7 Critical Mistakes Engineers and Architects Make During Project Negotiation and Execution: Mistake #2

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May 30, 2017
Author: Melissa Brumback

Author: Melissa Dewey Brumback is an AV-rated partner in the Raleigh, North Carolina law firm of Ragsdale Liggett, where she concentrates her practice on complex construction, commercial, and business litigation. For more information: https://constructionlawnc.com/contact-information/

Mistake #2 Allowing Unfair Or One-Sided Contract Terms To Persist

Avoiding this mistake is part of reviewing your contract well, but certain contract provisions are so unfair or one-sided that they deserve special attention during negotiations.  Three of the biggest unfair provisions you may encounter are indemnity, duty to defend, and consequential damages. 

a. Indemnity
Indemnity is the agreement, in advance, of a party to assume the  liability of another party.  Project owners sometimes have one-sided
indemnity clauses in their contracts stating that your firm will indemnify them from any claims.  Some of these provisions state that you are even required to indemnify the owner from the owner’s own negligence.  In North Carolina and other states, such a provision purporting to give someone else liability for your own negligence is void as against public policy.  If an indemnity provision is properly worded, however, it can still be valid.  There are pros and cons to indemnity, and the area is fraught with legal issues.  For example, most E&O policies do not provide coverage for assumed contractual liabilities such as indemnity clauses.

If there is to be indemnity in the contract, the least you should do is to push for a mutual indemnity provision, where each side agrees to
indemnify the other, and only to the extent the claim is based on that party’s negligence.

b. Duty to defend
The duty to defend can exist in a contract even if the indemnity clause is stricken.  If a duty to defend is stated, that requires you to pay
for the owner’s defense of the specified types of claims, whether or not your firm is negligent or even named as a defendant.  Usually, the duty to defend is tied to the indemnity provision, but it does not have to be. In addition to insurance coverage issues here, there is the likelihood that the owner will pick a law firm that is top of the line, leaving you no say, yet stuck with the legal bill.  At the minimum, if a duty to defend clause cannot be stricken, you should attempt to insert clauses to modify it by including language to allow your firm to hire, direct, or be consulted on the litigation defense.

c. Consequential damages
Consequential damages is another area where you need to pay  careful attention.  Consequential damages include everything that is not
a direct damage.  These are indirect sources of loss, such as loss of use, loss of profit, or even loss of bonding capacity.   The standard
construction agreements by AIA, EJCDC, and ConsensusDocs all have at least a partial mutual waiver of consequential damages.  However, if this provision is modified, it should be done with full knowledge of the increased risk.  Non-standard, owner-written contracts sometimes provide for consequential damages for the owner, but not for the design professional.  Again, if the provision is included, you should insist that it be mutual.

Mistake #1 Not Treating The Contract Seriously
Mistake #2 Allowing Unfair Or One-Sided Contract Terms To Persist
Mistake #3 Not Choosing The Proper Dispute Resolution Method
Mistake #4 Failing To Have Good Change Order and/or Failing to Have a Good Request for Information Processes
Mistake #5 Failing To Have A Quality Document Retention System
Mistake #6 Failing To Respond Properly To Claims Of Errors & Omission
Mistake #7 Failing To Involve Insurance Company & Lawyer At First Time Of Trouble

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