2007 international conference contracting infirmity: professional services contract wordings as the...

2007 International 2007 International ConferenceConference

Contracting Infirmity:Contracting Infirmity:

Professional Services Contract Wordings as the First Line of Defense

for Professional Service Firms

Contracting InfirmityContracting InfirmityPanel MembersPanel Members

• MODERATOR: Nancy Adams, AttorneyMintz, Levin, Cohn, Ferris, Glovsky & Popeo P.C.

• Stephen Cavallaro, ManagerProfessional Risk Facilities

• Timothy Esler, PrincipalFenner & Esler Insurance

• Thomas Schaufelberger, PartnerSaul Ewing, LLP

• James Schwartz, UnderwriterSpecialty Lines, Beazley Group plc

• Michael Stone, PartnerPeabody & Arnold, LLP

Key ConsiderationsKey Considerations

• Scope of Services

• Standards of Performance

• Limitations & Avoidance of Liability

Scope of Services

• Clearly define the deliverables under the contract; outline the Insured’s responsibilities

• Avoid ambiguous contract language

• Manage client expectations relative to the project deliverables

Case Study #1Case Study #1

• Insured: California Property Management firm contracted to manage third party property (138 units)

• Scope of Services included the following:

To display, “For Lease” signs on the property and to lease or rent the property in the name of the Owner, and to negotiate and execute leases and rental agreements, thereon together with renewals of the leases and renegotiations of the leases

Case Study #1 Case Study #1 (cont.)(cont.)

• Dispute: Client alleges the Insured failed to obtain proper annual rental increases as defined by Section 8 of the Hawthorne Housing Authority (“HHA”)

• Discovery indicated there was clear liability on the part of the Insured for failing to obtain maximum rental increases over a 2 year period pursuant to CA Law

• Outcome: As a result of the Insured’s negligence, the client suffered economic loss


• Closing attorney was retained by the lender to handle a residential mortgage loan (the mortgagor pays the fees for the closing attorney)

• Scope of services limited by the standard (statutory) language for mortgages on personal residences which mandates the following language in the closing documents which are sent to the mortgagor: The responsibility of the mortgagee’s attorney is

to protect the interest of the mortgagee The mortgagor may, at his own expense,

engage an attorney of his choice to represent his interest in the transaction


• Closing attorney writes to mortgagors and offers the following:

As a service to you, we offer to prepare a Declaration of Homestead at the closing for a fee of $125.00. The Homestead election allows, in general terms, a homeowner to protect his/her primary home and the equity built up in the home from attachment and seizure by many creditors

The mortgagors opted to engage the closing attorney services for that purpose

Case Study #2Case Study #2 (cont.)(cont.)

• Following the closing a dispute arose with an abutter over the property lines. Could the mortgagors rely upon the closing attorney to protect their interests in connection with the purchase?

• Settlement of $130,000


• Firm: ABC Architecture

• Location: Domestic

• Services: Building rehab along with roof replacement. The insured firm entered into an agreement with the State to provide architectural design and contract administration services for this re-roofing project. This included periodic site visits for general conformance with design intent.

• Sub-consultants – we engaged a roofing specialist who is a Professional Engineer.


• Our Scope of Work Document states:

• That the construction documents prepared by the insured firm “shall provide detail beyond that required to merely show the nature and character of the work to be performed. Construction documents shall provide sufficient information in detail to describe and clearly delineate all methods of construction required for this project.”

• The SOW also requires the insured firm, based on pre-construction findings, to “develop solutions that will achieve a practical and achievable method of installing a new roof and maintain operation of the facility” and the design documents “shall state that the contractor shall comply with all OSHA safety requirements.”


• Claim – an individual working for the roofing contractor falls from height [20 feet]. Father of 3 in his mid-30’s is now a quadriplegic with diminished cognitive abilities.

• Total Loss – Estimated damages are between $15 million and $20 million.

