Contracts 101 for Design Professionals

When defending design professionals on liability claims, the contract is what determines the obligations and defenses a design professional might have with respect to the claim. Here is a check-list of items to consider in your next contract:

1. Make your client sign a contract before you start work. While you can still get paid for the work without a signed contract, certain terms and conditions that may protect you may not apply. Do not start work without a signed contract. Do not rely on your proposal as your contract either. Indicate in your proposal that if it is accepted, you will submit a formal contract for signature.  
    
2. Clearly define your scope of services. Your scope of services limits your contractual obligations to just those matters included in that scope. Define the services you will deliver and clearly exclude what services you are not providing. In addition to plans and specifications, include (or expressly exclude) the number of site visits, project meetings, as-built or record drawings. And make sure you specifically exclude those services you are not providing. Clients often ask design professionals to do a "favor" as part of the main project. A design professional can perform the "favor" for a written change order describing the new scope and additional payment terms – and do this even if there is no additional fee. 
    
3. Make standard terms and conditions a part of your contract and attach them to your proposal. Here are some suggestions to consider for inclusion in your standard terms and conditions:

• Payment terms: Spell out when payment or payments are due. Clearly identify the milestones that trigger payment. Identify when late charges or interest starts.
   
• Owner obligations: Identify the information the Owner is required to provide including a project budget; project information including surveys and title information; geotechnical reports; environmental reports; any financial, time, environmental, zoning or political constraints. Basically, identify all the information you will need to begin the project. And expressly provide when this information is to be delivered to you.
   
• Termination: Always include a termination clause which includes termination for cause – including non-payment; termination due to suspension of the project; termination for convenience or no cause.
   
• Indemnification: Who is being indemnified and for what? Look out for the word "defend." A duty to defend is not insurable under most professional liability policies.
   
• Limitation of Liability: In some states (such as Arizona), a limitation of liability clause, which limits the professional's liability to the Owner to the amount of the professional fees, is valid and enforceable. 
   
• Waiver of subrogation rights: Require all parties to the contract to waive subrogation rights against the other. In that case, to the extent an Owner is reimbursed by insurance (or can be reimbursed by insurance), neither the Owner nor his insurance carrier can recover from you.
   
• Waiver of consequential damages: Include a clause where the Owner waives consequential damages in the event of a claim. A waiver of consequential damages might protect against claims such as delay damages for late completion of the project, loss of use, lost profits, and increased interest charges.
   
• Notice of Defect: Include a provision that the Owner must notify you of the alleged defect in design. If the defect is discovered during construction, you should be notified in 3-7 days of discovery, and provided an opportunity to remedy the defect. If the defect is discovered after substantial completion, then a period of 15-30 days is reasonable. Also include a provision that creates a repose date – e.g. no claim for design defect, whether based in contract, tort or indemnity can be made after five years from the date of substantial completion.
   
• Standard of Care: State that the professional services performed under the contract will be consistent with what any reasonable design professional would provide under the same circumstances, in the same time frame and in the same jurisdiction. State that no other implied or express warranty is made concerning the professional services performed under the contract. Consider a term that requires your client to provide a certificate of merit affidavit from a professional practicing in the same discipline and identifying the specific breach of the standard of care, prior to submitting a claim to you.
   
• Mediation: Include a requirement that before litigation can start, the parties have to participate in mediation to attempt a resolution of the claim. Include a time period for mediation to occur prior to litigation – but one that gives you enough time to investigate the claim; e.g. 45 or 60 days.
   
• Arbitration vs. Litigation: Clearly state whether a claim should be presented in arbitration or litigation. You should not agree to join in arbitration with any other contractor, subcontractor or trade, except on your express written agreement.

These are just a few suggestions you might consider to include in your standard terms and conditions. Do not hesitate to propose these terms just because you think your client will not agree to them. Many of our design professional clients successfully use contracts containing these terms – or are able to negotiate something acceptable with these terms as a starting point.

Lastly, consult with your attorney before you settle on the standard terms and conditions you want to become a part of your contract. If you have any questions or would like assistance developing a contract that protects you, please contact Christopher Hossack at (480) 684-1128 | chossack@clarkhill.com or another member of Clark Hill's Construction Law Team.