being the paramount concern, the additional risks that arise from normal operations span from the basic context of tenancies and ground transportation to complex capital improvement programs. These risks apply to airports of all sizes; the variations usually are just a question of degree or order of magnitude. A significant portion of the risk that arises in air- port operations can be addressed through risk-shifting and risk-sharing provisions in standard aviation sector agreements and through the use of tailored insurance programs. The purpose of these provi- sions is to shift a manageable portion of the risk to those entities that are being retained for that very purpose, whether it is the contractor that contracts to build a facility or the insurance company that contracts to cover certain risks. The end goal is a balanced risk-management approach that equitably allocates risk among the appropriate parties. Given the potential breadth of this topic, this digest focuses on a body of standard aviation sector agreements that form the core of airport operations. It is impos- sible to capture every possible agreement that an airport may utilize, but the agreements highlighted in this digest constitute the vast majority of opera- tions and incident risk. These agreements will include the following topics in the order presented: A. Professional Services Agreements. B. Construction Agreements. C. Repair/Maintenance Agreements. D. Tenant/User Agreements. E. Airline Signatory Agreements. F. Ground Transportation Agreements. G. Vendor/Purchasing Agreements. H. Software/Information Technology (IT) Agreements. As each agreement provides enough of a topic for a separate Airport Cooperative Research Program (ACRP) digest, the purpose of this digest is to identify the primary risks associated with each agreement. The identification of risk will be corre- lated to specific contractual provisions used by air- ports to address, shift, or allocate the risk presented. The digest will focus on several representative agreements used by major airports to provide a cross section of approaches and will then propose ways to contractually mitigate each category of risk. This ACRP digest will also address the primary insurance instruments used by airports to manage and allocate risk.1 Every agreement will carry spe- cific insurance, with the primary question being whether the appropriate insurance vehicles are being used and whether the required insurance thresholds are commensurate with risk. The authors of this digest recently completed a comprehensive survey of coverage limits used by airports in infrastructure agreements (construction and professional services) and concluded that the vast majority of large-scale projects are underinsured. This digest, therefore, will also propose recommended limits of coverage. An important point before commencing the con- tract discussion is that every state tends to have dis- tinct positions on some legal issues, indemnity law being a prime example. This digest only provides a general overview and does not supplant the need for legal counsel on local law. To the extent that federal funding for any contract type applies, federal law should be reviewed as well. CONTRACT TYPES A. Professional Services Agreements A substantial volume of services performed for airports is generally done through the use of pro- fessional services.2 These professional services can range from design, engineering, and owner’s 1 ACRP Synthesis 30: Airport Insurance Coverage and Risk Management, TransporTaTion research Board (2011), http://onlinepubs.trb.org/onlinepubs/acrp/acrp_syn_030. pdf, provides a synthesis study of variables that affect insurance purchasing and identifies the range of prac- tices that exist among U.S. airports for coverage selection, choosing deductibles and limits, and risk retention. 2 ACRP Report 87: Procuring and Managing Professional Services at Airports, TransporTaTion research Board (2013), http://onlinepubs.trb.org/onlinepubs/acrp/acrp_rpt_ 087.pdf, provides guidance for procuring and managing professional services at airports and processes for manag- ing professional services contracts.

4 construction administration representation to secu- rity, financial services, and so on. Although not a direct risk issue, the success of these agreements turns on the clear delineation of three key points: scope, schedule, and price. Lack of clarity as to any of these primary contractual points may result in ancillary risks to airports in the form of cost increases or contractual disputes. The primary risk associated with professional services agreements is ensuring the satisfactory performance of work. Deficiencies in the perfor- mance of work, while adding cost, also create more significant risk in the form of defects, damages to, or loss of real or personal property or injury to people. For example, structural load calculations on support beams that are deficiently performed by an engineer can result in costs to repair the defect, or in the more serious event of a collapse, costs to repair damaged property, impacts to operations, and potentially even injury or death to the traveling public, employees, or tenants. If the deficiency is discovered during con- struction, it creates the additional risk of impacts to the contractors’ operations, translating into change orders for additional compensation and time to com- plete the project. The risks attendant to professional services are addressed through contractual provisions and a variety of insurance instruments. All additional risk to the airport is essentially self-insured. Identification of Risk The risks and risk mitigation strategies under the majority of these agreements are similar. The primary ones include: 1. Standard of Care/Faulty Work.—Professionals must perform their work in accordance with an acceptable standard of care, one that is generally gov- erned by their licensing or certification organization and local law. Professionals generally cannot be held accountable for every error or omission in the perfor- mance of their work, but instead only for errors or omissions that violate the applicable standard of care. The level of care required can be escalated by contract, but it then becomes more difficult to insure. It is therefore critical to every professional services agreement to succinctly define the standard of care applicable to that contract. Example/Sample Provision The following is an example of how the standard of care may be addressed to mitigate risk in a profes- sional services agreement: Standard of Care: In addition to its duties and obligations under this Agreement, the Consultant and the Consultant’s selected staff shall exercise the degree of skill, competence, quality, and professional care rendered by the leading and most reputable companies performing the same or similar type services in the United States, and shall cooperate with City [Owner] and other parties in furthering the interests of the City in connection with the Project. Reasonable Compliance with and Identification of Applica- ble Service Standards: Listing of certain standards in this section does not relieve the Consultant from complying with all applicable standards whether or not listed here. The Consultant’s work on the Project shall comply with the following: 1) Any special design standards specified in Exhibit C; 2) The Americans with Disabilities Act; 3) All other applicable building codes, laws, or regulations; 4) All applicable City standards. See Appendix A-1, Salt Lake City International Airport. Appendix A-1 provides a survey of additional con- tractual provisions used by other airports to address standard of care or faulty work. