This past year, I had the opportunity to co-present with DSV attorneys David Temple and Jayme Donnelson at the American Institute of Architects (AIA) Ohio Valley Regional Convention on “Killer Contract Clauses”. This is a topic that always generates a lot of discussion among architects and engineers, most frequently in the form of “What if the Owner/Client refuses to change any of their contract terms?” In other words, the perception by a lot of architects and engineers is that it does them no good to negotiate alternatives to “killer” contractual provisions if in practice the contract negotiations consist solely of “take it or leave it.”
Problems can also arise where the Owner/Client is in such a rush to proceed with the work that having a contract that matches the agreed upon terms of service takes a back seat to moving the project forward. Ditto for the well-meaning architect or engineer that pulls out a standard form contract without consideration of whether the “boilerplate” provisions are truly appropriate for each particular project. The result under these scenarios is often the same: bad contracts that (1) do not accurately define the parties’ expectations and agreement on scope of services, (2) potentially jeopardize insurance coverage, and/or (3) are so one-sided that they unnecessarily expose a party to excessive liability or risk. Put simply, bad contracts often lead to disastrous results for architects and engineers.
There a number of reasons why design professionals end up with contracts that are all wrong for their business and for the project. What is the harm in signing one of these “bad” contracts? Nothing—if the project goes smoothly, if there are no funding or payment issues, if there are no disputes over changes to the work, if there are no delays or substitutions of alternate materials, if there are no disagreements about the agreed upon scope of the project and design services, if there is no disagreement about ownership and use of the electronic data comprising the construction drawings, and if there are no claims at the end of the project. However, if any one of these things does not go exactly to plan—let alone the dreaded project where multiple issues arise—then everyone pulls out the contract and—sometimes for the first time—look to see what the legal rights and remedies are. Even worse are the disputes that require attorneys, judges, arbitrators, or even juries to figure out what the parties intended when they originally signed the contract.
Architects and engineers often tell us that they do not have the time or the financial resources to have an attorney review every single contract that gets signed. However, this is no excuse for architects and engineers to proceed with bad contracts. Instead, maybe it is time to re-think your contract review and negotiation strategies. You should work with your legal counsel and insurance representatives to formulate an efficient strategy. Here are some ways to get started:
- Have a contract form that you are comfortable with and that you can use as your “go to” contract form when needed. Know and understand why you have certain terms included or excluded from that form and why those terms are important to your business. Be prepared to fight for the terms that are most critical to your business.
- Notwithstanding the suggestion above, do not be so married to your own contract form that you insist on only using your form. If you know and understand why you include (or exclude) certain terms in your preferred form, you will be better prepared to negotiate key terms even when using someone else’s contract form. If you do not understand why you include (or exclude) certain terms, ask someone; take time to understand the reasoning behind the contract terms.
- Clearly communicate with your legal counsel and insurance representatives as to what you expect from their respective contract reviews. What issues/risks are you willing to live with, and what issues/risks are deal-breakers? What is the substance of your discussions with the Owner/Client about your scope of services, and does the contract accurately reflect those discussions? Early communication of these issues helps streamline contract review, and further helps facilitate meaningful comments and suggestions back from your advisors.
- When negotiating key terms with the Owner/Client, focus on the mutual benefits of your proposed terms. The Owner wants to heighten your standard of care and include guarantees or warranties of performance? Remind the Owner that such terms may jeopardize your insurance coverage, resulting in the Owner losing that insurance protection for potential errors or omissions. The Owner refuses to waive consequential damages? Use the negotiations as an opportunity to find out what potential consequential damages are of most concern to the Owner (e.g., lost profits if the business does not open on time, lost tax credits if the project does not achieve certain certifications or milestones, etc.); then develop a strategy to address those limited issues, rather than leaving the scope of recoverable damages completely open-ended.
- Do not forget to coordinate all of your contracts with downstream consultants so that those consultants are bound by the same terms as you have with the Owner/Client. Your contract with the Owner requires arbitration for all disputes, but your downstream consulting agreements are silent on the issue of dispute resolution? You may face arbitration with the Owner and litigation with the consultants in two different forums. The Owner refuses to waive consequential damages, but your consulting agreement contains a mutual waiver for those damages? You may be on the hook for those damages to the Owner with no way to share that risk with your consultants (who may be ultimately responsible for the damages).
As you plan ahead for 2012, take time to sit down with your legal counsel and other individuals involved in contract review to formulate a strategy for how you will address contracts for the coming year. And stop signing bad contracts.