Contract Review Guide Your Guide to Navigating Architectural & …

Contract Review Guide

Introduction.............................................................................................3

Why This Guide Was Created .......................................................3

How to Use This Guide ..................................................................3

Chapter 1: The Professional Standard of Care ...............................4

What Is the Professional Standard of Care? .............................4

Why Is the Professional Standard of Care Important? ...........4

Key Points ........................................................................................4

Sample Language ..........................................................................5

Chapter 2: Scope of Services .............................................................6

What Is Scope of Services? ..........................................................6

Why Is Scope of Services Important? ........................................6

Key Points ........................................................................................7

Sample Language ..........................................................................7

Chapter 3: Extended Relationships ...................................................8

What Are Extended Relationships? .............................................8

Why Are Extended Relationships Important? ...........................8

Key Points ........................................................................................8

Sample Language ..........................................................................8

Chapter 4: Ownership of Documents ................................................9

What Is Ownership of Documents? ............................................9

Why Is Ownership of Documents Important? ..........................9

Key Points ........................................................................................9

Sample Language ........................................................................10

Chapter 5: Payment Terms ................................................................11

What are Payment Terms? .........................................................11

Key Points ......................................................................................11

Sample Language ........................................................................12

Chapter 6: Indemnity & Defense ......................................................13

What Is Indemnity & Defense? ...................................................13

Why Is Indemnity & Defense Important? .................................13

Key Points ......................................................................................13

Sample Language ........................................................................13

Chapter 7: Dispute Resolution .........................................................14

What Is Dispute Resolution? ......................................................14

Why Is Dispute Resolution Important? ....................................14

Key Points ......................................................................................14

Sample Language ........................................................................15

Chapter 8: Limitations of Liability ...................................................16

What Are Limitations of Liability?..............................................16

Why Are Limitations of Liability Important? ............................16

Key Points ......................................................................................17

Sample Language .................................................................. 17,18

What Are Warranties, Guarantees, & Certifications? .............19

Why Are Warr., Guar. & Cert. Important? ..................................19

Key Points ......................................................................................19

Sample Language ........................................................................20

Glossary ..........................................................................................21, 22

Stephen B. Litchfield, Litchfield Law PC

Zachary Waters, Black Swan Risk Management

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Introduction Why This Guide Was Created

This guide was created for you, the Design Professional, as a

handbook for reviewing contracts with your clients. With complex

projects and complicated legal language, reviewing contracts can feel

quite overwhelming. Few Design Professionals have the time to fully

understand the implications of what they are agreeing to in a contract

and end up putting themselves and their firm at risk.

To make the process easier, we’ve focused on the most important

aspects of a contract to review. Our ultimate goal is to help you maximize

your financial and professional success and minimize your firm’s risk.

We have organized this guide into several chapters. Each chapter looks

at one important section or clause in a contract and explains how it

should be reviewed and/or revised.

Each chapter includes:

• Definition of section/clause and why it is important

• Key points to review in that section

• Sample language to use in that section

There is no need to read this contract guide from start to finish.

It’s designed to serve as a quick reference when you’re drawing up an

agreement with a new client, or checking in on a contract with a former

client. Feel free to jump around and find the specific information pertinent

to you.

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C H A P T E R 1

The Professional Standard of Care

What Is the Professional Standard of Care? The Professional Standard of Care is a legal standard that requires Design Professionals perform services in accordance with a certain level of skill and care. It is used as a measuring stick to determine what a reasonable professional would do in a similar situation under similar circumstances.

The term reasonable professional has no technical definition, but generally can be defined as how a reasonably careful professional in the Design Professional’s discipline would have performed in the same situation. This includes consideration of when and where the services are provided, the type of project at issue, and various other components.

The AIA B101 defines the Professional Standard of Care for architects, as follows:

Why Is the Professional Standard of Care Important? There is an obligation to meet the Professional Standard of Care whenever a Design Professional works with a client. Any services provided that meet this Professional Standard of Care will be covered by your professional liability insurance.

Key Points Professional liability insurance provides protection against allegations that a Design Professional fell below the Professional Standard of Care. In light of this, it is critical to avoid incorporating any elevated standards of care into a contract.