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to standard of care or faulty work: • Define the provision with specific reference to the services performed, especially specialty projects. • Include an industry-specific standard applica- ble to that professional. • Define a geographic market (note that the Salt Lake City, Utah, provision defines the market as the entire United States, as the project is an air- port terminal of national scale and use). 2. Liability and Damages.—Professional services agreements should specify the category of damages for which the professional shall be liable. The con- tract ideally will succinctly provide for the recovery of all “actual” and “consequential” damages, as that broadly covers any damage scenario that reason- ably and foreseeably flows from the performance of work. Some specialty services, such as architecture and engineering, have industry group contracts that specify waivers of consequential damages. Air- ports should consider avoiding or limiting these waivers, when possible. A compromise could involve capping liability for damages, or just consequential damages, to a specified amount, which could include the limits of insurance coverage or the project value on large-scale projects. Although it is not recom- mended that any damages be waived or limited, in the event such compromise is necessary, the limita- tion or capping should be reasonably commensu- rate with the project value, risk, and complexity, and there should be a clear understanding of worst- case scenario events.

5 Example/Sample Provision The following is an example of how damages for delay may be addressed to mitigate risk in a profes- sional services agreement: The Architect/Engineer shall promptly review and approve shop drawings, samples, and other submissions of the Contractor(s) for conformance with the design concept of the Project Element(s) and for compliance with the infor- mation given in the Contract Documents. The Architect/ Engineer shall render decisions, issue interpretations, and issue correction orders within the times specified in the Contract Documents or, absent such specification, on such timely basis so as not to delay the progress of Work as depicted in the approved construction schedule. Should the Architect/Engineer fail to perform these services within the time frames specified in the Contract Documents or, if no time frames are specified, in a timely manner so that such failure causes a delay in the progress of the Work, the Archi- tect/Engineer shall be liable for any damages to the Owner resulting from such delay including, but not limited to, dam- ages related to delays and inefficiencies incurred by the Contractor for which the Owner may be responsible. See Appendix A-2, Miami International Airport. Appendix A-2 provides a survey of additional con- tractual provisions used by other airports to address liability and damages. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to liability and damages: • Limit or avoid the capping of liability. • Minimize or avoid waivers of consequential damage (sometimes difficult in the context of spe- cialty trades). • If damages are limited or capped, a clear under- standing of worst-case scenarios, which become self-insured, is critical. 3. Dispute Resolution.—Customized dispute res- olution provisions are a core staple of a well- designed risk mitigation strategy. Rather than allowing disputes to automatically devolve into liti- gation, professional services agreements could pro- vide for pre-suit dispute resolution options, such as tiered-negotiation and/or mediation. Consideration of the proper mechanism for resolving disputes, whether litigation or arbitration, should be made, as litigation is not always the best course of action. More technical matters may be better suited to arbitration with a panel of industry experts. Example/Sample Provision The following is an example of how dispute reso- lution may be addressed to mitigate risk in a profes- sional services agreement: Any claim, dispute or other matter in question arising out of or relating to this Agreement or the breach thereof shall, as an express condition precedent to the filing of a lawsuit, first be subject to mandatory mediation under the auspices of a mediator to be selected by the parties to be set at a mutually agreeable time, but in no event greater than thirty (30) days after the claim or dispute arises. Discovery prior to the scheduled mediation shall be limited to one (1) request for production of documents and two (2) depositions per party not exceeding 8 hours total time per deposition. Each party shall equally bear the costs of mediation and shall be solely responsible for its own attorneys’ fees and other legal costs prior to and during the mediation process. In the event the case does not settle at mediation, the parties may re-depose either or both witnesses on non- repetitive matters. See Appendix A-3, Orlando International Airport. Appendix A-3 provides a survey of additional con- tractual provisions used by other airports to address dispute resolution. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to dispute resolution: • Specify governing law. • Specify exclusive venue and jurisdiction. • Require pre-suit dispute resolution options. • Specify arbitration or litigation for final mode of resolution. • Specify right to reimbursement of attorneys’ fees and costs. • If allowed by state law, contractually limit statutes of limitation and repose to a commercially reasonable duration. 4. Indemnity.—Airports are frequently sued by parties injured or damaged as a result of the negli- gence of their professionals. For example, an error in the design of a public facility could result in personal injury to a member of the public, property damage to a tenant, or delay and impact damages to a contrac- tor that is performing work in accordance with the design documents. A broad indemnity provision is important to limit risk and shift it to the appropriate parties, and if allowed by state law, also to require a duty to defend any ensuing litigation. It is important for airports to understand the distinctions between the two duties: The duty to indemnify encompasses the carriers’ duty to pay for a covered event up to the policy limits, whereas the duty to defend is broader, encompassing the carriers’ obligation to assume the defense (legal fees and costs) of the claim itself. Not all states allow duty-to-defend clauses for architec- tural or engineering services.

