Schinnerer's RM Blog - contract tag

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.”

Managing Sustainability Risks via Contract

Thu, 21 Jul 2011 18:21:00 GMT

We’ve written about the challenges of managing green design project risks (subheading “Green Design/Sustainability”), particularly in using written contracts to manage professional liability and client expectations. Managing client expectations is only the first step in navigating the risks that green designs pose.

With that in mind, the author behind the Green Real Estate Law blog, Stephen Del Percio, offers a law review article to help firms contractually manage their sustainability risks. Green Building Contracts: Considering the Roles of Consequential Damages & Limitation of Liability Provisions, co-written by Professor Darren Prum of Regis University, offers a comprehensive overview of consequential damages and limitation of liability provisions and how these concepts apply to the various stakeholders (design professional, contractor, and owner) in a green design project. The article then talks about the contractual provisions in the documents published by the AIA, EJCDC, ConsensusDOCS, and Design-Build Institute of America, and how these standard forms allocate the risk of consequential damages between the various project stakeholders. As Del Percio states,

"It concludes by providing a set of recommendations for owners, design professionals, contractors, and consultants to consider when negotiating similar provisions, most of which are relevant for any type of construction project whether green or not."

Review Indemnification Provisions Carefully

Thu, 09 Jun 2011 19:55:00 GMT

Indemnification provisions that are not limited to the extent of a design professional’s negligence may result in claims that are not covered by professional liability insurance. We were recently asked to review the following Indemnification provision:

Indemnification: The Consultant shall indemnify, defend and hold harmless the Town, its officers, officials, agents, and employees from any claim, damages, injury, or death and action of any kind, whether at law or in equity, arising from any negligent act, error or omission in the performance of professional services by the Consultant. This undertaking shall not apply to damage, injury, or death suffered in the performance of a construction contract caused by or resulting solely from the negligence of the Town, its agents or employees attributable to the sole negligence of the Town, its agents or employees.

This indemnification is broader than the limited contractual liability coverage afforded by a professional liability insurance policy. Firstly, this indemnity includes an obligation to "defend" the town. Professional liability insurance only provides defense for the insured, not for clients of the insured. Once liability is determined, assuming such damages are recoverable in the jurisdiction, the policy would reimburse the client for expenses to the extent they were caused by the insured's negligence.

Secondly, this indemnity is not limited to the percentage of the consultant’s negligence. This could result in the consultant having to indemnify the town for a claim that will not be covered by the professional liability policy. In this provision, the only exception to the consultant paying 100% of the damages is for claims “resulting solely from the negligence of the Town….” Thus, unless the town is 100% at fault, the consultant may have to pay 100% of the damages, even when only partially at fault. The professional liability policy only provides coverage for claims to the extent they are caused by the insured’s negligent acts, errors, or omissions.

Here is an example of an insurable indemnity:

Sample provision: To the fullest extent permitted by law, Consultant shall indemnify Client, its officers, directors, partners, employees, and representatives, from and against losses, damages, and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses recoverable under applicable law, but only to the extent they are found to be caused by a negligent act, error, or omission of Consultant or Consultant’s officers, directors, members, partners, agents, employees, or subconsultants in the performance of services under this Agreement.

The interpretation and enforceability of indemnity provisions depends upon the jurisdiction, statutes, and case law. There are significant differences on how different jurisdictions interpret and enforce indemnity provisions. Accordingly, when reviewing or drafting indemnity provisions, it is essential to consult with knowledgeable legal counsel.

Is Your Client Willing to Pay You?

Tue, 31 May 2011 13:17:00 GMT

One of the most basic responsibilities of the client is to pay the design professional in a timely manner for services provided. Your firm’s ability to survive depends on this. Payment terms should be clear and specific. In a recent contract review we came across the following provision:

Redress for any claim against Owner under this Agreement shall be limited to and enforceable only against and to the extent of Owner’s interest in the Project with respect to which the Services called for herein are to be rendered by Professional. The obligations of Owner under this Agreement are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of the Owner.

A clause like this limits the practical ability of the design professional to collect any unpaid fees it might be owed by the client. The client’s real interest in the project may be very limited, especially if loans have been taken out against the project. As such, it is important that design professionals closely examine any attempt by their client to limit their potential liability. The business terms of the agreement deserve close scrutiny.