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C H A P T E R 1 ( c o n t ’ d )

The Professional Standard of Care

Avoid superlative language or phrases such as “we will do the best/ greatest/highest.” Any such verbiage allows the client to elevate your contractual responsibilities beyond that Professional Standard of Care and exposes your firm to additional and unnecessary risk.

Avoid any warranties, guarantees, or certifications (covered in Chapter 9) as well as any language that acts to change the relationship between the Design Professional and his or her client, such as agreeing to a “relationship of trust and confidence” or acting as the client’s “fiduciary.”

In essence, Design Professionals should practice using a Professional Standard of Care similar to what other professionals would follow under the same circumstances. You do not want to elevate your contractual responsibilities beyond that Professional Standard of Care, since this exposes your business to additional and unnecessary risk.

Occasionally, some argue that the Professional Standard of Care establishes a “floor” where other parts of the agreement (clauses, documents, etc.) could create a partially or entirely elevated standard. See below for sample language that addresses this.

Sample Language The following sample language defines the standard of care, dispels the possibility of a warranty or guarantee, and prevents the “floor” argument for elevated standards of care by limiting performance to the Professional Standard of Care and nothing more:

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C H A P T E R 2

Scope of Services

What Is Scope of Services? A Design Professional’s Scope of Services is a detailed written agreement that outlines the responsibilities of the Design Professional in connection with completing a particular project, along with all relevant expectations and obligations.

The Scope of Services has three components:

• Deliverables: The deliverable(s) is the actual product or service the design firm will deliver at the end of the project. Deliverables should be clearly defined.

• Timeline: The timeline is a representation of how long the project will take from beginning to end. It indicates major phases and milestones throughout the life of the project and marks deadlines for deliverables.

• Milestones: Projects are broken down into smaller sections called milestones to make the entire project and timeline more manageable. Milestones help both parties determine if the Design Professional is on schedule with the project.

Why Is Scope of Services Important? The Scope of Services clearly and logically states what needs to be done and when it needs to be completed. It clarifies all expectations of the project before work begins, thereby minimizing the likelihood of failure or miscommunication.

Because the Scope of Services acts as a reference guide for each step of the project, the Design Professional and client should both be able to look at the Scope of Services to answer questions regarding expectations about the project.

Another important function of the Scope of Services is to help reduce the risk of “scope creep.” Scope creep can occur when the client begins to ask for or expect work beyond the initial agreed upon parameters. A Design Professional’s Scope of Services should establish clear lines to indicate when additional compensation should be discussed.

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C H A P T E R 2 ( c o n t ’ d )

Scope of Services

Key Points Crafting an effective, good Scope of Services requires clear communication between the Design Professional and the client.

This section must be extremely detailed — the professional should be able to quantify EVERY aspect of work involved, especially regarding:

• Project process • Sequencing/scheduling • Quantity of activities

Any ambiguity in the Scope of Services harms project progress and hampers the Design Professional’s ability to demand additional payment for services not agreed upon in the contract. Any uncertainty or ambiguity in the Scope of Services can also make disputes over scope and fee more likely.

Overall, Design Professionals must have strong boundaries, clarifying that they will perform everything within the Scope of Services and nothing more.

The following language prevents ambiguity from seeping into the Scope of Services:

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C H A P T E R 3

Extended Relationships

What Are Extended Relationships? Extended Relationships are any relationships outside of the contract between the design firm and the client.

Key Points The Design Professional should affirm and commit to the core relationship with the client, while disclaiming other relationships.

Also make sure the agreement or project is not transferable to other external parties.

Sample Language To commit to the core relationship of the engagement:

To prevent one party from transferring or assigning the agreement or project to an external party without consent:

To further clarify the separation of the core relationships from any external relationships:

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C H A P T E R 4

Ownership of Documents

What Is Ownership of Documents? Ownership of Documents determines who owns and controls the design documents, often referred to as “instruments of service,” and for what purposes each party to the agreement may use these documents.

Why Is Ownership of Documents Important? Your design documents are your intellectual property. Maintaining ownership of these documents helps you and your firm grow and evolve. Ownership also prevents other parties from using your documents on outside projects and profiting off your designs. Owning the instruments of service can also provide leverage in the event of a dispute.

Key Points Whenever possible, Design Professionals should retain document ownership, not the client.

