Design Professionals live in a world of contracts. Service contracts and construction contracts are closely related to their work. They also come across insurance contracts both as they relate to their own risk management as well as performing work paid for by insurers.
Definitions of Contract
"Contract" can be defined in several ways. The simplest definition is that a contract is an agreement. The other end of the definition spectrum suggests that a contract is what the entire body of contract law that has evolved over centuries says it is. To more clearly understand the contract concept consider a few accepted definitions.
Webster's New Collegiate Dictionary defines the term contract as: "a binding agreement between two or more persons or parties... a writing made by the parties to evidence the terms and conditions of a contract..."
Black's Law Dictionary says that a contract is: "A promissory agreement between two or more persons that creates, modifies, or destroys a legal relation... An agreement, upon sufficient consideration, to do or not to do a particular thing... The writing which contains the agreement of parties, with the terms and conditions, and which serves as a proof of the obligation..."
Black's Law Dictionary goes on for several pages discussing various aspects of contracts. Included in this discussion are classifications such as commutative vs. independent, consensual and real, constructive, divisible vs. indivisible, entire vs. severable, executed and executory, express and implied, gratuitous and onerous, joint and several, parole vs. written, quasi, and so on. The intimidating volume of contract specifics is the result of hundreds of years of refining the legal concepts as needed to address the many disputes that have arisen out of what initially may have been simple agreements.
The good news for the design professional is that it is necessary to grasp only some basic concepts of contract law to survive as a consultant and to limit the risks of liability exposure to a reasonable level. Experience with malpractice claims shows, however, that many design professionals do not have the needed minimal understanding of contract principles needed to reduce the risk of liability exposure. Hopefully the following discussion will shed sufficient light on the subject to improve the design professional's odds in dealings with clients.
Types of Contracts
Contracts can be viewed as spanning a spectrum ranging from standardized, formal documents to oral agreements and even to implied agreements. The degree of formality needed in defining the contract depends on what is at stake. A municipality contracting for the design of a multi-million dollar waste water facility may define the agreement in a several hundred page written contract. In contrast, a surveyor often agrees to provide a mortgage survey based on a telephone order.
Let's examine this spectrum of contracts.
Most design professionals are familiar with the formal, written design service contract. There can be two general types. One is the standardized form ‑‑ usually the standard AIA (American Institute of Architects) or EJCDC (Engineers' Joint Contract Documents Committee) forms. It is not unusual for frequent users of consulting services ‑‑ such a government agencies, utilities, and major corporations ‑‑ to have their own standardized forms. Another type of formal, written contract is the manuscript contract. These might be custom written for a major one of a kind project.
Standardized Forms - AIA or EJCDC
The wisdom of not "reinventing the wheel" suggests the use of standardized service contract documents. The American Institute of Architects has historically taken the lead in developing and refining standardized design service and construction agreement documentation. These agreements have been updated periodically to incorporate experience with their use. Also, issues arising out of these standardized documents have been litigated providing precedents which may reduce the costs of dispute resolution. Use of the standardized documents allows the design professional to have the benefits of time and court tested language which is likely to be understood by the many participants in the construction industry.
Although the AIA documents are likely the most frequently used, the EJCDC standardized contract forms are also familiar to many in the construction industry. They cover the essential service contract issues in a rational and time tested manner. The design professional with an interest in limiting potential professional liability exposure would be wise to use the time and court tested standardized agreement language recommended by the AIA or the EJCDC.
Standardized Forms - Government or Corporate
Government agencies, utilities, and major corporations develop standardized service contract forms for purchasing design consulting services. Often such forms favor the project owner. Indications of this include the inclination to seek warranties, guarantees, indemnifications, and hold harmless commitments from the design professional. Occasionally, such forms are written in language more like that for the purchase of equipment than for the purchase of professional services. Sometimes the design professional is offered work under these agreements on a "take it or leave it" basis.
When confronted with such a choice the design professional needs to evaluate the risks involved. The risk not only includes acceptance of responsibility beyond normal professional standards but also the risk of losing professional liability insurance coverage. Professional liability insurance policies often contain exclusions for liability based on warranties and the assumption of liability by contract.
Another consideration in evaluating risk associated with a government or corporate form of agreement is whether the agreement contains requirements for work or documentation not normally provided as part of the design service. For example, government requirements with regard to discrimination, compensation of employees, safety or records keeping can increase the cost of delivering services. If the design professional is familiar with these requirements then little risk is involved. If the design professional is new to working with the government, these requirements can increase the cost of providing the service. The fee structure may need to be adjusted accordingly.
