Considering the engineer’s intimate involvement with a typical project from beginning to end, it is not surprising that engineers become very involved in the claims process. The claims process refers to the process whereby the construction contractor requests additional compensation or other benefits under the contract from the project owner.
The engineer’s responsibilities during the construction phase make it almost inevitable that the engineer will get involved in claims situations. Many construction contracts recognize this reality and specifically delineate a certain role for the engineer. This section examines the role of the engineer in the claims process.
Engineer as agent of the owner
If the engineer is given responsibilities during the construction phase of the project, the engineer carries out those responsibilities as the agent of the owner. This is a crucial factor, as the agency relationship has a number of legal ramifications. A construction contractor has the right to rely on the words and actions of the engineer if the engineer is acting within its actual or apparent authority on the project.
An owner cannot designate an engineer as an on-site representative and then disown the remarks or directives of that representative. The law recognizes this by holding that the project owner, as “principal,” will be bound by the acts of its agent, the engineer.
Engineers must constantly keep this in mind during the construction phase. Every directive and every interpretation must be consistent with the terms of the contract the construction contractor agreed to. If the engineer’s directives are inconsistent with the terms of the contract, the contractor may very well be entitled to additional compensation or some other remedy under the contract. The owner will pay for this remedy, as the owner is bound by its agent’s actions.
Conversely, any information that comes to the attention of the engineer during the construction process will be imputed to the project owner. If a contractor points out a differing physical condition at the site to the engineer or informs the engineer of a problem that is delaying progress, the engineer has a duty to promptly inform their principal, the owner. Even if the engineer fails to transmit this information to the owner, the knowledge will still be imputed to the owner because of the agency relationship. The contractor has the right to assume that anything said or given to the owner’s designated representative will be transmitted to the owner.
The legal impact of this agency doctrine is significant. An engineer, as agent of the owner, has the ability to inadvertently waive contract rights possessed by the owner or grant certain contractual remedies to the contractor.
An owner solicited bids for construction contract. The contract drawings contained a conflict regarding responsibility for relocation of a gas line. One bidder telephoned the owner’s engineer and asked for a clarification. The engineer said the utility would take care of it.
The bidder was awarded the contract. The owner then required the contractor to relocate the gas line. The contractor sued the owner for additional compensation, saying it had been entitled to rely on the pre-bid oral statement by the engineer.
The Court of Special Appeals of Maryland acknowledged that under similar circumstances, it had held project owners accountable for the pre-bid statements of engineers functioning as agents of the owners. In this case, however, the bid documents expressly stated that all clarifications must be in writing and oral explanations would not be binding. Therefore the engineer was acting outside the scope of his agency authority in giving an oral explanation and the contractor was not entitled to rely on that explanation.
Mass Transit Administration v. Granite Construction Co., 471 A.2d 1PI (Md.App. 1994).
It is crucial that any change in the legal relationship between owner and contractor result from a thoughtful, deliberate decision which the project owner has expressly authorized. An owner who discovers that their engineer has inadvertently waived certain contractual rights will not be pleased.
In order to protect themselves and their client (the owner), an engineer must be thoroughly familiar with the construction contract. This includes not only the technical aspects of the contract but the general provisions and other “legal” aspects as well. If the engineer is not familiar with the rights and responsibilities of each party, how can they appreciate the ramifications of their actions or directives’?
A construction contract specified a particular product “or equal.” Contract also stated that the engineer was responsible for determining the contractor’s compliance with the plans and specifications.
The contractor proposed an alternate product and the engineer approved the substitution. The owner later refused to allow the contractor to install the approved alternate product. The contractor installed the more expensive product named in the specifications and sued the owner for the increased cost.
The Appeals Court of Massachusetts ruled that the engineer was the authorized agent of the owner in matters of compliance with the specifications. Once the engineer had approved the product in accordance with the procedure established in the contract, the owner was bound by that determination and could not rescind the approval.
E. A. Berman Company v. City of Marlborough. 419 N.E.2d 319 (Mass.App. 1991).
While discussing agency, it is necessary to note the importance of the scope of the engineer’s authority. Frequently, the engineer is not designated as the owner’s on-site representative. The engineer’s construction phase responsibilities may be limited to monthly inspections and a final certificate of completion.
The engineer’s agreement with the owner should make this clear. So should the construction contract. There is nothing worse for an engineer or an owner than working with a construction contract which implies the engineer has broad job site authority when in fact the owner has given the engineer very little authority. All the contract documents should accurately reflect the engineer’s scope of authority. All parties will know where they stand, and there will be no problem with the contractor relying on apparent authority which the engineer actually does not possess.
