...Until the documents are tested from project concept to completion, it is hard to validate their effectiveness.”

A snag with the LLC indemnifying members is that it has no assets after project completion, says Quatman. The LLC likely cannot get insurance for the architect’s negligence as a subcontractor to the LLC. Indemnifying an architect for its own negligence is illegal and unenforceable in most states, he says. The indemnity clauses are likely “worthless” unless there is cash in the LLC after completion or the owner agrees to finance indemnity, says Quatman. “Even then, state law might void it,” he adds.

Cobleigh maintains the indemnities are not worthless. “We do recognize that some jurisdictions might have anti-indemnity statues that might impact the way these clauses are interpreted,” he says.

Quatman says, under the SPE, the architect is at risk for its insurance and deductible in the usual way even though the C197 document says the LLC will reimburse the architect for its deductible. That means the architect would need to invoice the LLC for the amount of the deductible. Quatman cautions: “This could be seen as insurance fraud. In any case, most insurance companies would not allow this because in effect, the architect has not paid its deductible.”

Quatman says a true limitation of liability would be to cap liability at incentive compensation, which is the difference between the actual cost and the target cost or some other agreed-upon number.

The issue with licensing is that under the SPE family of documents, the owner contracts with the LLC for design services. There is no contract between the owner and the architect. All design is provided to the owner by the LLC. If the LLC is providing design services, the C195 agreement may violate some state licensing laws, says Quatman. AIA addressed this issue to some extent in C196. But because the C195 form does not use the same language, the C195 and C196 forms are inconsistent, says Quatman.

Cobleigh says C195 is drafted so that it makes clear the LLC was not formed to do the actual design work and provide architectural services. The C196 agreement reiterates that and explicitly states the LLC will not provide design services, he says. “I don’t see an inconsistency in that language,” he adds.

The SPE governance board makeup is another concern, says Quatman. Under the model, there are three owner “managers.” There is one manager each from the architect and CM. The owner appoints the chairman. SPE decisions are made by unanimous board votes, with some exceptions. Disputes go to the governance board for resolution. There, the architect is outnumbered. “Why give the owner a two-person advantage?” asks Quatman. He is also concerned because there is no requirement for mediation. “This likely kicks any claims into arbitration,” he says.

If the board does not agree, the dispute goes to a committee of the CEOs of the LLC’s three members. Quatman suggests putting a dollar threshold on disputes that involve the three CEOs. He also suggests adding a true mediation clause.

The committee maintains the governance portions are fair and reasonable to all parties. “It seems doubtful an owner would relinquish significant portions of control over the way the project is run,” considering how much money is at stake, says Cobleigh.

In general, Quatman cautions architects to consult the AIA code of ethics about conflicts of interest and to disclose them to any likely affected parties. A waiver of conflicts in a contract does not supersede the code of ethics, he says.

The document uses the words “ensure” and “assure” for the first time in an AIA model contract, contrary to the recommendation of most insurers and lawyers, says Quatman. Those words could create an uninsurable express warranty by the architect, he explains.

Quatman has some final advice for architects: Do not ensure, insure, assure, warrant or guarantee under contract. “Be very, very careful of the SPE documents— they need lots of work,” he says. Check state licensing laws, and check with your insurance agent, he warns.