The design professional can face the choice of losing an assignment by attempting to negotiate out undesirable language or accepting the liability risks represented by such language. This type of language tests the design firm's commitment to its risk management program.
An alternative to standardized design service contracts is a manuscript agreement. These are often drafted with the assistance of legal counsel. One can speculate that they are used either because drafting counsel is not familiar with the standardized forms (perhaps indicating that counsel might not have sufficient contact with the construction industry) or because the project is sufficiently unique and large to warrant the expenditure time and money necessary to reinvent the contract wheel.
When either drafting, reviewing or negotiating a manuscript service agreement it is useful to find or develop a checklist of the key issues to be addressed. Without such a checklist the risk of overlooking some often disputed issue or including troublesome language increases.
When foreign work or a unique and large project is involved or a unique or limited service is to be provided, a manuscript agreement meeting custom needs can be used. Presumably, such contracts are negotiated in detail between the owner and the design professional. Such an effort is much more costly than use of the standard forms. However, the manuscript agreement can accommodate unique conditions which might allow acceptance of small risks normally assumed by the owner in exchange for increased fees or passing off other, greater risks to the owner or contractor.
Less Formal Written
Often design and construction related services are provided under a less detailed and less formal written agreement. Such "less formal" agreements can become the subject of litigation needed to address and resolve issues that are not covered by the service agreement.
Despite the risks involved there are situations in which a less formal agreement is sufficient. For example, if there is a long standing relationship between the design professional and the client, and the service to be provided and the terms under which it is to be provided have been defined by a long standing pattern of dealing, a short agreement may be adequate. For example, an architect who undertakes to adapt a standardized franchise building to a given site, may have established a routine method of performing the service.
Less Formal Written - Confirmed by Letter
Confirmation of a verbal agreement for design services by letter can be a useful method of documenting the agreement. Problems can arise, however, when the party who documents the understanding of the agreement understands it differently from the other party. The difference in understanding often does not come into focus until a dispute develops. Differing expectations combined with the omission of some key item (such as who will be responsible for obtaining construction permits or checking for easements across the parcel) can lead to costly disputes. The problem with letters, unless they follow some checklist or standardized format, is that they focus on those aspects of the agreement of interest to the writer of the letter.
Less Formal Written - Purchase Order
A purchase order similar to those used for the purchase of some standardized commodity is sometimes used for the purchase of design related services. To the extent that such services are standard, predictable, and are commonly understood, the purchase order may be adequate documentation. Surveys, geotechnical investigations, construction inspection services and repetitive designs are often purchased in this way. However, difficult liability issues can arise where the service can be interpreted in several different ways by the parties involved in the project. For example, when construction management services are rendered under a purchase order agreement, the vendor of those services faces increased risks in connection with accidents, delay/extra claims, and deficiencies in the completed project.
Where there is a longstanding relationship and operating procedures have been developed, such limited documentation may be sufficient. However, if a dispute develops, it could be costly to gather testimony needed to define the terms and conditions of the agreement.
Occasionally design professionals labor under the misconception that if there is no written contract they cannot be held liable. The law recognizes oral contracts. When a dispute arises the major problem becomes defining the terms and conditions of an oral contract. Evidence of those terms and conditions is the testimony of the various parties connected with and observing the relationship created by the oral contract. Ultimately, after a dispute emerges, the contract is "written" consistently with various "appearances" as observed by those with a direct interest and outside observers. In such situations the observation that "if it waddles like a duck, and if it quacks like a duck then it must be a duck" can apply ‑‑ sometimes even when one of the parties involved intended it to be a "swan." Lack of specificity in an oral contract can lead to frustrated expectations and costly disputes.
If it becomes apparent that both parties misunderstood the terms and conditions of the verbal agreement (mutual mistake) the court can determine that no agreement existed.
One step beyond the oral contract is the implied contract. Yes, a contract can be found to exist even where none was intended by one of the parties. One party can argue intent to create a contract when the other party acted consistently with there being a contract. For example, when a design professional providing construction site services under an "observation and reporting only" service contract begins to take an active role in the construction process by giving instructions to construction workers and the contractor and owner become aware of and dependent on such active participation, it is possible that a court may conclude that the service contract was implicitly altered by the actions of the design professional.
Hopefully this brief introduction to the world of contracts can help design professionals understand some of the basics of the legal world in which services are provided.
This article expresses ideas for consideration and should not be taken as recommendations applicable to any specific situation. When making a decision on how to address a specific situation consulting with an experienced attorney is recommended.
© 2017 John Wersyn, All Rights Reserved