Engineer as arbitrator
It is common for construction contracts to state that any claim for a price increase or extension of time must first be presented to the engineer for a decision. When presented with such a request, the engineer is expected to make an independent judgment as a professional, not a parochial decision based on the engineer’s loyalty to the project owner.
This is a difficult task, as the engineer is being asked to function simultaneously as agent of the owner and as a neutral arbitrator. Furthermore, the engineer may be faced with a direct conflict of interest if the claim relates to the sufficiency or accuracy of the engineer’s work product.
For instance, where a contractor claims that the drawings inaccurately portrayed site conditions or failed to address the fit of particular components, the sufficiency of the engineer’s professional work product is called into question. It is difficult for the engineer to be entirely objective, knowing that a favorable recommendation on the contractor’s claim will raise questions from its client, the project owner. Nonetheless, the engineer has an obligation to make an objective determination and give the contractor that which it is entitled to under the contract.
The effects of this conflict are mitigated by the fact that when the engineer functions as an arbitrator during construction, it is usually just dispensing a preliminary administrative remedy. The contractor must, under the terms of the contract, seek the engineer’s decision first, but it is not ultimately bound by that decision.
Typically, the decision can be appealed to an administrative board or a court. Frequently, an arbitration clause calls for formal, binding arbitration of the dispute. This is separate from the engineer’s “arbitration” role during the construction phase, and the engineerwould never serve on a panel of arbitrators if they had been involved in the project.
In the past, some public contract documents purported to give the engineer final authority to resolve all claims. These so-called engineer decision clauses stated that there could be no appeal from the engineer’s decision on a claim.
Courts were hostile toward these clauses, recognizing the inequity of allowing the owner’s agent or employee to make unappealable decisions. Although the clauses were considered enforceable, courts were resourceful at finding ways to limit their effect. Today, engineer decision clauses are rare in public construction contracts. Most jurisdictions have established administrative boards to decide contractor’s claims.
While the engineer’s opinions and the engineer’s initial response to the claim will certainly be considered, the board will have authority to make independent findings of fact, rulings of Law, and a decision on the claim.
A construction contract stated that the engineer “will decide all questions which may arise.. . as to the acceptable fulfillment of the contract on the part of the contractor.”
The owner and contractor got into a dispute over late completion of the project. The engineer made a determination regarding the amount of liquidated damages that the owner could withhold from the contractor’s final payment. The contractor sued to recover the money withheld. The owner argued that the terms of the contract made the engineer’s decision final and binding on all the parties.
The Court of Appeals of Arizona ruled that an engineer’s resolution of a dispute will be final and cannot be appeal only if the construction contract expressly states that the engineer will be the final arbitrator. In this case, the contract contained no such statement. The engineer’s authority was limited to interpreting the contract documents and making decisions during the performance of the work. The engineer was not the final arbitrator of disputes.
New Pueblo Constructors, Inc. v. State of Arizona, 696 P.2d 203 (Ariz.App. 1985).
The claims process
In concluding this chapter on engineers and claims, it is useful to summarize the process by which claims are usually asserted.
Typically, a contractor will orally convey a problem to the owner’s representative, precipitating a certain amount of give and take. If the owner agrees that a change order is appropriate, the contractor will be asked to submit a change order proposal putting prices on the changed or additional work.
There is frequently extensive negotiation regarding the price of changed work. Once this has been resolved, the change order is executed by both the owner (or owner’s representative) and the contractor. A contractor who proceeds with changed or extra work without a signed change order proceeds at its own risk.
If the owner does not agree that a particular work item or a particular directive is a change in the original scope of work, the owner may direct the contractor to proceed with the work. The contractor is obligated to proceed but will proceed under protest and later submit a claim for the increased cost.
A court, board, or panel of arbitrators will ultimately decide whether this was a change and whether the contractor is entitled to additional compensation.
A similar process occurs regarding requests for an extension of time. The owner’s representative will be called on to determine whether a particular delay is excusable, non-excusable, or compensable under the terms of the contract. Typically, excusable delay is beyond the control of both owner and contractor, entitling the contractor to an extension of time. Compensable delay is the fault of the owner or its agents, entitling the contractor to an extension in the schedule and an increase in the contract price to cover the increased costs of performance resulting from the delay.
If an agreement is reached regarding any extension or price increase the contractor is entitled to, a change order is issued and executed. If the parties can’t agree, the contractor will be forced to submit a formal claim.
Thanks to Ignacio Manzanera for providing this book