The Contract Review Checklist: Identifying and Negotiating Problematic Contract Clauses
1. INDEMNITIES
Recommended Action
Remove the word "defend."
Limit liability to the extent of your negligence.
Exclude parties other than your client.
DEAL BREAKER
Indemnities not limited to your negligence or that require defense of the client.
Rationale
Agreeing by contract to defend your client means you could be forced to hire (and pay for) a lawyer to represent him or her, even if you have acted non-negligently. You do not owe your client's agents the same obligations you owe your client.
Indemnifying someone against "any and all allegations and claims" is overly broad language. Anyone can make an allegation or claim against your client with or without basis.
If you indemnify your client for anything other than your own negligence, you are accepting liability beyond that required by law, and that additional liability is likely not insurable under your professional liability policy.
Sample Wording
The Consultant agrees to indemnify and hold harmless the Client, its officers, directors and employees against all damages to the extent caused by the Consultant's negligent performance of the services under this Agreement. Notwithstanding the foregoing agreement to indemnify and hold harmless, the parties expressly agree that the Consultant has no duty to defend the Client from and against any claims, causes of action, or proceedings of any kind.
Alternatives
Replace "arising out of" or "resulting from" language with "to the extent caused by" language. If "defend" obligations cannot be removed, amend language to say: "defend for general liability claims, not professional negligence claims."
2. ASSIGNMENT
Recommended Action
Delete unilateral right of owner to assign.
Prohibit assignment without written mutual consent.
DEAL BREAKER
Assignment of your agreement without your consent. Rationale Each party should be protected from having the other party assign either party's rights and/or obligations to an unknown third party on unknown terms.
Sample Wording
Neither party to this Agreement shall transfer or assign any rights, duties or interests under this Agreement, including but not limited to monies that are due or monies that may be due, without the prior written consent of the other party. Subcontracting to subconsultants, normally contemplated by the Consultant as a generally accepted business practice, shall not be considered a transfer or an assignment for purposes of this Agreement.
3. CERTIFICATIONS, GUARANTEES AND WARRANTIES
Recommended Action
Delete from the contract all certifications, warranties and guarantees.
Properly define terms as "professional judgments" or "opinions."
DEAL BREAKER
Certifications, guarantees and warranties (by you of virtually anything).
Rationale
Professional liability policies specifically exclude coverage for liabilities created by certifications, warranties or guarantees provided by the insured.
Sample Wording
The Client agrees that the Consultant shall not be required to sign any documents, no matter by whom requested, that would result in the Consultant having to certify, guarantee or warrant the existence of conditions whose existence the Consultant cannot ascertain. The Client also agrees not to resolve any dispute with the Consultant or make payment of any amount due to the Consultant in any way contingent upon the Consultant's signing any such certification, warranty or guarantee.
4. CODE COMPLIANCE
Recommended Action
Delete warranties or certifications of code compliance.
Insert representation of performance to achieve code compliance as subject to the "professional standard of care" or "reasonable professional efforts."
Rationale
You cannot certify that the building was designed and constructed in conformance with all applicable laws, codes and ordinances.
It is entirely possible that codes, regulations and rules of various overlapping jurisdictions will conflict with each other, so that compliance with one may mean noncompliance with another.
Codes and regulations are subject to varying and sometimes contradictory interpretations.
Sample Wording
The Consultant shall put forth reasonable professional efforts to comply with applicable laws, codes and regulations in effect as of [the date of the execution of this Agreement, submission of documents to building authorities, or other appropriate date]. Design changes made necessary by new laws, codes and regulations enacted after this date shall entitle the Consultant to a reasonable adjustment in the schedule and additional compensation in accordance with the Additional Services provisions of this Agreement.
5. COST ESTIMATES
Recommended Action
Clearly define in the contract the consultant's limited professional services regarding project cost estimates and budget evaluations.
Identify client's responsibility for cost overruns and redesign.
If you use the term "estimate," define it as an opinion only.
Rationale
Consultants should only be responsible for performing services in accordance with the prevailing standard of care.
Rendering cost estimates is a service most appropriate for professional cost estimators retained by the project owner (not architects or engineers).
Sample Wording
The Client understands that the Consultant, in providing estimates of probable construction cost, has no control over the cost or availability of labor, equipment or materials.
