Reviewing a Contract
Design professionals typically encounter five generic types of professional service contracts:
- oral agreements
- letter agreements
- purchase orders
- standard form agreements (often with extensive modifications)
- custom agreements.
Custom agreements drafted by the prospective client and negotiated with the design professional present the greatest danger. While such agreements are often developed because of the unique nature of a project or because of events that occur in the normal course of dealing with the client, the use of custom contracts is driven by the client's intent to establish an unbalanced contractual relationship.
It is important that the design professional keep sight of the need to include project – specific and general condition terms in those agreements and strive to limit onerous, unrealistic, or ambiguous terms. In this effort, it is often useful to start by comparing the proposed agreement with the consensus industry documents from the AIA or EJCDC (links).
Contracts as a Productivity Tool
The contract negotiation process provides an opportunity to set the client design professional relationship on a firm and productive course. Both parties must have a full appreciation of the issues involved in the negotiation, their interrelationships and relative importance. From a risk management (link) perspective, the outcome of the contract negotiation process can be considered successful if it results in a contract that satisfies the following criteria:
- The expectations of the parties are clearly articulated and reasonable integrated.
- The rights and obligations of the parties are clearly expressed.
- Risks and rewards are addressed and fairly allocated
- Each source of risk is allocated to the party in the best position to control or otherwise manage the risk.
- Insurance is available to support any common law or contractual indemnity obligation.
- Mechanisms exist to reasonably accommodate change during the course of the project.
- The mutual understanding of the parties is confirmed in writing.
Basic Questions To ask When Reviewing Custom Contracts
Whenever a custom contract is reviewed, some basic questions should be asked.
- What does the language say?
- What does the language mean?
- Why is the language "better" than the consensus language?
- What problem is this language intended to solve?
- How does the language affect the design professional's responsibilities?
- Will the language have an adverse impact on the working relationship between the client and design professional?
The value of a carefully crafted professional service agreement and a coordinated agreement between the client and contractor is that the contractural roles and responsibilities are clearly communicated. Contract negotiations between the design professionals and the client, therefore, represent the prime opportunity to communicate with the client. The agreement that results should guide the relationship of the parties throughout their collaboration.
The information presented here is for professional liability risk management guidance. It is not legal advice nor should it be construed to be a determination on issues of coverage for specific claims. Contract language establishes legal duties and rights and should be reviewed by competent local legal counsel.
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