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Risky Contract Agreements
The contract agreement outlines the responsibilities of the parties and the terms and conditions when rendering services for a project. The contract determines the obligations, and if there is a claim, aids in the defense of a design professional.
When developing your next contract agreement, here are some items to consider:
Scope of Services. Your scope of services outlines, as well as limits your contractual obligations. Define the services you will deliver and clearly exclude what services you are not providing. In addition to plans and specifications, include (or expressly exclude) the number of site visits, project meetings, as-built or record drawings. Make sure you specifically exclude those services you are not providing.
Signed Agreement. Obtain a signed agreement before starting work. Almost 50% of all design firms make the mistake of not obtaining a signed agreement. Many firms are requested to start work without a signed agreement putting your firm at higher risk. Firms should not rely on the proposal as your contract unless you include standard terms and conditions attached to the proposal. Always request a signature, and indicate if the firm is requested to start work, the terms and conditions shall apply.
Certain Standard Terms and Conditions
Standard of Care: State that the professional services performed under the contract will be consistent with what any reasonable design professional would provide under the same circumstances, in the same time frame and in the same jurisdiction. State that no other implied or express warranty is made concerning the professional services performed under the contract. Prior to submitting a claim to you, consider that your Client must provide a certificate of merit affidavit from a professional practicing in the same discipline and identifying the specific breach of the standard of care.
Owner Obligations: The Owner has responsibilities for the successful completion of the project. Identify the information and services the Owner is required to provide including a project budget; project information including surveys and title information; geotechnical reports; environmental reports; any financial, time, environmental, zoning or political constraints. Basically, identify all the information you will need to begin and support this project effort and when this information is needed.
Indemnification: Identify who is being indemnified and for what. Look out for the word "defend." A duty to defend is not insurable under most professional liability policies. Indemnity obligation should only apply to the extent caused by negligence in performance of services. Always remove duty to defend against any and all claims and the obligation does not exceed statute of limitations.
Limitation of Liability: In some states a limitation of liability clause, which limits the professional's liability to the Owner to the amount of the professional fees, is valid and enforceable. Establish an agreement to the firm’s total liability, the Cleint accepts a specific sum, firms service fees, or at a maximum limited to the amount of insurance available at the time of the claim.
Consequential Damages: Include a mutual waiver of consequential damages in the event of a claim. A waiver of consequential damages might protect against claims such as delay damages for late completion of the project, loss of use, lost profits, and increased interest charges. Include neither party shall be liable to the other or shall make any claim connected in anyway to the Project or the Agreement, and the mutual waiver shall apply to any cause of action including negligence, strict liability, contract, etc.
Termination: Always include a termination clause, which includes termination for cause - including non-payment, termination due to suspension of the project, termination for convenience or no cause. Make sure terms are not one-way for the Client. Either party shall provide a written notice, and the Client shall pay for all services rendered to the date of suspension. If the Client does not pay invoices, suspend work until payment has been made current and the Client shall indemnify and hold the firm harmless from liability resulting from a suspension.
Dispute Resolution. Clearly outline the steps in handling a dispute between the parties. Recommended that negotiation in good faith shall be the first step. If the parties fail to come to an agreement through negotiation, use non-binding mediation prior to the initiation of legal proceedings. Avoid mandatory arbitration. Include a time period for mediation to occur prior to litigation - but one that gives you enough time to investigate the claim; e.g. 45 or 60 days and the parties shall split the mediation costs.
Instruments of Services. Ensure the instruments of service remains the property of the design firm, and that they shall only be used for the construction and maintenance of the project under the project agreement, and use of instruments only once the firm has been paid in full for services rendered. Any misuse by Client, the firm shall not be held liable.
Warrantees and Guarantees. Delete all warranty and guarantee statements, including not being held responsible for the performance of the Contractor. Include observation shall not constitute a warranty or guarantee, and a catch all statement that the Client agrees that services provided by the Consultant will be rendered without any warranty, and/or guarantees, expressed or implied.
Summary. These are just a few suggestions you might consider to include in your standard terms and conditions. Using terms and conditions such as these provides a better understanding as to the responsibilities and limitations of the parties supporting project efforts. Many design professional clients successfully use contracts containing these terms - or are able to negotiate something acceptable with these terms as a starting point.
NOTICE: The information in this newsletter should not be construed as legal advice, nor intended to replace legal advice specific for your firm or circumstances. Comments, advice and suggestions are for informational purposes only.
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