Schinnerer's RM Blog - contractual provisions tag

Florida Design Firms Need to Understand Their Legal Protections

Tue, 07 Feb 2012 16:00:00 GMT

Recently we have seen governmental agencies in Florida requiring professional service firms to accept broad contractual defense and indemnity obligations. This is a trend we are seeing across the U.S. state and local governments as they appear to be attempting to insulate themselves and their political leaders from any project risk. But design firms in Florida have protection from such uninsurable and unmanageable exposures—as long as they understand and enforce Florida law.

Contractual defense and indemnity provisions must conform to highly specific state law requirements. In Florida the legal constraints on such contractual obligations have always been somewhat unusual. While parties are fairly free to negotiate anything in private sector contracts, for the last decade in Florida there has been a law that precludes public entities from requiring contractual provisions that exceed the normal legal liability of design firms to correct harm to the extent it is caused by the design firm’s deficient performance. The actual provision that does this is Florida statute 725.8, which states: “a professional services contract entered into with a public agency may not require that the design professional defend, indemnify, or hold harmless the agency, its employees, officers, directors, or agents from any liability, damage, loss, claim, action, or proceeding, and any such contract provision shall be void as against the public policy of this state.” This prevents the governmental entity from requiring an upfront defense paid for by the design firm or a payment to indemnify the client related to “any” action. Therefore, the design firm’s exposure remains the reimbursement of costs, losses, or damages to the extent caused by the design firms’ negligence—which is within the scope of professional liability insurance coverage—recklessness, or intentional wrongful conduct.

This language is a great model for adoption in other states. It is an important protection that all construction-related professionals in Florida should be referencing when government agencies overstep their contractual authority.

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.

Arbitrating a Claim on a Tribal Project

Wed, 24 Aug 2011 13:20:00 GMT

Many design firms are providing services to sovereign American Indian nations related to casino and resort development and the many other types of projects funded by these sources of tribal income. Although we have published extensively on the claims that often occur on such projects and on the difficulty in relying on tribal law to resolve design disputes, one of the common remedies to avoiding tribal courts—contractually mandated arbitration—might need special consideration.

Contracts might specify mandatory and binding arbitration of disputes between a design firm and a tribal client. But without a waiver of the sovereign immunity of the tribal client, such a provision—or any award made by an arbitrator—might be impossible to enforce. Arbitration awards are not self-effectuating; they have to be enforced through court approval. While a federal court might consider an agreement to arbitrate by a tribal client as an implied waiver of the tribe’s sovereign status, such a ruling is problematic.

If a firm is providing services to a sovereign tribal nation and wants to rely on arbitration rather than the application of the often unclear tribal law to any dispute, it makes sense to work with legal counsel to include in the contract a limited waiver of the tribal client’s sovereign immunity for the purposes of enforcing the award. This also often involves a clear statement of choice of laws where the tribal law might be applied in some situations but state law in others. Entering into a contract with a sovereign American Indian client could result in a firm surrendering its right to payment or recovery unless appropriate legal advice guides the contract formation.

Contracts in Foreign Countries

Wed, 10 Aug 2011 15:08:00 GMT

We are occasionally asked to review contracts for projects in foreign countries. We provide a contract review service to assist our policyholders in identifying potential coverage issues relating to their professional liability policies. We use principles of U.S. common law precedent when performing these reviews. We have no expertise in the laws of other countries.

The Schinnerer and CNA professional liability policy will respond to a claim anywhere in the world. The professional services a policyholder provides in other countries are covered by the professional liability policy. We suggest that policyholders seek advice from local legal counsel who can provide more specific guidance based on the specific jurisdiction.

When reviewing contracts for foreign projects, firms should keep in mind that the CNA policy contains the following exception to the contractual liability exclusion:

The CNA policy excludes coverage for any claim:

B. arising out of:

1. your alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees; or

2. the liability of others you assume under any oral or written contract or agreement.

However, this exclusion shall not apply to your liability that exists in the absence of such contract or agreement.

In a foreign jurisdiction where your liability to a client is predicated only on contractual liability, subparagraph B.1 does not apply except to the extent that you have agreed to pay consequential or liquidated damages.

Also, remember that the Schinnerer risk management website contains an entire section of management advisories on international practice. Here is a link to the management advisories on our website: http://www.schinnerer.com/risk-mgmt/Pages/Management-advisories.aspx

Intellectual Property Infringement Actions

Mon, 27 Jun 2011 12:23:00 GMT

Professional liability insurance covers many violations of intellectual property rights. The key is whether the negligent professional services of the insured firm resulted in the harm. In a contract, many clients differentiate the duties of the design firm related to alleged violations of intellectual property rights from alleged harm that might have occurred from negligent design services. Clients often understand that a professional liability policy will only defend the policyholder from allegations of negligent professional services, and require by contract indemnification of actual costs, losses, and damages. But in regard to alleged violations of intellectual property rights, clients often demand a defense.

Since it is highly likely that a violation of intellectual property rights on a project is not a shared responsibility, few clients are willing to treat such harm or allegations of harm in the same way that many are willing to treat allegations of negligent performance of professional services. Allegations that a third party was harmed because of design negligence usually involve allegations against not only the design team, but also the client and other parties. Since those situations are difficult to sort out and concurrent liability is often found, it makes sense for each party to defend its own interests and apportion the costs based on actual fault.

Because design professionals are in control of so much at the design stage, an allegation of the infringement of intellectual property presents a different scenario. Design firms have a greater ability to control the risk of copyright, patent, or other infringement situations. Therefore, many clients also want them to take charge of the defense of any infringement claim. It is difficult to present strong arguments against such a contractual requirement; it is a business decision that the firm has to address.

Although professional liability insurance coverage only extends to actual harm (a cost, loss, or damage) caused by the failure of the policyholder to perform professional services to the applicable standard of care (negligence), attempting to limit a firm’s exposure in a copyright or other intellectual property infringement situation would be a difficult contract negotiation. No client would agree that a design firm should be legally untouchable if the firm intentionally infringes on either the client’s copyright, or any other copyright, patent, or intellectual property right. And most clients do not want to burden themselves by having to conduct a defense when the cause of harm was so clearly out of their scope of responsibility and control.

There is also the effect on the law that a contractual provision limiting the defense of an intellectual property infringement case might cause. Legally, firms are responsible for the harm they cause whether they cause the harm intentionally or negligently. If a client uses a contractual indemnity provision or a contractual defense and indemnity provision that only mentions negligence as the source of contractual responsibility, a court could well interpret that provision of “private law” between the parties as a statement that the client is waiving its right to recover for harm caused by the firm in any situation other than negligence in the performance of professional services. So the client might be afraid that in the case of intentional infringement it is stuck with paying for both defense and damage.

Since design firms have such strong control over the selection of materials and systems and the use of intellectual property, most are willing to take on the business risk of defense and indemnification.