Likewise, the Client recognizes that the Consultant has no control over market conditions or the Contractor's method of pricing, and that the Consultant's estimates of probable construction costs are made on the basis of the Consultant's professional judgment and experience. The Consultant makes no warranty, express or implied, that the bids or the negotiated cost of the Work will not vary from the Consultant's estimate of probable construction cost.
6. DELAYS
Recommended Action
Allow for delays due to force majeure (inclusive of "pandemic, epidemic, quarantine, acts of government" language).
Include a mutual consequential damages waiver.
Delete liquidated damages provisions.
DEAL BREAKER
Liquidated Damages (which may accrue in excess of actual damages).
Rationale
There are many "acts of God" and other factors outside of a consultant's control that can cause project delays.
The consultant cannot be held responsible for delays caused by other parties to the project, such as the client or the contractor.
Sample Wording
The Client agrees that the Consultant is not responsible for damages arising directly or indirectly from any delays for causes beyond the Consultant's reasonable control. For purposes of this Agreement, such causes include, but are not limited to, strikes or other labor disputes; severe weather disruptions or other natural disasters or acts of God; fires, riots, wars or other emergencies; pandemics, epidemics, quarantines, or acts of Government; failure of any government agency to act in a timely manner; failure of performance by the Client or the Client's contractors or consultants; or discovery of any hazardous substances or differing site conditions. In addition, if the delays resulting from any such causes increase the cost or time required by the Consultant to perform its services in an orderly and efficient manner, the Consultant shall be entitled to a reasonable adjustment in schedule and compensation.
7. DISPUTE RESOLUTION
Recommended Action
Make mediation the primary alternative dispute resolution (ADR) method.
Avoid mandatory arbitration.
Rationale
Mediation has been proven to be a more successful, cost-effective means of resolving construction disputes than either arbitration or litigation.
With arbitration, the joinder of additional parties is generally not permitted, discovery proceedings are generally not allowed, rules of evidence are not followed, and the application of legal principles is not required.
An arbitration award is very rarely subject to appeal.
Sample Wording
In an effort to resolve any conflicts that arise during the design and construction of the Project or following the completion of the Project, the Client and the Consultant agree that all disputes between them arising out of or relating to this Agreement or the Project shall be submitted to nonbinding mediation. The Client and the Consultant further agree to include a similar mediation provision in all agreements with independent contractors and consultants retained for the Project and to require all independent contractors and consultants also to include a similar mediation provision in all agreements with their subcontractors, subconsultants, suppliers and fabricators, thereby providing for mediation as the primary method for dispute resolution among the parties to all of those agreements.
8. INSURANCE REQUIREMENTS
Recommended Action
Ensure consistency with current insurance coverage.
Remove special insurance requirements that are unattainable.
Review insurance requirements with broker/risk manager and/or attorney.
DEAL BREAKER
Insurance with unattainable or unreasonable requirements.
Rationale
You cannot guarantee to a client that you will be able to secure and maintain a given level of professional liability or other types of insurance. You can agree to make a reasonable attempt to meet a client's reasonable insurance requirements.
Sample Wording
The consultant agrees to attempt to maintain professional liability coverage if such coverage is reasonably available at commercially affordable premiums. Consultant's insurance requirement shall be maintenance of its standard annual insurance policies, copies of which may be made available upon reasonable request of Client.
9. OWNERSHIP OF INSTRUMENTS OF SERVICES
Recommended Action
Limit your retained designs to final documents.
Retain ownership of documents, especially proprietary details.
Limit or prohibit reuse or modification of your documents.
Secure indemnity if documents are to be reused or modified.
Rationale
Retaining ownership of your documents can help prevent unauthorized changes or reuse of those designs.
To lessen the possibility that your plans and specifications could be considered products, you should affirm in your agreement that they are "instruments of your professional service."
Referring to "all documents" is too far reaching, as it could conceivably include all your notes, sketches, field reports and other preliminary data.
Unauthorized reuse of your plans can expose you to extensive liability and high defense costs. Indemnification by your client would help protect you from these claims.
Sample Wording
The Client acknowledges the Consultant's documents, including electronic files, as the work papers of the Consultant and the Consultant's instruments of professional service. Nevertheless, upon completion of the services and payment in full of all monies due to the Consultant, the Client shall receive ownership of the final documents prepared under this Agreement. The Client shall not reuse or make any modification to the documents without the prior written authorization of the Consultant.