6 Example/Sample Provision The following is an example of how indemnity and duty to defend may be addressed to mitigate risk in a professional services agreement: A. Consultant hereby agrees to defend, indemnify, and hold harmless City [Owner], its appointed and elected officials, agents, and employees against all liabilities, claims, judg- ments, suits, or demands for damages to persons or prop- erty arising out of, resulting from, or relating to the work performed under this Agreement (“Claims”), unless such Claims have been specifically determined by the trier of fact to be due to the sole negligence or willful misconduct of the City. This indemnity shall be interpreted in the broadest possible manner to indemnify the City for any acts or omis- sions of Consultant or its subcontractors. B. Consultant’s duty to defend and indemnify City shall arise at the time written notice of the Claim is first provided to City regardless of whether suit has been filed and even if Consultant has not been named as a Defendant. C. Consultant will defend any and all Claims which may be brought or threatened against City and will pay on behalf of City any expenses incurred by reason of such Claims includ- ing, but not limited to, court costs and attorney fees incurred in defending and investigating such Claims or seeking to enforce this indemnity obligation. Such payments on behalf of City shall be in addition to any other legal remedies available to City and shall not be considered City’s exclu- sive remedy. D. Insurance coverage requirements specified in this Agree- ment shall in no way lessen or limit the liability of the Consul- tant under the terms of this indemnification obligation. The Consultant shall obtain, at its own expense, any additional insurance that it deems necessary for the City’s protection. E. This defense and indemnification obligation shall survive the expiration or termination of this Agreement. See Appendix A-4, Denver International Airport. Appendix A-4 provides a survey of additional con- tractual provisions used by other airports to address indemnity and duty-to-defend. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to indemnity and duty-to-defend: • Include broad-form indemnity, hold harmless, and duty-to-defend to fullest extent allowed by state law. • Cover negligence and improper intentional conduct. • In general, avoid mutual indemnity obliga- tions; all indemnity should flow to the airport only. 5. Termination.—Professional services agreements must afford the airport the unequivocal right to ter- minate for cause and for convenience. A “for cause” termination can include termination for a contract violation like faulty work or safety or security violations, or for fraudulent billing practices. A “for convenience” termination allows for termination for any reason or no reason, with no cause stated, which affords the airport the opportunity to terminate the project entirely, bring in a replacement professional, or terminate when suspicion of cause exists but may not be fully developed. These termination provisions allow an airport to control risk scenarios without breaching the contract and allow for broad remedies such as assuming control of the subconsultants to expedite completion and withholding payment to cover any increased costs or damages. Example/Sample Provision The following is an example of how contract ter- mination may be addressed to mitigate risk in a pro- fessional services agreement: A. City Termination. City [Owner] may terminate this Agreement at any time for any reason or no reason upon seven (7) calendar days written notice. B. Termination for Cause by City. City may terminate this Agreement for cause if the Consultant fails to cure any defect in the Consultant’s performance of the work under this Agreement within seven calendar days after receiving written notice to cure. C. Work Project Termination. City may terminate the Con- sultant’s work on a specific work project initiated under this Agreement pursuant to this Article. If City designates any termination as a “work project termination,” only the Consultant’s work on the specific project shall be termi- nated and such notice shall not constitute a termination of this Agreement. D. Termination by Consultant. If City materially fails to meet its responsibilities and obligations under this Agree- ment, the Consultant shall notify City of such failure. If City fails to cure its material breach, the Consultant may, after thirty (30) days written notice, terminate its perfor- mance under this Agreement. E. Payment for Termination. In the event of termination, City shall pay the Consultant a percentage of the fee speci- fied in Exhibit D based upon the ratio of work satisfactorily completed and reasonable costs incurred to the total work required as determined by City, less any appropriate dam- ages as City may determine. See Appendix A-5, Salt Lake City International Airport. Appendix A-5 provides a survey of additional con- tractual provisions used by other airports to address contract termination. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to contract termination: • Maintain the unequivocal right to terminate for cause and for convenience (for any reason or no reason).

