Contracting With The Client

Of all the activities undertaken by a design professional during the course of a project, the least amount of time is devoted to the drafting and review of its contract with the project client. Whether a byproduct of familiarity, or a belief that a contract cannot be negotiated, design professionals afford a cursory review of the contract. The contract, however, is arguably the most critical risk control device that the design professional has at its disposal. Risk exposure is defined by the terms and conditions that are contained in the contract. Accordingly, the contract should be a project document that is reviewed and discussed thoroughly.

In reality, discussion concerning the terms and conditions of a contract commences during the project evaluation and proposal phase. In those discussions, an understanding of the duties and responsibilities should have naturally developed. Each party should also have a clear sense of the expectations and goals of the other. These understandings and goals must now be formalized in writing.

While oral contracts are enforceable in law, their usefulness in preventing disputes is nil. Disputing parties will not agree as to the terms and conditions of their oral agreement. Without a written document, a Court will be left with determining who is the most credible party in the dispute. With legal fees exceeding $300/hour, reliance on an assessment of your credibility by an unknown individual is a risky, and potentially costly, proposition. Written contracts lessen that risk considerably.

A written contract must set forth the parties’ duties and responsibilities clearly. It should also set forth the services you are not willing to perform. Written contracts constitute the parties’ complete agreement. In other words, unless there exists a substantial ambiguity in the contract, the words of the contract represent the entire contract and additional words or documents you may want to use to clarify the contract will not (in most cases) be considered by the Court or another trier-of-fact. Therefore, a condition left out of the contract because the client states “it is implied,” or “it is understood” will not be considered part of the contract, and will not be enforceable. All terms and conditions must be included in the contract language. Similarly, if you want your proposal or other document included in the contract, the contract must “incorporate” those by reference.

Key Contract Clauses:

In addition to setting forth the duties and responsibilities of the parties, the design professional should seek to include other contract language that controls the risk exposure of the professional. While the language of these provisions may vary, the following should give you an idea of what should be included in your contract:

• INDEMNIFICATION AND HOLDHARMLESS - Nearly every contract contains an indemnification and hold harmless clause. These clauses are the most difficult clauses to comprehend legally. An indemnification and hold harmless clause requires the design professional to protect the client from losses arising from claims of third parties that are asserted as a consequence of an action taken by the design professional.

While the provision is standard, its language is not. Certain phrasing of the clause can create a broad form indemnification provision that can expand the design professional’s risk exposure greatly. Broad form indemnification provisions can create liability for the design professional for any claims that may be asserted against the client even where the claim does not relate to an act of the design professional.
Appropriate indemnification language will state that the design professional will indemnify the client “to the extent of the design professional’s negligent acts.” Language such as the aforementioned, limits the design professional’s risk exposure to negligent acts. A client that seeks a broad form indemnification provision does not understand industry practice or is not willing to accept the risk of doing business. Faced with a broad form indemnification provision, the design professional should not be willing to accept the risk of doing business under those conditions.

• LIMITATION OF LIABILITY LANGUAGE (“LOL”) - A LOL clause is intended to minimize the consultant’s liability for damages to a fixed, pre-determined amount. The LOL clause and allocated dollar amount verify that the client had the opportunity to negotiate the sum. LOL clauses will be upheld by most courts if the limitation is not too low or unreasonable. A contract provision limiting the liability of the design professional will contain language that the design professional’s risk exposure shall be limited to a certain dollar amount or the design professional’s fee. The language may also include an acknowledgement of the client that there are certain inherent risks in project construction and design. While many clients shun LOL provisions, communicating the need to balance risks can convince a client to insert a LOL provision. XL Insurance can aid in the education of a client with regard to the above.

• STANDARD OF CARE – A design professional‘s performance of work will be measured against the services that would be rendered by a similarly situated design professional working on a similar project in the same locale. The design professional should be careful not to agree to a higher standard of care. Not only does a higher standard of care create greater risk exposure, but it may not be covered by insurance.

• PROJECT BUDGET ESTIMATE – Despite your conversations with the client that prepared budgets are only estimates, clients have a tendency to view the estimates as the project budget. When bids exceed the estimate, the client will view the design professional has done something wrong. It is important to have a clause in the contract in which the client acknowledges that the budget is based upon information provided by the client and also does not constitute a guaranteed maximum price. Any clause that suggests the contrary should be avoided.