Design Professionals typically provide licenses to the client for the use of the documents for the project in question. The Design Professional should make the license contingent on the client paying all costs and fees for which they are responsible according to the agreement. Standard AIA contract documents do it this way.

Limit ownership of documents to the specific project in question. Build in a remedy in case the client violates the Ownership of Documents provision.

In particular, the agreement should clearly remove all liability from the Design Professional in the case of unauthorized use of their documents. This can be done by requiring the client to release, indemnify, and hold the Design Professional harmless for any unauthorized use.

If the final design documents must be transferred for any reason, all of these stipulations should still apply. However, be certain to include the following: • Any acquired rights should be limited to use for the specific project

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C H A P T E R 4 ( c o n t ’ d )

Ownership of Documents

• Transfer should be expressly contingent on payment of all fees and costs

• Transfer should (again) release, indemnify, and hold the design professional harmless the Design Professional for any unauthorized use

• Design Professional retains the right to continued use of the component elements (such as details, specifications, etc.) as a part of its ongoing practice

To release, indemnify, and hold harmless the Design Professional for any unauthorized use and retain his or her right to continued use of the component elements:

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C H A P T E R 5

Payment Terms

What are Payment Terms? Payment establishes when and how the Design Professional will be compensated for services rendered.

Why are Payment Terms Important? Establishing a clear set of payment provisions in the contract ensures that you get paid on time. Clarity will maximize profitability and cash flow. It will also reduce the risk of disputes over payment and provide leverage for the Design Professional in the event of a dispute.

Additionally, effective payment provisions protect you from having to perform extra uncompensated work. Similar protection can also be gained from a well-defined Scope of Services (Chapter 2).

Key Points It’s best to establish payment details up front, when collaboration and consensus between both parties are the strongest.

A good set of payment provisions should include the following:

• Invoice timing and frequency. • Invoice content (invoice template for informational purposes

is a good idea). • Finite amount of time during which the client can review and dispute

an invoice—along with a continuing obligation on the client’s part to pay any portion of the invoice that is not in dispute.

• Prompt payment deadline that occurs before the next invoice is issued.

• Consequences for the client failing to pay. These can and should include interest and the Design Professional’s right to suspend and terminate services.

Some clients will want to withhold payments to protect against potential claims or losses, and this harms the Design Professional’s cash flow. If these withholding provisions cannot be deleted entirely, limit the right to withhold to only those fees directly related to the perceived deficiencies

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C H A P T E R 5 ( c o n t ’ d )

Payment

in the services. Also, include language that requires the client to provide detailed written notice of the grounds for withholding and a reasonable opportunity for the Design Professional to cure any perceived deficiencies.

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C H A P T E R 6

Indemnity and Defense

What Is Indemnity & Defense? Indemnity & Defense clauses shift accountability and responsibility for potential risks from one party to the other.

A typical Indemnity clause will attempt to make the Design Professional liable to the client for damages incurred by the Client that arise out of the Design Professional’s services.

Many Indemnity & Defense clauses wrongfully shift financial responsibility away from those who are legally responsible. These provisions place a disproportionate amount of responsibility onto one party and may even force that party to pay legal fees and legal defense costs.

Why Is Indemnity & Defense Important? An Indemnity & Defense clause may place too much financial burden on the Design Professional, posing a significant financial risk. Also, an Indemnity & Defense clause that is not tied to the Design Professional’s negligence is likely not covered by professional liability insurance, creating a potentially uninsured exposure.

Key Points Ideally, Design Professionals would remove Indemnity & Defense clauses from their contracts entirely or at least make the provisions mutual, so the obligations flow both ways.

However, if an agreement does include Indemnity & Defense clauses, the Design Professional should take care to ensure it is as equitable as possi- ble. The best way to accomplish this is to limit the Design Professional’s indemnity obligation to the extent of its negligence by tying the clause directly to legal fault and making liability proportionate to that fault.

Design Professionals should also take care to limit the scope of its obliga- tion to the Client alone and avoid agreeing to indemnify other third parties, especially project participants like the contractor.

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C H A P T E R 6 ( c o n t ’ d )

Indemnity and Defense

Sample Language If it isn’t possible to exclude an Indemnity & Defense clause from the con- tract, here is language that creates a reasonably fair Indemnity & Defense clause:

If the Design Professional is unable to achieve a mutual Indemnity & Defense scheme such as the one above, the language below would be acceptable under most circumstances:

Design Professionals in California do have some protection through statute, which protects to a degree against uninsurable defense obligations assumed through contract that have been problematic to Design Professionals for many years. With this said, it is always preferable to remove the defense obligation entirely.

