Professional Indemnity Issues for Design Teams – are

they really on the rise in 2008…….by Dermot McEvoy of O’Donnell

Sweeney Eversheds

Economic Journalists have been heralding doom and gloom for quite some time. We have also
seen a slow down in the property and financial sectors in Ireland after an era of unprecedented
growth. Looking principally at the construction industry one must question how the industry is
going to cope and to whom will it look to recoup some of its mounting losses.

Today economic trends are demonstrating an increased potential exposure on design teams
against their professional indemnity policies. Consequently, design teams in Ireland are in
turn facing greater scrutiny over their project management and design capabilities and an ever
growing prospect of claims against their professional indemnity policies.

The Historical Position

Traditionally Architects and Engineers have enjoyed a direct contractual relationship with the
developer, but this relationship has been slowly eroded through the development of onerous
clauses limiting liability for design and project management failure in the appointment
contract. With these inroads to potential liability out of the contractual relationship, liability in
tort for various breach of duties of care and professional skill became increasingly under the
microscope. Whilst potential liability in tort was not subject to the same possibilities for
excluding liability, it could be a harder claim to bring home in terms of proof and evidence of
loss.

The Courts have looked kindly on allowing a party to mount a claim in tort or contract 1 where
it was shown that there was a voluntary assumption of responsibility by an Architect and
where he still had a duty to use reasonable care, holding that he was “liable in damages and
those damages should be, and are, the same whether he is sued in contract or in tort.”

The Courts in the UK favoured the view that where a party had a number of concurrent
remedies he must chose the remedy which he felt to be most advantageous to him. The Irish
Courts on the other hand showed greater latitude to a potential litigant and held 2 that such a
party could choose “the remedy which is most advantageous to him subject only to” finding
out if the alleged duty of care was so inconsistent with the contract that it should be limited or
excluded as remedy.

Issues also arise on the scope of any potential damages which apply. Should a contractual
claim be excluded under the terms of the contract, questions still arise if a Court can deal with
a claim for damages for indirect consequential or economic loss. (ie imagine a hotel is closed
down due to an electrical malfunction the direct cost is the repairs to the electrics, but who is
to pay for the lost revenue for closing down the hotel?). The courts not surprisingly seek to
limit recovery for pure economic/consequential loss; allowing recovery for losses flowing from

1
Esso Petroleum –v- Mardon [1976] 2B.L.R. 82,
2
See the Supreme Court in Kennedy & ors. –v- AIB, unreported, (October 29, 1996)

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negligent misstatements but not negligent acts, on the basis that the relationship between the
loss and the parties is not sufficiently proximity. 3 In the real world this became a significant
distinction resulting in claims against construction professionals being thrown further under a
judicial microscope.

Certification

For a building or civil engineering project to work properly all on-site interaction between the
design team, the contractor and the developer must work. Sufficient funding must be in place
to cover the project, the contractor must properly perform his work and the design
professional must ensure that there is fair and adequate certification for payment, without
these essentials the project becomes increasingly fraught.

Traditionally, the standard form of building contract in Ireland provides a section where the
Architect responsible for administering the contract is named; understandably as the industry
has developed in Ireland with the monetary size of the contracts ever increasing, problems do
arise if the project Architect (who manages the project) differs from the Contract Architect.

Question: Who is the appropriate person to issue Certificates for payment and/or to monitor
the works as they proceed?

Answer: Project Architects need to pay careful attention that they do not expose themselves
needlessly to liability by inappropriately issuing Certificates for payment, where they have no
authority to do so. Similarly the contract Architect needs to ensure to properly monitor the
works before certification. Professionals who do not take sufficient care in the management of
their projects may ultimately find themselves being sued; this is something which can be
avoided by careful drafting of the contract of appointment and of course by tick tacking with
the appropriately named person in the contract.

Duties on Certification extend beyond Contract.