7 • Distinguish between termination of all or part of project. • Address how compensation will be determined in event of termination for cause and termination for convenience (“For cause” termination should al- low the right to withhold payment in an amount that reasonably covers damages and impacts to the airport, while “for convenience” termination should allow compensation only for work performed and perhaps reasonable termination expenses, such as demobilization). • The airport should not allow, under either ter- mination scenario, for lost profits or anticipated profits on uncompleted work. An express disclaim- er of this damage component should be written into the termination provisions. Insurance and/or Bonds Professional liability and commercial general liability (CGL) insurance policies are critical compo- nents in addressing risk that arises from errors and omissions. Very few professional services firms have sufficient assets to cover a large negligence judg- ment, and many insulate liability through corporate limited liability vehicles. The insurance policies effectively become the funding source for any errors and omissions that can be charged back to the pro- fessional. Absent policies with limits of coverage that are commensurate with the risk, it is very dif- ficult to recover damages even in clear cases of error. Professional liability policies can also be supple- mented by the airport owner through the use of an umbrella policy, as discussed in the following sec- tion, and through builder’s risk with a specialty LEG-3 endorsement (an endorsement first devel- oped by the London Engineering Group). A common misstep on most major design and con- struction projects is using standard form coverages with limits that are far below the value of the proj- ect or the risk entailed. Many airports use standard $1 million to $5 million coverage limits even on large-scale projects where the value and risk exceed coverage thresholds by significant multiples. This critical component of risk control is unfortunately often an afterthought. a. Professional Liability Policies.—Professional liability policies cover deficiencies and damages that arise from errors and omissions committed by the professional. The standard of care applies directly to what is covered. Not every error or omission actu- ally constitutes a violation of the standard of care. A professional’s liability, and the measure of liability that is insured, arises only if the error or omission violates the standard of care set forth in the contract and dictated by the applicable custom of the trade. For example, an architect’s errors and omissions that cost a client an extra $1 million in construction work may not be a compensable error on a $100 mil- lion job as the error rate (1 percent) on the project was within an acceptable threshold for errors. So although the airport clearly suffered a damage of $1 million, the applicable standard of care may not allow for recovery, and this portion of the loss becomes self-insured. The prevailing law in most states is that design contracts do not impose strict liability, but instead only impose liability for errors and omissions that violate the standard of care. A professional liability policy checklist should: 1. Ensure that coverage limits (per claim and aggregate) are commensurate with project value and risk (taking into account that these policies are declining balances, meaning that defense costs incurred by the carrier reduce coverage lim- its accordingly). 2. Evaluate whether a practice policy (i.e., one that covers all of the professional’s ongoing proj- ects), or a project-specific policy with tail coverage for latent defects, is appropriate. A project-specific policy is far more protective but comes at a sub- stantial price increase, so an analysis of risk and cost is necessary. 3. Evaluate whether the project is of a sufficient size and level of risk that an “umbrella” policy in the form of Owner’s Protective Professional Indemnity (OPPI) is justified. OPPI is a project-specific umbrella policy that an owner can obtain to supple- ment the professional liability policy of its profes- sional, usually with tail coverage that is coextensive with the statutes of limitation for latent defect work. b. CGL Policies.—A standard CGL policy provides limited coverage for professionals in the performance of their professional duties, contrasted with the value that such policies afford contractors. Simply stated, CGL policies generally do not cover deficien- cies or damages that flow from professional errors and omissions. CGL policies for professionals cover damages and injuries that flow from nonprofes- sional negligence that causes personal injury, prop- erty damage, or death. For example, a surveyor leaves his instruments of service on airport property, and the instruments damage an airplane that was taxiing. That damage would likely not be covered by CGL as it flows from the professional’s services; pro- fessional liability coverage would apply instead. If that same surveyor casually leaves his instruments of service on the sidewalk leading to his office while he is unpacking the truck, and airport employees trip over the instruments while attending a meet- ing, injuring themselves and damaging personal property, the CGL would apply. So although a CGL may not be a primary coverage instrument in most