• CONTROL OF WORK – It is generally recognized that the contractor shall be responsible for the means and methods of performing work. There are occasions when a client wants the design professional to control construction activities. A design professional assuming control over the project assumes the risks for all claims for delay, interference, breach of contract, etc. In certain situations, a design professional can be subtlety enticed to assume project control. Contract language that requires the design professional to approve project schedules; participate in the scheduling and updating process; and approving means and method submissions can create control responsibilities and risks. In addition tot contract provisions, the design professional should be careful not to assume any means and methods responsibility through advice or direction given to the contractor. The design professional should constantly remind the contractor and its client, in writing, that any document interpretations or advice regarding changed conditions does not constitute its assumption of means and methods responsibility.

• SITE SAFETY – The project contractor is in the best position to control site safety and health. The design professional should never assume this risk especially when the design professional’s role on the project during administration is usually limited to periodic visits. Even where the design professional may have full-time site representation, site safety and health responsibility should rest with the contractor. Similarly, the design professional should not be required to approve the safety manual of the contractor. Lastly, it must be noted that despite contract provisions that exclude site safety from the design professional’s responsibility, State law may ascribe a level of site safety responsibility to the design professional. State law should be checked before any project is commenced.

• DEFECTIVE CONTRACT DOCUMENTS – Avoid contract clauses that require you to be perfect. No design professional will be held to that standard. You should not be made responsible for any and all defects in the contract documents. Contractors should be responsible for reviewing the drawings and specifications during bid and identifying any defects that they discover.

• DISPUTE RESOLUTION PROCEDURES – Disputes that are allowed to exist throughout the course of a project tend to fester and disrupt party relationships. Contracts that call for early dispute intervention through mediation or non-binding arbitration serve to preserve costs and relationships. The design professional should also consider whether to accept a contract provision that allows it to be joined in a dispute proceeding between the contractor and the client. Non-joinder provisions force the client to sue or arbitrate with the design professional in a separate forum than the contractor regardless if the claims are related. A non-joinder provision can dissuade a client from pursuing a separate proceeding against the design professional as a consequence of the duplication of costs and time. Related to dispute resolution, the design professional should consider a provision that waives the ability of the parties to seek the collection of consequential damages, as well as a separate provision that allows for the collection of legal fees by the prevailing party in a dispute. Both provisions serve to limit a design professional’s risk exposure.

• REVIEW OF CONSTRUCTION DOCUMENTS – Too often the design professional is not afforded an opportunity to review the contracts being proposed to the project contractors when the project client prepares the contracts. These contracts may contain different responsibilities for the design professional. You should be afforded the opportunity to review and coordinate the contracts in advance.

There are many more contract provisions to be considered when reviewing a contract. Clauses regarding items such as payment; ownership of drawings; shop drawing and submittal review; and change orders can have significant affect upon the design professional’s liability exposure. It is important to review each proposed contract carefully, and negotiate over clauses, provisions and words that unnecessarily increase your risk.

In addition to reviewing contracts and clauses for risk exposure, consideration must be provided to the possible effects of the clauses on your insurance coverage. For example, broad form indemnification provisions ask that you be contractually responsible for damages even though you are not negligent. These non-negligent acts are not insurable. A higher standard of care provision is also not covered by insurance. Watch for clauses that ask for additional named insured to be listed on your policy and waivers of subrogation. All serve to adversely affect your risk exposure and insurance protection.

The above indicates the need to review each proposed contract carefully. Where provisions do not meet your risk control needs, discussion and negotiation with the project client is required. Many design professionals are adverse to negotiating contract terms and conditions especially where the client has prepared the contract documents. The design professional does not believe they are in a position to bargain and that the hint of negotiation will cause the client to go elsewhere. A proposed contract that shifts all the risk to the design professional that is accompanied by an unwillingness of a client to negotiate, constitute two (2) significant reasons for not wanting to assume the risks of that project. Most clients recognize that negotiation is apart of the business. Most clients are also willing to discuss means of reasonably sharing risks especially in the face of recognized industry standards and practices.

If you arrive at a contract that you feel comfortable executing, it is important that an individual with authority to bind you and the client sign the contract. A contract executed by an individual without authority may result in a nullification of that agreement.

It is also important to know who is signing the agreement on behalf of the client. If the client is a leaseholder, any property rights you may have in lien or otherwise, will be limited to solely the lease rights held by the leaseholder. If you are providing services to residential property owners, the lack of a signature by one or more property owners could limit claim rights against a significant portion of the property.

Always review your contracts before entering them. Negotiate where appropriate and contact your legal counsel and/or insurance broker whenever you have a question concerning any contract provision.