What’s in Your Contract?

You might not think that a freelance writer would have much in common with an engineer or architect. However, I read this story and saw parallels to a big issue in the practice of engineering and architecture:

If a Lawsuit Can Bury Gawker, What Could It Do to a Freelancer?

It is not my intent to wade into the controversies over the Gawker lawsuit, be it the question of the newsworthiness of celebrity gossip, free speech implications or the abuse of process that allows a billionaire to bankroll a lawsuit for the sole purpose of personal vengeance. However, the author’s discovery of the legal risks she was assuming by agreeing to indemnify a publisher for her work is recognizable to anyone who reviews, or (hopefully) negotiates professional services contracts for engineering and architecture. In the freelance author’s case, she was being required by the publisher to indemnify and even defend them for lawsuits associated with her story, despite the fact that her story was a “work-for-hire” that she would no longer control once accepted by the publisher. Sound familiar?

Firms imposing burdensome contract terms on their suppliers and professionals is nothing new. Nor is the suppliers’ or professionals’ casual acceptance of these terms anything new. Surely some design professionals are naive about their contracts and do not understand that their professional liability insurance will not fully cover an overly broad indemnity. Many probably assume that the contract will not be enforced. Others may understand the liability they are assuming and knowingly plan on seeking bankruptcy protection if a client attempts to collect. In any case, the client may assume that they have transferred some risk through an indemnity, although there will not be adequate resources available to the design professional to make good on it.

Professional service contracts with broad indemnities violate two fundamental principals for risk management: First, risk is best borne by the party who is best able to manage it. Second, when one party transfers risk to another party, they should pay a premium in exchange. A project owner is exposed to a variety of risk associated with project, including the business risk associated with financial performance of their investment, subsurface risk to the extent that the site conditions vary from what is encountered during the subsurface exploration and third party risks if adjacent property is damaged during construction. The design professional does not control any of these risks because they do not control market conditions at the time the project is completed, nor the geologic processes that created the site, nor, typically, the selection of the contractor and the contractor’s means and methods with the respect protection of adjacent structures. The design professional can only help the client better manage these risks, if given the scope and budget to do so.

If a client wants to transfer their risk to the design professional they should pay a premium. However, design professionals are not insurance underwriters (nor are they banks, but that’s another story). And would the type of client that demands that their risk be transferred to others be willing to pay for this service? I am guessing they would not willingly. Some firms might increase their fees as a sort of risk premium, just as some firms will require a slow-paying client to pay more. However, a lot of firms would be put out of business if a client were to enforce a broad indemnity for just one of their projects.

I am sometimes approached by a firms that makes extensive use of independent engineers to complete their projects. In one particular case, the indemnity in the contract prepared by the client’s attorney was so broad that the client could demand reimbursement to investigate allegations and potential claims, as well as defense costs, without the engineer (me) being found to have contributed to the loss, much less having performed negligently. When I confronted the firm’s representative who was negotiation the contract he assured me the intent was to protect them against misconduct and that I would be covered by their insurance. Of course that’s not what the contract said. No one had objected to these terms before, he said. I never received a response to my comments on the contract.

When presented with a burdensome client-prepared agreement, each firm needs to make a business decision about the risk and reward, preferably with the advice of a qualified attorney. However, accepting these terms without attempting to educate the client just allows them to become commonplace and is a disservice to your profession. If design professionals routinely agree to assume clients’ risks without compensation or the means to control the risks, it becomes difficult to argue that accepting these risks is not ordinary and customary. The client can say that if you don’t accept the terms someone else will. After all, no one has objected before.

The information and statements in this document are for information purposes only and do not comprise the professional advice of the author or create a professional relationship between reader and author.

Need help managing risk for your engineering, architecture or construction business? See also: Problem Solving & Consulting for A/E/C fims, Risk Management