Schinnerer's RM Blog - contract review tag

Task Orders that Contain Onerous Terms

Tue, 21 Feb 2012 15:32:00 GMT

Design firms often have long-term clients that engage their services from time to time on different projects. These clients often execute a master services agreement with the design firm and then use task orders to parcel out the work to their consultant as needed. A lot of time and effort is spent on negotiating the master services agreement. However, to allow the client flexibility to craft the task order to the specific needs of the particular project, the master services agreement often states that the terms of the task order have precedence over the terms of the master services agreement. We have seen situations where the important protections of the master services agreement that have been painstakingly negotiated have been effectively eviscerated by task orders that have onerous terms and conditions. It is crucial that design firms carefully scrutinize the terms and conditions of the task order, and take the time to negotiate those terms that shift too much risk to the design firm.

Confidentiality Agreements

Tue, 15 Nov 2011 15:37:00 GMT

Recently I’ve been asked to review several confidentiality agreements. Design professionals frequently receive confidential information necessary to perform their services. Sometimes, information of this nature may constitute a “trade secret.” In most states, the common law protects clients from the disclosure of designated “trade secrets,” “confidential information,” or “proprietary information.” In addition, clients will often require that an express confidentiality provision be included in the professional services contract or, alternatively, will request that the design professional sign a separate confidentiality agreement. Clients have many reasons for this desired confidentiality. Disclosure of the information could adversely affect the proposed acquisition or sale of property, place the client at a competitive disadvantage to its competitors, or subject the client to various statutory or common law liabilities for site cleanup or personal injury.

Design professionals, however, may be required by law or professional responsibility rules to disclose certain information to regulatory authorities. For example, while performing services, the design professional may learn that a soil sample indicates that a site contains hazardous waste. A licensed professional’s public health and safety obligation generally requires that this information be disclosed to protect innocent third parties from potential injury or to comply with federal and state statutory and regulatory reporting requirements.

Accordingly, confidentiality provisions in contracts should include exceptions for disclosure required by legal or ethical obligations. Here is an example of a provision that recognizes the client’s rights to confidentiality while acknowledging the design professional’s disclosure responsibilities:

Sample Provision: Consultant shall maintain the confidentiality of the Project information including but not limited to the nature of the Project, the location of any sites under consideration or selected sites, together with any other information supplied to Consultant by Client and designated by Client to be confidential or proprietary, except (1) when such confidential information becomes generally known to the public through no fault of Consultant or (2) when disclosure is required pursuant to applicable governmental regulations or with an order of a court of competent jurisdiction.

If the client requests the execution of a separate confidentiality agreement, the above referenced exceptions for disclosure should be included. In addition, the design professional should take care to be sure that the separate confidentiality contract is coordinated with the terms of the professional services contract and does not include conflicting terms. In particular, the design professional should be certain that the separate confidentiality agreement does not include express warranties or guaranties or alter the ownership and use-of-documents provision or choice-of-laws provision contained in the professional services contract.

Design-Build Skip Over Clause

Tue, 18 Oct 2011 13:21:00 GMT

For design professionals considering design-build projects for the first time, special attention must be paid to the prime agreement between the owner and design-builder. Frequently, design professionals provide their design services as a subconsultant to the design-builder. During a recent contract review we came across the following clause in the prime agreement between the owner and design-builder:

The Owner acknowledges that the Design-Builder is not a design professional, but is merely furnishing, not performing, professional design services. Owner expressly agrees that Owner’s recovery for claims of professional errors and omissions shall be limited to the amount recoverable from the errors and omissions insurance coverage carried by the design professionals employed by the Design-Builder or its contractors or subcontractors. Subject to the limits of Architect’s insurance, Design-Builder agrees to assign to Owner Design-Builder’s rights against Architect to the extent Owner suffers damages or losses caused by professional errors and omissions of Architect. Owner shall be a third party beneficiary of the Agreement between Design-Builder and Architect for purposes of recovering against Architect for damages or losses of Owner caused by professional errors and omissions of Architect under this clause.

This is known as a skip over clause where, essentially, the design-builder has agreed that if there is a problem that appears to be design-related the owner has the right to bring a claim directly against the architect. Just about any problem is going to involve questions about design adequacy, and as such a skip over clause would make the architect a target for cost recovery efforts by the owner. From a risk management standpoint it would be prudent not to have such a skip over clause; instead the owner can pursue a claim against the design-builder, the entity with whom it has a contract. The design-builder can then bring a claim against the architect if it relates to the professional services that the architect provided on the project. Having the owner designated as a third-party beneficiary with a right to bring claims directly against the architect increases the risk for the project significantly.

Who Should Be Indemnified?

Mon, 10 Oct 2011 14:36:00 GMT

A recently reviewed contract contained an indemnification provision that required the design professional to indemnify the client as well as the state, the city, and the local transportation department. The design professional wanted to know who should be included when agreeing to indemnify a client.

Client-drafted indemnity provisions often include a long list of parties to be indemnified whose connection with the client or project is remote and may not ordinarily be entitled to indemnity under common law, i.e. in the absence of the contract. Beyond naming the client, a reasonable list of parties to be indemnified could include, but generally should be limited to the client’s officers, directors, partners, employees, and representatives. If some third party is damaged, such as a lender, that party is free to pursue its own legal remedies.

Design professionals should check with local legal counsel to determine how common law in the local jurisdiction handles indemnity obligations to parties other than the insured’s direct client. Agreeing to indemnify a party that has no common law entitlement to such indemnity might result in an uninsurable contractual obligation. The professional liability policy issued by CNA excludes coverage for costs “arising out of the liability of others you assume under any oral or written contract or agreement, except that coverage otherwise available to you shall apply to your liability that exists in the absence of such contract or agreement.”

Warranties in Contracts

Wed, 07 Sep 2011 12:29:00 GMT

In a recently reviewed contract, an engineer replaced the word “warrants” with the word “represents,” believing that this would alleviate the possibility of an uninsured claim for express warranties. Unfortunately, it did not solve the problem. A warranty is a promise of a given result. If the promised result does not occur, the consultant can still be held responsible, even if the damages were not caused by the consultant’s negligence. Warranties can be created in many ways without using the word “warrant.” Using words such as “assure,” “ensure,” “insure,” “promise,” “represent,” and even “shall” could result in uninsurable warranties.

Express warranties and guarantees establish liability even though no proof of negligence is required. Under U.S. common law, design professionals have the responsibility of using due care in providing their services. There is no warranty of the efficacy of professional services, nor does the design professional provide a warranty for the work of the contractor or others based on the services or instruments of service provided by the design professional. Courts have not extended the duty to provide a guarantee to design professionals because they provide services based on judgment and expertise; a design professional is applying its professional skills and reasoning on a unique set of facts for each project. Professional liability insurance policies exclude coverage for claims arising out of express warranties or guarantees. Because coverage is for professional services provided and not assumed contractual obligations, professional liability insurance does not "stretch" to provide coverage for a warranty of services beyond meeting the standard of care.