Professional Liability Update – Contract Negotiations

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December 1997

Contract Negotiations

A contract is a legally enforceable agreement that sets forth the obligations of one party to another. A well-written professional services contract is one that outlines a precise understanding of the duties and responsibilities of each party to the process, leaving as little room as possible for interpretation.

In the event of a problem on a project, the contract will determine who is responsible for what. As such, a well-written equitable con- tract is a critical risk management tool.

Client-developed Contracts

Contract negotiation is even more important when dealing with client-developed contracts. It will come as no surprise that these agreements are typically crafted to protect the client. They will often transfer as much risk as is legally possible from the client to the design professional. Although this may be legal, it is often uninsurable.

As insurance advisors, it is our job to provide our design professional clients with the information they need to make the best decision for their company. We cannot make decisions for them. Rather, we review contracts from an insurability standpoint, and advise our clients accordingly. Design pro- fessionals need to establish what is accept- able and what is not acceptable for their firm, and negotiate their contracts accordingly.

It should also be pointed out that just because a portion of a contract may be unin- surable, it does not make the entire contract uninsurable. Coverage remains for liability arising out of the design professional’s negli- gent acts, errors or omissions, subject to the terms and conditions of the policy.

It helps to have a sense of what is ac- ceptable and what is not before you begin the negotiation. You should know what your

“walk-away” position is on every issue.

“Deal Makers” and “Deal Breakers”

It also helps to have a sense of what your “Deal Makers” and “Deal Breakers” are. A “Deal Maker” is a contract clause which is so important that you must consider walking away from the project if it is not included. Conversely, a “Deal Breaker” clause is one that is so onerous that you should never agree to having it included in one of your contracts. (A sample list of “Deal Makers” and “Deal Breakers” follows).

If the client’s budget is so restrictive that you have to reduce the scope of your services, your risk is increased. You may be able to counteract this increased risk through certain provisions in the contract’s terms and conditions, assuming the scope of services is not reduced to such an extent that it creates a public safety concern.

If the client is unwilling to accept certain defensive provisions in the contract’s terms and conditions, can you charge a higher fee to fund the heightened risk? Can you expand the technical service offered, thereby reducing the unknowns and risks arising from them, and thus eliminating your need for the defensive provisions?

Be candid and objective in discussing these issues with your client. Good clients who are aware of your concerns and who want you to solve their problems will work with you to develop fair and equitable agreements. Candor and objectivity very often establish the founda- tion on which lasting relationships are built.

A final note

Contract negotiation is a personal issue. Some of our design professional clients do not read their con- tracts and often sign anything that is put in front of them. Other clients are diligent about reviewing their contracts, make every effort to avoid uninsurable lan- guage, and even walk away from a contract if the lan- guage is unacceptable. Most of our clients fall some- where in between.

Regardless of who your client may be, always be

prepared to say “no,” respectfully declining the engage- ment if you cannot develop acceptable terms. Serious losses  have  befallen  many  design  professionals  who have given up too much in order to obtain a contract.

Even if you terminate negotiations, you will not necessarily lose the job. Often, clients with whom you are unable to come to terms will be sufficiently im- pressed by your professionalism to rethink their own position. On the other hand, you may never hear from a client again, and  that may be the best possible loss prevention measure of all.

Finally,  don’t  hesitate  to  call  on  professional sources of expertise. That would include your insurance broker and your contract attorney.!

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.

Deal Makers

Certain contract clauses are so important to the protection of your firm that they must be included in each contract you sign. If your client won’t agree to these vital provisions, you may want to decline the pro- ject. As a starting point, here’s our list of suggested “Deal Makers:”

 Attorney’s Fees

 Delays

 Construction Observation

 Dispute Resolution

 Limitation of Liability

 Jobsite Safety

 Environmental and Health Hazards

 Scope of Services

 Statutes of Repose or Limitation

 Termination

Not every clause will apply to every project. De- pending on the circumstances of a particular project, other important issues may be relevant. The following issues may present unique liability exposures:

 Asbestos

 Condominiums

 Fast Track Projects

 Preliminary Site Assessments

 Renovation/Remodeling

It is important to determine your bottom line on risk – the point beyond which you must never venture – and develop your own list of must-have Deal Makers.!

Deal Breakers

A “Deal Breaker” is a client-written clause so onerous that you must insist it be deleted from all con- tracts. If your client refuses to delete or substantially modify such a clause, seriously consider refusing the project. One such clause is Liquidated Damages. An- other Deal Breaker is a client-drawn Warranty clause that requires you to guarantee a technical result or condition.

Many provisions may be either Deal Makers or Deal Breakers. For instance, a badly-worded indemnity that is not limited to your negligence is a Deal Breaker and must be deleted or modified substantially to be insurable. On the other hand, a well-worded insurable indemnity may be acceptable to you. A mutual indemnity or one in which your client indemnifies you is desirable.

Depending on how they are worded, the following clauses can be either Deal Makers or Deal Breakers:

 Assignment

 Certifications, Guarantees or Warranties

 Indemnities

 Insurance

 Opinion of Probable Construction Cost

 Stop Work Authority!