Standard of CareStandard of Care

• Heightened Standards of Care Representations Marketing and Advertising Materials

• Inadvertent Warranties


• The owner of a fishing vessel obtained $1 million of Protection & Indemnity (liability) coverage through its insurance broker

• The owner switched insurance brokers several times but continued to maintain the same amount of coverage. Although the annual renewal quotations noted in bold print that “Higher Limits Available on Request”, the owner never requested quotes for higher limits, never asked the broker if the coverage amount was appropriate for his needs and the broker never provided recommendations about the sufficiency of the liability coverage.


• A seaman on the vessel suffered a catastrophic injury leaving him paralyzed and he was awarded approximately $3 million to compensate him for his injuries

• The $1 million in liability coverage was insufficient to compensate him, the vessel & permit were sold at auction with the proceeds going to the seaman

• The owner brought an action against the broker alleging that the broker should have advised him that he needed additional insurance


• Case law on the standard of care is that there is no general duty of an insurance agent to ensure that the insurance policies procured by him provide adequate coverage

• Special circumstances can change the applicable legal duty if there is “assertion, representation and reliance”

Case Study #1Case Study #1 (cont.)(cont.)

• The broker’s website had the following language touting its activities:

“We systematically and comprehensively examine your potential maritime exposure, recognizing that protecting your corporate business risks is our primary concern”

Case Study #2

• ABC Architect retained by Owner to provide architectural services for Courthouse building

• At the end of the project, the Owner filed a claim against ABC claiming negligence and breach of warranty arising out of alleged errors and omissions

• Owner did not retain an expert to testify as to a breach of the standard of care

• ABC moved for summary judgment on the basis that expert testimony is required to prove a breach of the standard of care


Contract Language:

Architect shall provide its services in accordance with the highest degree of skill and care and shall be fully responsible for the professional and technical accuracy and the coordination of all work product furnished under this Agreement.

Case Study #2 (cont.)

Result:

Court denied summary judgment on the basis that the contract provision constituted a warranty which does not require proof through expert testimony

Limitations and Avoidance Limitations and Avoidance of Liabilityof Liability

• Indemnity Agreements

• Limitation of Liability

• Dispute Resolution

IndemnityIndemnity

• An agreement whereby one party agrees to secure another against an anticipated loss or damage

• Indemnification Provisions within a contract can be an effective tool for transferring liability, insulating an Insured from claims that are not otherwise covered by Insurance or would cause the Insured to be subject to a retention or deductible

Case Study #1

• Insured: Property Preservation Specialist contracting with Lending Institutions

• Scope of Services: Property preservation, including eviction scheduling & completion, debris & property removal, lock change and routine property maintenance

• Facts: Insured contracted with a lending institution to provide property preservation services for a foreclosed property located in FL. The Insured then entered into a separate agreement with a subcontractor who was ultimately responsible for performing the property preservation services.


• Dispute: The claimant/former property owner sued the lending institution, claiming damages in excess of $50,000, resulting from lost/damaged property or goods

• Lending Institution seeks indemnity as provided under the contract executed with the Insured


• Insured places their Insurance Carrier on notice• Insurer and outside counsel bring claim against the

subcontractor to enforce an Indemnity agreement executed between the Insured and the subcontractor, which stated the following:Indemnity: Subcontractor agrees to save, defend and indemnify and hold harmless Client from and against any and all claims of any kind, whatsoever arising from (i) any act, omission or negligence by Subcontractor, Subcontractor’s agents, employee’s, representatives, subcontractors and any and all others acting upon Subcontractor’s behalf, or (ii) any accident injury or damage caused by any person or entity, or to the property of any person, or entity, where such accident, damages or injury resulted or is claimed to have resulted from any act, omission or negligence on Subcontractor’s part, or

Indemnity: Compare … Indemnity: Compare …

To the fullest extent permitted by law the consultant shall indemnify, defend and hold harmless, the Owner and its agents and employees, from and against any and all demands, claims, disputes, suits, arbitration proceedings, damages, lawsuits and expenses including but not limited to attorney’s fees arising out of or resulting from the performance of the work of the consultant and which is caused in whole or in part by any negligent act or omission of the consultant or anyone employed by the consultant

