BY DAVID BOWSER
This article originally appeared in the February 27, 2017, edition of the Daily Journal of Commerce.
As a professional designer, such as an architect or engineer, you will enter into many contracts to provide professional services. Owners often will not acknowledge the narrow profit margins experienced by the design professional or that design professionals have limited access to assets and expendable capital to fund large payouts. When you are dealing with buildings and development, the potential liability if something goes wrong is great. Most often, the only real source of potential payment is your errors and omissions insurance. The owners will most likely require you to have such coverage in the contract. Over the years, draft contracts have asked the design professional to assume more and more liability. As you review your next draft contract, there are a couple of things you might want to look out for to minimize expanded liability and to maximize the likelihood that your errors and omissions policy (“E&O”) will actually cover your liability.
First, you will want to make sure that the applicable standard of care is correctly stated in the contract. In general, the standard of care is usually phrased as performing your services consistent with the professional skill and care ordinarily provided by your fellow design professionals practicing in the same or similar locality under the same or similar circumstances. Notice that the standard only sets the bar at “ordinary” and is limited by regional differences and the specific circumstances. It does not require the best. This general standard of care is what is covered by your E&O. Many contracts will seek to raise the bar, for example by requiring the “highest” skill and care. That area between ordinary and highest will not be covered by your E&O. Refuse any attempt to increase the standard of care. Watch for language that promises there will be no errors and omissions. Strike that language out.
Once you have the standard of care correctly stated, it is then important to make sure that it applies throughout the contract. Many draft contracts will contain warranties or certifications or unconditional promises, such as the plans and specifications will comply will all legal requirements (federal, state, local, and often the Americans with Disabilities Act is explicitly mentioned, even though some would argue it is implied already by being a federal law). The “contractual promises” are not covered by E&O. In any place where you find such warranties or certifications or unconditional promises, just add language making the “promise” expressly subject to the standard of care. A useful addition is the opening clause, “Subject to the applicable standard of care,…”. This is often much easier to get the owner to agree to compared to insisting that such language be stricken (“What? You don’t plan to follow the law?”). A review by an attorney who is familiar with Design Professional Law and such contracts can assist you with maximizing finding and limiting such clauses.
After you have made the correct standard of care apply to the contract, you should definitely turn your attention to the indemnity clause. This clause usually requires you to protect the owner when it has to pay money to others based upon your work. It usually uses words like “indemnify” and “hold harmless.” If it says “defend” or makes references to paying the owner’s attorneys’ fees, that means you are promising to pay for the owner’s litigation costs too. Some form of indemnity clause is standard. If you can get it completely out it will be a coup. The most you can usually hope for is to impose some reasonable limits.
Try to remove the “defend” language. The legal costs incurred by the owner can easily reach $100,000 or more. Your E&O policy will most likely not cover providing an ongoing defense to an owner. You will be expected to pay those monthly bills. Also, try to limit the indemnity to things caused by the negligent acts or omissions of the design professional. Negligence usually invokes the standard of care and brings the E&O policy into play. Finally, since you know in advance that the policy limits of your E&O policy are what is really available, insist upon adding a cap to the indemnity obligation that limits recovery to the available proceeds of insurance coverage. Such a cap could save your business.
The number of variations in contracts out there in the world is only limited to the creativity (perhaps “depravity” would be a more appropriate word) of the drafters. Contracts are about the allocation of risks and many owners attempt to allocate all risks to the design professional, the one who is usually the least able to absorb such losses. The above is only some general guidance based upon common issues I have observed over the years. To truly maximize your position, it is important to find an attorney who understands design professionals and their business (including those narrow margins) and with whom you are comfortable. Such persons will be able to work with you in an economical manner to ensure that a reasonable bargain is made. While there is no such thing as a perfect contract, they usually can be made fairer and less risky.