Imprecise, incorrect contract language may leave AEC firms uninsured for professional liability exposures.
Any AEC firms familiar with the popular saying, “You don’t know what you’ve got ‘til it’s gone” might not realize its potential application to standard design contracts. As owners’ attorneys look for ways to transfer more risk to design firms and other project participants, many have moved away from standard contracts provided by the AIA, SBIA and other organizations, either by making significant modifications to the language or by crafting their own agreements. Unfortunately, the consequences of these for design firms can be disastrous, potentially leading to the assumption of excessive and uninsured exposures.
While the standard contracts provided by various professional organizations tend to be long, they have stood the test of time and are fully accurate with respect to terminology, roles, and responsibilities. The AIA Design Contract is about 25 pages unedited as is the DBIA contract. EJCDC contracts are about 50 pages, as are the consensus documents contracts.
All these contracts have been negotiated over time with lawyers and professionals representing the various parties involved in construction. Their descriptions and references to various construction project participants have been negotiated extensively. Furthermore, there’s widespread agreement that they provide clear, accurate, and balanced representations of each participant’s roles and responsibilities.
Unedited, the contracts have been proven to be largely insurable for design professionals as a result of this negotiation. In addition, the parties involved understand that it is better to have a contract that does not jeopardize the professional liability insurance coverage to respond on the behalf of design professionals should they be negligent in their performance. This is why professional liability carriers uniformly recommend the use of standard contracts.
Many insurance advisors are relieved to see an unedited standard contract, or even a lightly edited one. Nowadays, however, it has become more typical for AEC firms to receive an extensively edited contract, which doesn’t resemble the original standard version, or a contract completely drafted by the client’s lawyers.
A common error: Mistaken identities. Frequently, these contracts misname the parties or reflect a complete lack of understanding of the construction process and the roles of those involved. For example, one recent contract between an engineer and owner, correctly described the engineer one time in the contract. Yet, afterward incorrectly referred to them as “architect.” In many cases, both architects and engineers are referred to as “contractors” and their professional services as “work.”
Although lawyers have been educated to use precise language, the mischaracterization of the parties on the project can be particularly harmful – and costly – should a claim arise. Fact finders have a difficult enough time figuring out the roles and responsibilities on a project without having to navigate imprecise contract language.
One trial involving delays and extras on a project that centered on a misunderstanding about an alternate paving detail resulted in a hung jury. Afterward, one of the jurors commented that they “thought the engineer could have paved earlier.” Construction is complex; it’s important to avoid making it even more difficult for someone outside the industry to understand by agreeing to ambiguous contractual language.
What’s even more frustrating is when a prime design professional has already agreed to a bad contract and chooses to pass along all the unreasonable terms to a consultant. The design community should stand together to make sure their roles are understood and appreciated, which is why timely and precise communication with everyone involved in a project is critical to avoid any misunderstanding.
Of course, it’s easy to blame the lawyers who draft and modify these contracts with onerous terms, misidentified parties, warranties, uninsurable standard of care definitions, liquidated damages, time is of the essence clauses, and prevailing party clauses. Certainly, they are the ones drafting the contracts and telling their clients the terms are “reasonable.” So, much of the responsibility for this situation rests with them.
While it may be their job to try to shift as much of the responsibility as possible away from their client to others, the fact is without insurance coverage to back up that transfer or exposure they truly are not doing their clients a service.
Starting off on the right foot. It’s important to begin any new relationship based on mutual understanding, honesty, and fairness. It may be helpful to get clients and their lawyers in a room together during the negotiation process to have civil discourse about the contracts. That can help get all parties started on the right foot.
Designers can take a lesson from other professionals. Lawyers, medical doctors, accountants, and various other professionals also provide professional services. And they do so without telling their clients they are better than others, will advise or treat you perfectly, and without providing any guarantees. Indeed, professionals in all disciplines are expected to meet the standard of care for their industry, in other words not to practice their profession negligently.
Under no circumstances would a lawyer guarantee a win in court, or any other type of outcome for that matter because they understand their professional liability coverage would not respond. Similarly, a lawyer would not agree to be referred to as a medical doctor or an accountant.
Thus, in negotiating with current or prospective clients, try to appeal to fairness; appeal to coverage being in place should there be a problem on the project; appeal to whatever you can to make sure you are treated appropriately.
If design firms communicate with each other, as well as with their clients, perhaps as an industry we can move back toward standard contracts. These contracts have been previously negotiated and agreed upon as being fair. Without a doubt, this approach is safer and far better for your business than being bullied into contracts that don’t reflect either the designer’s role or appropriate risk and responsibility.
Although lawyers may represent an initial obstacle to fair dealing in these matters, the design community exacerbates the problem by agreeing to unreasonable contracts without objection. One of the more common arguments used to pressure designers during negotiation is that other firms will agree to the terms. Let’s try to make that argument more difficult by pushing back against confusing, unfair, and uninsurable terms.
Lauren Martin is a risk manager and claims specialist at Ames & Gough. She can be reached at lmartin@amesgough.com.
