IPD has been lauded by many in the construction industry as the next great innovative contracting delivery method that will reduce the risk of claims, delays and project cost overruns through “gain sharing” and “pain sharing” collaboration. However, IPD may not be the panacea that will – or should – replace other forms of collaborative agreements or other more conventional forms of contract delivery. Owners, contractors and design professionals should seriously consider the legal implications created by the blurring of traditional project roles and responsibilities when assessing the potential risk on any IPD project. Without an appreciation of the risks involved in IPD, project participants may find themselves unsuspecting victims of unintended consequences, which can be especially troublesome to the extent that the insurance industry may not be fully versed in the nuanced exposures attendant to this fairly new (and evolving) form of project delivery.
IPD remains a relatively new, untested concept that has not been subject to rigorous examination through the litigation and appeals process. Additionally, IPD agreements may be problematic to the extent they utilize innovative shared risk/reward concepts in the context of new building modeling technology (like Building Information Modeling (BIM)), which has the distinct potential of blurring the lines between the parties’ roles, rights, responsibilities, remedies and risks.
Below are some potentially significant legal issues to consider before taking the leap into the IPD realm:
- Erosion of the Spearin Doctrine
The Spearin Doctrine originates from a U.S. Supreme Court case that held that a contractor in a traditional design-bid-build contract could reasonably assume that the plans and specifications provided by the architect were buildable. See United States v. Spearin, 248 U.S. 132 (1918). If the contractor constructed pursuant to those design plans without material deviation, the contractor was absolved of liability to the extent that those design plans and specifications were later found to be defective or deficient. Spearin shifts the responsibility back to the owner, who may then pursue legal action against the project architect or engineer of record for design defects. This principle is less applicable with design-build contracting where a single entity design-build contractor is responsible for providing the design services. Unlike conventional design-bid-build contracts or even design-build contracts, IPD blurs the lines between construction means and methods and design obligations, particularly when the owner, contractor and design professional all participate in the design development through BIM or other collaborative processes.
- Third-Party Design Liability
IPD contracts also present risks associated with third-party liability for defects and deficiencies in the design of a project. Suppose a structure designed and built under an IPD contract collapses and causes personal injury or property damage. Under IPD, with varying levels of contribution, cooperation, participation and involvement from each of the IPD team members, the blurred lines of responsibility mean both the designer and contractor (and possibly the owner) may share in the potential liability. There may be gaps or deficiencies in insurance coverage, which place the project team members at direct risk of covering these losses. This issue also implicates the contractual indemnification clauses and any limitation of liability provisions which, if not carefully crafted to appropriately allocate the risk between the parties, could contribute to unintended liability exposure.
- Economic Loss Doctrine/Independent Duty Doctrine Implications
In most states, the economic loss doctrine (ELD) is a valid defense that generally precludes the recovery of purely economic damages against a contractor or designer to the extent that the damages or other legal remedies are addressed in the contract. This has the effect of limiting or barring negligence causes of action between parties that do not share a direct contractual relationship. Courts generally adhere to this doctrine unless there is shown a breach of a legal duty owed independently of the contract. This exception to the ELD has been adopted as the independent duty doctrine (IDD) in Washington, where the courts have recognized independent duties arising beyond the four corners of a contract when personal injury or property damage is sustained by third parties. This doctrine is nebulous at best under the current state of the law, and it remains to be seen if Washington’s appellate courts will retreat to the ELD or continue to relax the limitations of recovery that the ELD imposes. In the ELD or IDD analysis, designers may have challenges applying the doctrine as a defense, because appellate courts (at least in Washington) now recognize liability arising independently from the contract’s stated scope of work. Contractors also share increased exposure from third-party claims arising from an IPD project. With the blurred line between design and construction in an IPD setting, contractors (or owners) may now find themselves in a position of increased exposure to negligence-based claims because they may have participated in the design and assumed a professional standard of care.
- Elevated or Altered Standard of Care
Third-party negligence actions arising from personal injury or property damage will invariably raise the question of whether the design professional adhered to the applicable standard of care. The professional standard of care generally provides that an architect or engineer performing professional services has a duty to exercise care and skill to the same degree as that used in like cases by reputable members of the profession practicing under similar circumstances. With the emergence of BIM, this standard of care may be altered to the extent that it presumes collaboration by multiple parties. So, the issue may become whether the standard of care is diluted by shared participation/collaboration from disparate interests within the IPD team. Or, will the standard of care be elevated across all IPD team members insofar as BIM and “clash detection”[1] provide a more robust modeling resource from which (a) the design can be formulated and (b) the project can be constructed under scheduling and budgetary limitations and without defects?
- Inadequate Insurance Products
As a result of the blurred lines of design and construction in the IPD setting, few insurance products are available that sufficiently deal with the risks arising from IPD. The insurance industry, reacting to industry trends and new offerings, will likely offer products that cover IPD risks. Unquestionably, all project participants wishing to participate in an IPD project should consult with their insurance advisors and discuss the risks emanating from IPD and what coverages are available. It may also be advisable to discuss the nature, type, limits and exclusions in coverages with the other IPD parties, to determine if any gaps or overlaps in coverage exist and how best to mitigate that risk.
While IPD is garnering accolades for benefits realized through a new collaborative team approach to construction, where the project members drive the project toward a common goal, this relatively new and untested model still poses many risks. For the unwary IPD participant, IPD may pose some unique legal challenges and amplified risk that need to be carefully considered before undertaking an IPD project. Accordingly, great care should be exercised in drafting any IPD agreement so that risks are properly identified and allocated among the project team members.
“‘Blurred Lines’: Important Caveats to Consider with Integrated Project Delivery (IPD)” was originally published on January 20, 2017, by the Daily Journal of Commerce.
[1] Clash detection is an automated process offered through BIM that helps in identifying, assessing and reporting of conflicts, interferences or “clashes” in a project model. This can be a critical resource as the individual models of various design disciplines (e.g., structural, MEP, fire suppression) are introduced and incorporated into a BIM model. Clash detection can therefore save both time and money to the extent that conflicts between trades can be recognized in the office before work is actually performed on the jobsite.