Project Owner and Lender Certifications - PCIA AE Risk Review

Project Owner and Lender Certifications

The following material is provided for informational purposes only. Before taking any action that could have legal or other important consequences, speak with qualified legal and insurance professionals who can provide guidance that considers your own unique circumstances.

“I guarantee it!”

Those three words, or their equivalent, have been the bane of many architects, engineers, and other design consultants when spoken to clients or written into their contracts.

Clients and other parties often include contract provisions like certifications, guarantees, and warranties verbiage in their professional services agreements for a construction project because they seek certainty in their uncertain world. For instance, clients may want certainty because they desire job sites free of pollutants or other subsurface conditions that may stall construction and increase costs. Or, clients may seek certainty for their project’s completion by a specific date and at a set cost so they can start earning income and profits as anticipated. They may also seek a promise from the designer that the project will meet ADA and other code compliance or achieve LEED certification.

In making an argument for certifications, guarantees, and warranties, clients often point out that vendors of materials, systems, and equipment routinely provide guarantees on their goods. So why won’t designers offer similar guarantees?

The problem is that a design consultant cannot guarantee, warrant, or certify their services nor conditions on the jobsite. There are too many unknowns in any project to provide absolute certainty about project outcomes.

Design consultants who provide certifications, guarantees and warranties for delivering their professional services despite project unknowns open themselves to significant liabilities. That’s because such promises go beyond the standard of care required of a design firm.

For instance, suppose a consultant performs a subsurface survey of the jobsite and certifies no pollutants or obstacles. Later an old leaky storage tank deep below ground is discovered that must be removed, along with 50 gallons of seeping petroleum.

Ordinarily, the Consultant isn’t liable for the cost of remediation – so long as he or she had performed the subsurface site inspection within the prevailing standard of care for delivering such services.  A standard prevailing standard of care clause reads as follows: “In providing services under this Agreement, the Consultant shall perform in a manner consistent with that degree of care and skill ordinarily exercised by members of the same profession currently practicing under similar circumstances at the same time and in the same or similar locality.

However, if the Consultant had signed a contract guaranteeing no subsurface pollution on the jobsite, the Consultant would likely be held liable for the remediation costs. That’s because the contract language raised the standard of care above that ordinarily applied. Any subsurface conditions that resulted in delays or added costs would now be a breach of the contract that promised no such problems. What’s worse, the cost of the remediation likely would not be covered by the design firm’s professional liability policy since, absent the contractual promise, the activity performed to the prevailing standard of care would not be considered an error or omission.

That’s not to mean, however, that you can’t guarantee, warrant or certify specific known facts. For instance, you can certify to a client that you are currently a design professional licensed to operate in a given state or province — assuming, of course, you are currently licensed and can provide proof of such. You could also certify that you were on the jobsite on a particular day performing particular services. But if you decide to guarantee, warrant, or certify known facts to a client or other party to the project, you’re better sure that these are all provable facts.

Contractual Tips

So how do you handle situations where a client or other party to a project asks you to certify, guarantee or warrant your work or the existing conditions on a jobsite? The best defense against such requests is a good offense. Early on in project negotiations, make it clear to the client that you cannot certify, guarantee, or warrant any project conditions that you cannot be 100% certain. Explain to the client that giving such certifications will raise your standard of care above that of the prevailing design industry and threaten your professional liability insurance coverage should something on the project go wrong.

Provide the client with the language you and your attorney would like to have added to the contract stating that you will not be required to sign any documents demanding a certification, guarantee, or warranty of conditions that cannot be fully known. Also, note that you have the right to refuse to sign any subsequent project documents that include requests for certifications, guarantees, and warranties of project conditions that cannot be fully known.

What if the client is insistent that you must provide some form of certification, guarantee, or warranty regarding your work to get the project? You might try modifying the contract language to make it less onerous. For instance, you might replace certification language with language such as “to the best of my knowledge” or “in my professional opinion.” You should certainly be able to render your professional opinion regarding project conditions without the liability that would ensue by guaranteeing that your opinion is correct.

