Professional Liability/Risk Management Brief;Exposures Created by Recognizing The Risk of Third-Party Beneficiaries
Avoiding Third-Party Beneficiary Claims
Contracting practices and provisions that have proven sound are an effective risk management tool since contracts define and determine rights, responsibilities, and procedures. Accordingly, they are often used to determine the liability of project participants. Obviously, a disappointed client can sue a professional services firm with which it has a contract. Claims, however, are often brought by contractors or other third parties that do not have any contractual privity with the professional services firm.
In many states, these third-party claims cannot demand the payment of economic losses, but are limited to property damage and bodily injury. If such a third party—a contractor, lender, tenant, or other entity—is included as a third-party beneficiary in the contract, the exposure of the professional services firm increases. Some jurisdictions have construed professional contracts in a way that gives selected third parties, such as contractors, rights that are significantly equivalent to contractual privity; others simply no longer exclude economic losses from a third party’s possible recovery under a negligence claim.
Although being named as a third-party beneficiary provides the greatest opportunity for the beneficiary to recover, certain situations often lead to claims based on detrimental reliance. Even without contractual privity, third parties will claim to have relied upon the professional services or work product (e.g., opinions, reports, surveys, plans, and specifications). For example:
· A contractor may claim additional costs or delays due to alleged errors and omissions in the plans, specifications, or reports prepared by the design firm;
· Another consultant providing services on the project may claim damages because it relied upon statements or opinions regarding conditions contained in a study or report;
· The purchaser of a property may claim damages resulting from reliance upon information contained in any assessment and report in deciding to purchase the property; and
· Employees of a contractor, subcontractor, or even the government may claim that they have been injured as a result of the design firm’s services. Workers’ compensation laws limit recovery by employees from their employer. Thus, individual employees often seek damages against design firms based on the theory that the practitioner negligently breached its duty in the design or in performing on-site services. A citizen may bring a claim under the same theory.
Minimizing the Risks of Studies and Reports
It is advisable to include a provision stating that deliverables are for the sole use of the client and not for any other individuals. A second recommended provision should state that the work product may be used for a limited duration and is not to be used by any other person without the express written authorization of the professional. Such disclaimers may preclude a finding by the courts that third-party reliance upon a report, analysis, or the deliverables of design services was “justifiable.” In litigation, a court should hold that third parties have no right to sue based on some other set of contractual obligations, because that contract contains a third-party exclusion provision which clearly states that all rights and benefits are owed solely by one party to the other.
Prohibiting Third-Party Claims on Construction Projects
A precise definition of the scope of services may act as a defense to a third-party claim on the theory that the design firm was not retained to perform services for the third party. The Engineers Joint Contract Documents Committee (EJCDC), in EJCDC E-500, Standard Form of Agreement Between Owner and Engineer for Professional Services (2008 edition), handles this issue with the following language:
C. Unless expressly provided otherwise in this Agreement:
1. Nothing in this Agreement shall be construed to create, impose, or give rise to any duty owed by Owner or Engineer to any Contractor, Subcontractor, Supplier, other individual or entity, or to any surety for or employee of any of them.
2. All duties and responsibilities undertaken pursuant to this Agreement will be for the sole and exclusive benefit of Owner and Engineer and not for the benefit of any other party.
3. Owner agrees that the substance of the provisions of this Paragraph 6.07.C shall appear in the Contract Documents.
Reducing the possibility of a third-party beneficiary is of particular concern, because such status often provides for recovery of economic losses in those states where such losses are not recoverable on basic negligence claims. A third-party exclusion does not compromise a client’s position. It is one that could significantly limit the risks of the professional services provider.
© 2010, Victor O. Schinnerer & Company Inc. Statements concerning legal matters should be understood to be general observations based solely on our experience as risk consultants and may not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with a qualified advisor. Victor O. Schinnerer & Company Inc. is managing underwriter for the CNA/Schinnerer Professional Liability Insurance Program, commended by NSPE/PEPP since 1957.
People Skills for Project Manager Webinar
People Skills for Project Managers
April 29, 12:30–1:30 p.m. (E.D.T.)
Your success as a project manager is directly related to your ability to manage and communicate with people. This Webinar will arm you with some of the necessary tools to improve your communication skills and increase your effectiveness as a team leader.
Product Code: WS-100429
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Study Affirms QBS as Best Procurement Method for Public Projects
In a two year study, data was collected from about 200 public works and private construction projects in the U.S. These were the study’s findings:
- QBS ensures cost effectiveness;
- QBS lowers risks for complex projects;
- QBS results in better projects and highly satisfied owners;
- QBS takes account of emerging societal issues;
- QBS encourages innovation and protects intellectual property; and
- QBS supports owner capacity building.
To read more about this study, see the March issue of PE magazine.
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Itís Just that Easy
William Clarke, P.E., F.NSPE, 2009-2010 PEPP Chair
Last week, Horner and Shifrin participated in our first Web seminar from NSPE. The Web seminar conveniently fell right at the lunch hour. So, for $99, we gathered together. We each earned a PDH and we spent time talking about work and engineering issues. Sometimes it is just these small acts that make a supervisor look good.
And it was easy. I simply clicked on the e-mail sent by NSPE, logged in as a member, ordered online, and paid by credit card. A couple of days before the Web seminar, an e-mail was sent to me with all of the instructions to log in. Afterwards, we sent back a roster of attendees. Each attendee then could take and pass the online quiz and print out their PDH certificate.
Technology makes many things easier today. Google searches place information at our fingertips. Electronic newsletters ease communication. Electronic downloads ease the purchasing and downloading of products and services like EJCDC contract documents or NSPE’s four free Web seminars on ethics.
It’s just as easy to contact PEPP as well. You can e-mail or you can call. Staff and officers are listed each month in PEPP Talk or visit the PEPP Web page. We are always interested in hearing from you.
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Four Free PDHs
NSPE members can also earn four free professional development hours by taking these online seminars on ethics topics. At the end of each seminar, a quiz will be available for those who need it to meet their state's continuing education requirements.
Engineering Ethics & Fair Trade: Employment Practices (ONL-019)
Engineering Ethics & Fair Trade: Ethics of Agreements (ONL-020)
Ethics Forum: Access to Client Information and Public Safety (ONL-037)
Engineer's Duty to Report (ONL-039)
Looking for more PDH credits? Join NSPE on Sunday, July 18th, in Orlando for the $99 "NSPE Education Workshop: A Day of Engineering Substance" (ethics and licensure) and earn up to 7 PDHs. All-day session includes lunch with "speaker of note."
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