With …

To the fullest extent permitted by law, the contractor shall indemnify and hold harmless the owner, architect/engineer, architect/engineer’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorney’s fees and court costs, arising out of or resulting from performance or non-performance of the Work provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the work itself) including loss of use resulting therefrom, but only to the extent cause in whole or in part by negligent acts or omissions of the Contractor, a subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

Limitations of Liability Limitations of Liability

Legislation may limit in some jurisdictions the scope of permissible indemnification & may prevent:

Indemnification for liability caused by or resulting from the sole negligence of the indemnitee

Indemnification for liability caused by or resulting from, in whole or in part, negligence of the indemnitee

Overbreadth of clause prevented enforcement of an indemnification agreement for “all claims” arising out of the Project or the Work

Limitation of LiabilityLimitation of Liability

• Contractual provision restricting the amount of damages a client may recover as a result of an Insured’s negligence

• Typically coverage is limited to the amount of fees paid under the contract

• Exclusion of Liability for special, incidental, indirect or consequential damages

• Use of Milestones or Deliverables, including client sign off and acceptance on each phase of the project


• Insured: Custom Software Developer – ABC Company

• Scope of Services: Develop a web application, including an e-commerce site for a small retail golf store

• Dispute: Client alleges the platform incorrectly codes products and prices over a 3 month period causing the client a financial loss in the amount of $300,000

• Client brings suit against the Insured seeking damages in the amount of $300,000


• Limit of Liability Language in the Contract: In no event shall ABC Company be liable to the client for any monetary damages arising hereunder or relating to the Services & Deliverables which exceed the fees paid to ABC Company under this agreement

• Outcome: Claim is settled for $120,000, which were the fees paid by the client

Limitations of LiabilityLimitations of Liability

• Generally limit exposure to consequential damages

• Limited damages to fee paid or portion thereof

• Conspicuous and not unconscionable

• Will usually be enforcedOne Example: In no event shall [A&E] be liable to

Owner whether in contract, warranty, tort (including negligence) or otherwise for any special, indirect, incidental or consequential damages of any kind or nature whatsoever.

Limitation of LiabilityLimitation of Liability

Inapplicability to Attorney Claims

• State ethical rules governing attorneys as well as the ABA Model Code prohibit a lawyer from prospectively limiting liability to a client for malpractice. They also prohibit the settlement of liability claims with an unrepresented client or former client “without first advising that person in writing that independent representation is appropriate in connection therewith”.

Dispute Resolution or Dispute Resolution or Contractual RemediesContractual Remedies

• Dispute Resolution: Methods of resolving business related disputes outside of traditional legal and administrative forums

• Examples: Arbitration or Mediation Arbitration: Arbitration is the procedure by which parties agree to

submit their disputes to an independent neutral third party, known as an arbitrator, who considers arguments and evidence from both sides, then hands down a final & (usually) binding decision.

Mediation: The process whereby the parties involved utilize an outside party to help them reach a mutually agreeable settlement. Rather than dictate a solution to the dispute between labor and management, the mediator—who maintains neutrality throughout—suggests various proposals to help the two parties reach a mutually agreeable solution

Dispute Resolution or Dispute Resolution or Contractual RemediesContractual Remedies

• Contractual Remedies: Provision within the contract that affords the Insured the ability to correct or remedy any errors before they escalate into an actual claim Example: Insured is a Software Developer, implementing a

Enterprise Resource Planning System, automating critical business process such as manufacturing, distribution, payroll and finance.

Contractual Remedy Language: The client’s remedies for breaches of the foregoing warranty shall be initially limited to ABC Company’s efforts to 1. Correct any non-conforming services, 2. Repair any non-confirming Deliverables, or 3. Replace any non conforming deliverables.

• Importance: If the client is not satisfied with the ERP system, the Insured has the ability to alleviate the client’s concerns, before it results in actual litigation

Many thanks to . . . Many thanks to . . .

• Nancy Adams

• Stephen Cavallaro

• Timothy Esler

• Thomas Schaufelberger

• James Schwartz

• Michael Stone

2007 international conference contracting infirmity: professional services contract wordings as the...

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