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C H A P T E R 7

Dispute Resolution

What Is Dispute Resolution? Dispute Resolution is the part of the agreement that determines how the Design Professional and the client will solve any disputes.

Why Is Dispute Resolution Important? Disputes can cause emotions to rise, so it is crucial to clearly define how disputes will be dealt with. You also want to require communication between yourself and the client when resolving disputes in the agreement. This may settle disputes before having to move forward with arbitration or litigation, which involve more time and expenses.

Key Points Avoid mandatory arbitration clauses, as Design Professionals may later want to go to court instead of arbitration.

Mediation is a good option. It is confidential and privileged, so third- parties do not find out about it and it cannot be used in court. The Design Professional and the Client can agree on a solution without an arbitrator or judge forcing either party into anything as the process is entirely voluntary and no binding decision is made.

It may be a good idea to avoid any “prevailing party attorneys’ fees” clauses, which require the losing party of a lawsuit (should the dispute move to litigation or arbitration) to pay the winning party for its attorneys’ fees.

These clauses can pose substantial risk to the design firm if they lose the case, and professional liability insurance will offset the firm’s legal fees anyway. If one of these clauses is included, it should limit the dollar amount to what the design firm can safely provide on an uninsured basis.

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C H A P T E R 7 ( c o n t ’ d . )

Dispute Resolution

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C H A P T E R 8

Limitations of Liability

What Are Limitations of Liability? A limitation of liability is a clause within a contract used to manage the Design Professional’s risk associated with the project. This is accomplished by putting a limit on the potential damages for which a Design Professional can be held responsible for.

A limitation of liability clause creates a monetary limit, so the Design Professional will not owe anything beyond that limit, regardless of the actual amount of damages.

The Design Professional may impose limits on liability based on a specific dollar amount, the fee they receive as part of the agreement, or its available insurance.

Why Are Limitations of Liability Important? Limitations of liability clauses set hard limits on how much the Design Professional will be responsible for monetarily if something goes wrong, thereby protecting their firm.

For example, a contract limits the Design Professional’s liability to the Client to $1,000,000. If something goes wrong, and the Client’s damages total $2,000,000, the firm is only responsible for $1,000,000.

Additionally, limitations of liability prevent the professional from being held liable for possible damages occurring from events outside their control.

Key Points Limitations of liability are some of the most highly-negotiated parts of contracts. Both parties will fight to minimize their liability. Expect to spend a lot of time negotiating this part of the contract with your clients.

It is wise for Design Professionals to include language stating they shall not bear any personal liability for damages.

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C H A P T E R 8 ( c o n t ’ d . )

Limitations of Liability

It is also a good idea for the Design Professional to limit their liability to how much insurance he or she has available and price the insurance deductible into the contract. Doing so mitigates personal liability and stops the professional from having to pay out of pocket for damages.

Finally, Design Professionals should explore the statute of limitations. For example, limit the period of time a client has to seek damages according to the statute of limitations. Alternatively, the firm could limit that period to a specific number of years.

If setting a dollar amount instead of insurance proceeds, then the language may read as follows:

To prevent the professional from bearing personal liability:

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C H A P T E R 8 ( c o n t ’ d ) .

Limitations of Liability

To prevent either party from bearing responsibility for consequential damages (damages resulting from either party breaching the contract):

Finally, to limit the time frame:

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C H A P T E R 9

Warranties, Guarantees, and Certifications

What Are Warranties, Guarantees, & Certifications? Warranties, Guarantees, & Certifications state that the Design Professional promises some standard of care or work beyond the Professional Standard of Care.

Some clients may demand a warranty, guarantee, or certification because they want to be sure they get what they pay for. However, Design Professionals should avoid including such clauses in their contracts at all costs.

Why Are Warranties, Guarantees, & Certifications Important? Warranties, Guarantees, & Certifications demand perfection that is not realistic and not required by the Professional Standard of Care.

Design Professionals cannot guarantee that their subconsultants will do perfect work, or that their contractor will follow the design documents exactly. Both instances are outside of the Design Professional’s control.

