The Use of a Well-Written Contract as an Important Risk Management Tool

written contract insurance

The Use of a Well-Written Contract as an Important Risk Management Tool BY, ANDREW J. CARLOWICZ, JR.  Travelers *


Is a claim being asserted against you and your firm? Are you a defendant in a malpractice case? Are you now looking back at your contract and wondering if it could have been written better (assuming it is even written)? All too often a claim arises, or is more severe than it should be, because of a poorly written (or non-existent) contract. A well-written contract is the best first step you can take to significantly manage the risk of a claim against your firm. The Latin phrase every first year law student learns in his/her contract class is “quid pro quo,” i.e., something for something. That is the very essence of a contract. So when writing one, make sure everything you get (i.e., your fee), and everything you give (i.e., your services) are clearly articulated in the contract. At a minimum, these four broad issues should be expressly addressed in every professional contract – the project itself, the scope of your services, your professional fees, and “legal” requirements. What you may have discussed about a fee before agreeing to perform on the project, or what you thought your client meant when you discussed your scope of services, generally has no legally binding effect whatsoever. If your client is unwilling to reduce the entirety of your agreement to writing – and then sign it – that may be a sign your client is not prepared to live up to that supposed agreement you discussed. For starters, the “project” itself should be expressly defined in your contract. At the commencement of your negotiations, you need to ask the owner three questions: (1) What do you want? (2) When do you want it? (3) How much money do you have to spend in order to build it? With the answers to these questions, you are now ready to define in the contract the specific “program” required by the owner, the acceptable “budget”, and the “completion date”. Then you are in a position to discuss with the owner an appropriate scope of services, as well as an appropriate fee arrangement. The design phase should be fully addressed in the contract. Will it be done in phases, i.e., schematic design, design documents, construction documents? Will the owner review each generation of drawings? Will a construction manager be reviewing each phase of drawings in order to prepare cost estimates? Is there a deadline for putting the project out to bid? All of these issues need to be considered during your negotiations, and then appropriate answers to these questions should find their way into your written agreement. Fee disputes between owners and design professionals seem to arise more often during the construction phase than during the design phase. It is critical on every job – whether it is a $25,000 residential addition/renovation or a $45,000,000 new school – that your specific responsibilities during construction, if any, are explicitly set forth in your written contract. Writing that you will “administer” the project is not nearly enough. Agreeing to “periodically visit” the site is also an inadequate description. The use of specific, critical provisions in the contract can protect the design professional from being legally obligated to provide services at no additional cost to the owner beyond those originally contemplated by the design professional. The failure to properly contemplate this potential problem can result in a situation in which the architect and the engineering consultants remain legally and contractually obligated to continue to visit the site, review change orders, review shop drawings, provide responses to RFIs, and generally administer the project long beyond the anticipated timeframe, and/or more frequently than originally contemplated and budgeted by the design team. Without the use of clear contractual provisions, the client may have unrealistic expectations as to the level of your site responsibilities. Thus, clearly defining the length of the construction phase, as well as the number of site visits, shop drawing reviews, RFI interpretations, etc., that are required under the “base” contract, can help avoid these problems. Of course, these limits need to be expressly linked to a “base” fee in the written agreement as well. Most well-written contracts also set forth a variety of legal requirements, i.e., indemnity obligations, insurance requirements, copyright ownership, right of assignment, and dispute resolution, to name a few. As these are “legal” requirements, they should be written by lawyers. Not every contract can be the same. A significant problem often arises when the project contracts do not all Risk Management PLUS+ Online® Page 2 of 2 contemplate the same dispute resolution mechanism. By way of example, it occurs all too often the owner/contractor agreement has an arbitration clause, and the owner/architect agreement does not contain such a provision. What happens when an owner claims that the roof leaks because of a combination of design errors and workmanship deficiencies? The answer is that there might be multiple hearings/trials in multiple forums with multiple “juries” who hear the same evidence and arrive at different conclusions. In order to avoid these kinds of problems, counsel needs to review all the project contracts in order to ascertain that they all “fit” together into one coordinated set of documents. This pitfall can occur on a significant public project when the owner employs the use of a design team, a construction manager, and multi-prime contractors. However, it can be equally problematic on a minor residential project when the owner/contractor agreement contemplates a certain level of involvement during construction by the architect that is not equally borne out in the owner/architect agreement. You can unwittingly increase your risk of potential exposure to liability by improperly dealing with two issues: namely, site safety responsibilities or the standard of care that applies to your professional services. Generally, the contractor is responsible for maintaining site safety. However, if you are visiting the project during construction, you can take on some limited liability for an unsafe site condition. Simply placing a provision in your contract to the effect that you are not responsible for site safety – while recommended – probably does not completely insulate you from such claims. Each jurisdiction is different, so consulting with counsel knowledgeable in construction law is a prudent step to take before stepping on site. In general, the law holds professionals to a distinct level of care. The law focuses on the services as measured against others in your profession, and not on the result. If your services were consistent with this standard of care, you are not legally liable even if a bad result, i.e., the roof leaked, or the project finished late. However, if your contract elevates your standard of care, you have increased your risk of exposure to a claim. Moreover, this elevated risk may very well not be covered by your professional liability policy. Examples are provisions that stipulate that your services be “the highest in the profession” or “state of the art.” Another common example is a provision in your agreement that states the building “will be fit for its intended purpose.” What should you do when confronted with a proposed contract that changes the standard of care? The answer is simple. Unless the fee is so high that you do not need insurance coverage, do not sign that contract! In conclusion, effectuating a good set of clear, thorough, and coordinated project contracts is not easy. However, the effort and expense that need to be expended is far outweighed by the potentially dire consequences of failing to take these critical, initial steps in risk management. Just like a structure needs a good foundation, your “relationship” with the other project participants – which is after all a legal relationship – also needs a good and solid foundation. Your contract is that foundation. How solid is it?
* Andrew J. Carlowicz, Jr. devotes his law practice exclusively to representing clients in the construction industry. Andy has practiced law with Hoagland Longo since 1983 and joined the firm’s partnership in 1990. He currently serves as co-partner in charge of the firm’s construction litigation practice group. He is actively involved in the representation of architects, engineers, construction contractors, land surveyors and private owners in professional malpractice claims, various construction contract and delay damage claims, property damage suits, building defect litigation, and construction site personal injury actions.

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