If the client insists on having contract language that explicitly includes the words certification, guarantee, or warranty of project conditions, try to include an acceptable definition of these terms. For instance, include language in the contract that defines certification as “an expression of your professional opinion that does not constitute a certainty of conditions.”

Finally, if a client refuses to budge on its insistence in having you certify, guarantee, or warrant unknown project conditions, you have a difficult business decision to make. You can explain once again why you cannot in good faith certify, guarantee or warrant things that are unknown and, by doing so, weaken your professional liability coverage. If this final plea falls on deaf ears, consider the certification, guarantee, or warranty is a deal-breaker and refuse the project. That is a business decision only you can make.

Lender Certifications

A number of our architect clients have reported an increase in lenders asking them to certify project conditions as a prerequisite for funding the project. We’re not talking about the architect’s lenders, but the project owner’s lender. They want the project’s lead designer to agree to, among other things:

  • Certify, guarantee or warrant facts about the project that the architect cannot know for a certainty.
  • Agree to execute “any and all” documents that the lender demands.
  • Cooperate in all respects with the lender.

Frequently, you will find these stipulations in “assignment” clauses in project contracts. Assignment clauses typically state that the project owner should violate the loan terms, an automatic transfer of the project owner’s contractual rights transfer to the lender. The transfer provision may include the assignment of all plans, specifications, agreements, reports, licenses, permits, and contracts to the lender. In effect, the contract that the design consultant signed with the project owner may become a binding agreement between the design consultant and the lender.

The liability issues discussed earlier regarding a project owner’s demands for certifications, guarantees, and warranties apply equally to lender demands. The Agreement to execute “any and all” documents the lender demands and cooperate in all respects is entirely open-ended and fraught with liability concerns and other legal dangers.

Be aware that the design consultant may not have to accept an assignment clause presented by the lender as a condition of the loan to the project owner. Your leeway to negotiate will depend on 1) the contract language the lender negotiated with the project owner, 2) any client contract language you agreed to for assignment, and 3) any agreements, such as a lender’s “Consent of the Architect” clause, presented by the lender and signed by the design consultant.

The consent verbiage typically obligates the design consultant to continue to perform its scope of services on behalf of the lender (as long as the Consultant gets paid according to the original or renegotiated contract terms). Still, it gives the lender the right to terminate the contract in the event of a default by the project owner. The design consultant may also be obligated to inform the lender if it receives any information indicating that the project may miss the substantial completion date indicated in the client contract or that there have been substantial deviations from the project plans.

If there is no assignment clause, the design consultant likely has room to negotiate an acceptable assignment that could keep the project moving and financing flowing without increasing professional liabilities, insurable or otherwise, through any certifications, guarantees, or warranties.

Better yet would be a contract clause that stipulates that neither party to the client contract can impose that contract’s assignment to a lender or any other third party without both parties’ written consent.

Here are some other tips regarding dealing with a project owner’s lender that you should discuss with your legal and insurance representatives:

  • Include a clause in your contract with the project owner or the lender that provides you the right to refuse to sign any contract that could, in your opinion, jeopardize your insurance coverage, increase your insurance costs, and increase your liability risks. You could agree to accept this increased risk through increased compensation for your services delivered on the project.
  • Include a clause in your client contract that requires the client to append to the contract with any other agreements you will be required to sign during the project, including any assignment consent form. Any other contract amendments or proposed agreements not appended to the primary contract, including those with the lender, could then be refused or amended through negotiations.
  • Include a clause in your contract that ensures you have sufficient time to review any documents or requests for certifications given to you by the lender. You should then thoroughly review any such documents and remove any onerous language that you believe could increase your liabilities or cause them to be uninsurable.

Final Words

We recently heard from an architect asked by a lender to certify that the contractor on a large project would meet all construction schedules. This example of the type of lender demands a certification, guarantee, or warranty that a design consultant cannot accept.

Have your legal representative and the insurance agent or broker review any certification, guarantee, or warranty contract clauses presented by the project owner or project lender for your signature. Any assignment clauses require careful review. Typically, clients and lenders will show some leeway and willingness to negotiate if you can demonstrate that their requests present untenable liability risks you cannot accept.

 

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