Guaranteeing results creates additional uninsured liabilities and an elevated standard of care that falls outside regular liability insurance.

Key Points Do not use absolutes in your contracts, as parties may interpret them as guaranteeing services. Avoid words such as “all,” “none,” “solely” and “every”.

The only three things appropriate for warranty in a design or construction professional agreement are:

• Licensing • Contract compliance • Compliance with the Professional Standard of Care

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C H A P T E R 9 ( c o n t ’ d ) .

Warranties, Guarantees, and Certifications

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Glossary 1st Party vs. 3rd Party: 1st party claims involve one party (the indemnitor) indemnifying the other (the indemnitee) for losses occurring due to the indemnitor’s conduct. 3rd party claims involve the indemnitor indemnifying the indemnitee from claims brought by persons not part of the agreement should the claims fall within the terms of the Indemnity & Defense clause.

Claims Made Policy: Provides coverage triggered when a claim is made against the insured during the policy period, regardless of the wrongful act’s timing. (Exception: when a retroactive date applies to a claims-made policy. In such cases, the wrongful act must have taken place on or after the retroactive date.) Most professional liability, errors and omissions (E&O), directors and officers (D&O), and employment practices liability insurance (EPLI) are written as claims-made policies.

Comparative Fault: Allocates fault to each party based on its level of responsibility for the damages.

Errors or Omissions: Errors are incorrect information in documents. Omissions are absences of certain information. Professional liability coverage can cover attorney fees, court costs, and judgments resulting from suits involving these.

Exposure: The chance of a firm facing a loss (generally financial) due to risks. For example, clauses that promise an elevated standard of care increase the design firm’s exposure to breach of contract risk.

Indemnification: The contractual agreement of one party to assume financial responsibility for the liability of another party. Hold harmless agreements are typically used to impose this transfer of responsibility.

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Glossary Professional Negligence: A failure to meet the professional standard of care of the ordinary and prudent professional under similar circumstances. Said behavior generally consists of actions, but may also consist of omissions when there is some duty to act.

Primary & Non-Contributory: Stipulates the order in which multiple policies triggered by the same loss are to respond. For example, a contractor may be required to provide primary and noncontributory liability insurance. The contractor’s policy must pay before other applicable policies (primary) and without seeking contribution from other policies that also claim to be primary (noncontributory).

Professional Liability Insurance: Protects traditional professionals (e.g., attorneys, design professionals, doctors, etc.) from liability incurred through errors and omissions in performing professional services. Most of these policies are written with claims-made coverage triggers. Also, these policies contain “shrinking limits,” — unlike CGL policies (where defense costs are paid in addition to policy limits), the insurer’s defense cost payment reduces available policy limits.

Risk: Events that could cause a firm to face loss (generally, financial loss). For example, breaches of contract and intellectual property infringements are risks firms may face.

Waiver of Subrogation: An agreement between two parties where one party agrees to waive their rights to pursue recovery against another party after a loss (e.g., when one party’s insurance company paid a claim where another party was potentially at fault). Intends to prevent one party’s insurer from pursuing subrogation against the other party. Generally, insurance policies do not bar coverage if an insured waives subrogation against a third party before a loss. However, many policies exclude coverage if subrogation is waived after loss because doing so would violate indemnity.

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© 2021 Black Swan Risk Management

IMPORTANT NOTICE: This information is not legal advice. Legal advice may be only obtained from an

attorney. Black Swan Risk Management LLC resources have been prepared solely for the purpose of sharing

general information regarding insurance and practice management issues and are not intended to constitute

legal advice or a determination on issues of coverage. Black Swan Risk Management LLC makes no

representations about the accuracy, completeness, or relevance of this information.

Legal Notices

The guide is protected by US Copyright Laws. Reproduction, distribution, display and use of the guide without

written permission of Black Swan Risk Management LLC is prohibited.

Information provided by Black Swan Risk Management is for general interest and risk management purposes

only and should not be construed as legal advice nor confirmation of insurance coverage. As laws regarding

the us and enforceability of the information contained herein will vary depending upon jurisdiction, the user

of the information should consult with an attorney experienced in the laws and regulations of the appropriate

jurisdiction for the full legal implications of the information.

Stephen B. Litchfield Litchfield Law PC

Zachary Waters Black Swan Risk Management