The Client agrees, to the fullest extent permitted by law, to defend, indemnify and hold harmless the Consultant, its officers, directors, employees and subconsultants against any damages, liabilities or costs, including reasonable attorneys' fees and defense costs, arising from, allegedly arising from, or in any way related to or connected with the unauthorized reuse or modification of the documents by the Client or any person or entity that acquires or obtains the documents from or through the Client, without the written authorization of the Consultant.
Under no circumstances shall the transfer of ownership of the Consultant's drawings, specifications, electronic files or other instruments of service be deemed a sale by the Consultant, and the Consultant makes no warranties, either express or implied, of merchantability or fitness for any particular purpose, nor shall such transfer be construed or regarded as any waiver or other relinquishment of the Consultant's copyrights in any of the foregoing, full ownership of which shall remain with the Consultant, absent the Consultant's express prior written consent.
10. STANDARD OF CARE
Recommended Action
Delete language that alters or elevates the consultant's standard of care.
Define "standard of care" properly. Limit the standard to ordinary skill, care and judgment.
Avoid superlatives (highest, best, expert, etc.).
DEAL BREAKER
A standard of care elevated beyond a negligence-based standard.
Rationale Professional liability insurance responds to negligence, and so standards of care must be negligence-based.
Absolute words such as "highest" or "best" change the standard of care to which you are agreeing to perform.
Language which addresses the "end product" is inappropriate, as professionals perform services, not deliver products.
Representations that your plans and specifications will be "free from defects" or similar promises are a form of warranty, which may be uninsurable for professionals.
Sample Wording
In providing services under this Agreement, the Consultant shall perform in a manner consistent with that degree of care and skill ordinarily exercised by members of the same profession currently practicing under similar circumstances at the same time and in the same or similar locality.
11. THIRTD PARTY RELATIONSHIPS & RIGHTS
Recommended Action
Ensure that you are only contracting with the intended party or parties.
Ensure there are no listed third-party beneficiaries.
Rationale
As it is easier to bring suit against a party with whom one has a written contract, written contracts should not include rights for parties who do not sign the contract.
The concept of privity of contract has been extended by some court decisions to anyone who conceivably could be harmed by the actions of the consultant even if no contract with the consultant exists.
Including a restrictive provision addressing third-party liability in all contracts on the project is protective.
Sample Wording
Consultant's services are intended for the Client's sole use and benefit and solely for the Client's use on the Project. Except as agreed to in writing, Consultant's services and work product shall not be used or relied upon by any other person or entity, or for any purpose following substantial completion of the Project. Further, nothing contained in this Agreement, and no act or failure to act or representation, statement, report or opinion or the giving of or failure to give information by either party hereto, shall create a contractual relationship with or a cause of action in favor of a third party against either the Client or the Consultant.
12. TIMELESSNESS OF PERFORMANCE
Recommended Action
Delete any "time is of the essence" language.
Include in your contract a "reasonable time to perform" clause.
Include in your contract a statement that you will perform your services in an effort to meet schedules, but also consistent with your standard of care.
Rationale
The phrase "time is of the essence" has been interpreted as a warranty that services must be completed within a given schedule, and could subject you to claims for delays not caused by your negligence, which would be uninsurable.
It is difficult to establish accurate time estimates for performing professional services. Your contract clause should be written in general terms that will give you enough flexibility to do a proper, professional job.
Project schedules are impacted by many different parties and issues (e.g., Covid-19) not under your control.
Sample Wording
The Consultant shall prepare and submit for the Client's approval a schedule for the performance of the Consultant's services. This schedule shall include reasonable allowances for review and approval times required by the Client, performance of services by the Client's consultants, and review and approval times required by public authorities with jurisdiction over the Project. This schedule shall be equitably adjusted as the Project progresses, allowing for changes in scope, character or size of the Project requested by the Client, or for delays or other causes beyond the Consultant's reasonable control. The Consultant shall only be required to perform its services as expeditiously as is consistent with reasonable skill and care.
Source: "Contract Review Checklist." Published by the Professional Liability Agents Network (PLAN). Reprinted with permission.