Architects / Engineers have considerable discretion and latitude in how they operate building
contracts. However, they must remember that in taking on the task of contract administrator
they are undertaking a duty to the developer; contractors and subcontractors alike; to carry
out the role with reasonable care and skill and in an impartial manner. Of critical importance
in the day to day management of the project is the payment certification process. It must be
an independent assessment carried out after due recognition and consideration of the actual
work undertaken.

Question: Do Architects/Engineers have a discretion to revise a certificate downwards by

making a disallowance for monies over certified.

Answer: Yes, but with caution, by the issue of a negative or remedial Certificate. Bear in mind
that from a practical viewpoint, the issue of a negative certificate can give rise to problems
particularly if a contractor has received payment for subcontractor’s works on an earlier
certificate and paid out for the works. Should it transpire that works already certified are

3
Supreme Court in Glencar Exploration –v- Mayo County Council [2002] 1 ILRM 481, questioned if pure economic loss
was recoverable and expressed the view in certain obiter dicta that the court would consider allowing recovery for
economic loss resulting from negligent misstatements but not negligent acts.

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incomplete/defective, a disallowance is made. Problems arise where the subcontractor has
finished his works and the contractor looks for reimbursement – a difficult task under any
circumstances. If the subcontractor refuses to repay the money or is unable to do so due to
bankruptcy, inevitably fingers will point to the professional for negligence and/or
mismanagement. This is again increasingly an area where the professional indemnity policy is
falling under scrutiny!

The Irish High Court has looked into the circumstances where a negative certificate may be
issued. Although the Court has resoundingly affirmed the concept of issuing negative
certificates it has limited the circumstances4 in which it can be done. Suffice it to say the
Court found that it was common practice in the Irish Construction industry for Architects to
issue Negative Certificates, but the validity of such a Certificate might be called into question if
an Architect opened up and revisited a payment certificate after the passing of the date for
practical completion (and indeed in that case, where the date of the defects liability period had
also expired.5)

The lesson for professionals is to take due care if they seek to open up or re-visit work which
has already been certified, and to do so with extreme caution. If you get it wrong you be
sued! Recertification should be limited to circumstances where the project is live and ongoing
and where the defects liability period has not yet expired; otherwise be prepared to advise
your professional indemnity insurer.

Certification of Release of Retention.

At the end of a building or civil engineering contract in this country the contracts traditionally
allow for a period which allows for the normal growing pains in the building/structure to
manifest itself (ie the defects liability period (DLP)). The DLP is ultimately a period for the
benefit of both the employer and the contractor. 6 However, this is yet another area where
potential claims might arise against design professionals. In particular, care needs to be taken
to ensure that certificates for payment of retention are issued on time. There is only limited
discretion allowed to the design professional in failing to certify release of retention payments
even where defects are discovered and the contractor does not or has not repaired them at his
own cost.

Conclusion

The levels of the duty of care being imposed are growing. There is no doubt that the
responsibility of the design professional is increasingly onerous and questions arise as to whom
the duty of care is in fact owed? The demands in terms of time, energy and commitment are
ever increasing as is the scope for missing something or making a mistake.

The risk of disputes entering the High Court rather than the traditional route of contractual
arbitration is also on the increase. In Ireland a failure by a professional to act independently

4
Rohcon –v- Siac in 2003
5
The decision of the High Court remains under appeal.

6
The DLP allows the contractor a period within the confines of the contract to remedy any defects which might
otherwise amount to a breach of contract.

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towards all the parties on the building / civil engineering contract leaves scope for a claim
where it may not have previously existed. Unfortunately, for the construction industry the
most obvious forum for the resolution of such a dispute is the High Court by way of injunction
applications or through the fast track Commercial Division of the High Court. The stakes are
high in terms of costs, and on the effect a claim will have on the future viability of the building
or civil engineering contract, but the threat remains!

By Dermot McEvoy, Litigation and Construction Disputes Partner at O’Donnell

Sweeney Eversheds

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