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FIRMS SPEAK OUT AND SHARE THEIR INSIGHTS When Frank Dudek, president of Dudek (Encinitas, CA), a 300-person environmental consulting firm, was asked if he ever runs into problems with contractual agreements, he replied: “Yes, don’t all firms?” It appears that most do. We talked with three about their chal- lenges and solutions. Private versus public clients. “We practice al- most entirely in California, which has laws that protect design professionals to some degree, so most government agreements comply with – or will be made to comply with – those provi- sions and are therefore very similar,” Dudek says. “For non-design professional work, the language is usually less protective, but the li- ability is usually less also.” As a result, Dudek signs most government agreements without comment, but has oc- casionally received edits. For private clients, particularly development companies and con- tractors, the firm sees more requested edits. “If they are unwilling to comply on significant issues, we walk,” he says. “That said, with long-term, trusted clients of either type, we are more tolerant, having established a rela- tionship of trust, and tend to work out issues between staff.” Dudek says that the firm will employ an out- side former lead counsel from a large A/E firm that reviews most of its agreements as-need- ed, recommends changes, discusses strategy, negotiates with clients’ attorneys if necessary, and explains the risks to project managers when they sign to help avoid pitfalls. Know client history; manage risk. John Flint, se- nior vice president and managing director of lines of business at T.Y. Lin International (San Francisco, CA), a full-service infrastructure con- sulting firm with more than 2,500 employees, says that the risk must be weighed first. “In some cases, clients are not prone to litiga- tion, and their claims history is such that even though the clauses are unreasonable, there is little risk to the designers signing standard contracts as long as you deliver competent work,” he says. “You need to know your client well. In other cases, the commoditization of engineering services has squeezed all of us. This is reflected in the terms and conditions of agreements we are asked to sign. We find that if we identify all walk-away conditions up front, then we can focus on the issues that are negotiable to us and really make a difference in managing risk.” Dave Petrone, corporate counsel for MBP , (Fairfax, VA), a 273-person multi-disciplined construction consulting firm, says that the

firm is regularly asked to sign indemnification agreements that pose potentially significant uninsurable risks. He says the reasons vary: Some clients may not understand what indem- nification obligations can be insured under a professional liability policy, others may not be concerned about whether the obligation is in- surable, and others may use clauses that have been in existence for many years and have not been revised. Deal breakers. For Dudek: ❚ ❚ Assuming other parties’ liability for negli- gence or partial negligence ❚ ❚ Agreeing to provide service higher than the industry standard ❚ ❚ Unlimited and poorly defined liquidated and consequential damages ❚ ❚ Unrealistic schedules ❚ ❚ Defense costs before establishment of neg- ligence For T.Y Lin: ❚ ❚ Parent company guarantees ❚ ❚ Subsurface conditions related items For MBP: ❚ ❚ Any indemnity clause that subjects a profes- sional services firm to uninsurable risks Final words of wisdom. Flint: “If you approach every request with a clear statement of the level of risk that is priced into a proposal or assumed as part of contract negotiation, you can usually get the other side to understand your position and the exposure you are being asked to take on. Don’t be shy about stating clearly what the risk means to you. And be prepared to say how far you can move in the client’s direction and what it will cost (them) to do so. Usually the client understands your risks, and is unwilling to pay for the level of indemnification that he thinks he needs. But always be willing to walk away if the terms are too unreasonable. Finally, it is important that all involved in these negotiations think and act as owners – like it’s their money.” Petrone: “At minimum, all firms need to con- sider key factors when evaluating any unrea- sonable contractual liability terms and condi- tions to include indemnity clauses, and if given the opportunity to do so, try to explain the risks of such clauses, and suggest alternative language that might be acceptable to the cli- ent which is still fully protective of the client’s rights.” Dudek: “Stick will clients who truly value your services and will provide flexibility and trust.”

HOT OR NOT? What do you think? Is contractual liability a major issue for A/E/P and environmental firms today? Email your thoughts, experiences, and insights to Andrea Bennett at abennett@zweiggroup.com, and we’ll feature them in a future issue of THE ZWEIG LETTER .

of-pocket defense costs could far outweigh any returns on projects, unless the designer is one of the large firms. As an ESOP, our pockets are not that deep.” GLMV WEIGHS IN – DEFEND OR NOT? “We are a responsible midsize architec- ture/interior design firm that has been successful in the past with clients that have been reasonable regarding the indemnity liability that we share on projects,” McKee says. “We have been through train- ing regarding contracts, have master agreement templates – based on AIA and other documents – that have been reviewed by our attorney and insurance broker, and we review all agreements with a principal that is in charge of contract review. Prob- ably 70 percent to 80 percent of our agreements have limitations of li- ability clauses that have been negoti- ated with the client.” McKee adds that the firm is regu- larly on the phone with its attorney or insurance broker when there are questions/concerns regarding con- tract language or one-sided indem- nity clauses. He says GLMV ranks its choices as: ❚ ❚ There should be no indemnity, be- cause the firm assumes additional liability even if the language is ac- ceptable. ❚ ❚ Agree to a mutual indemnity clause to cover the architect’s negligent per- formance for professional services. ❚ ❚ Agree to a client indemnity, if they insist. McKee says that these contractual problems tend to occur with larger

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See RISK & LIABILITY, page 8

ER JULY 13, 2015, ISSUE 1111

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