The article below is the fifth and final installment of a five part article from the March 2017 issue of The Practical Real Estate Lawyer discussing issues and concerns in design and construction contracts, from an owner’s perspective. Due to the length of the original article, it has been broken into five parts.
Limitations on Architect’s Liability. Many architects now modify the initial draft of proposed agreements by adding a cap on the architect’s monetary liability. It is not uncommon to see an architect to try to limit its liability to the amount of its fees on the project or some multiple of that amount. Another approach used by architects is to link the cap on the architect’s potential monetary liability to the policy limits of the architect’s errors and omissions insurance. Related to the monetary cap are provisions that require a bilateral waiver of consequential damages. Of course, to the extent that consequential damages should arise out of an agreement for architectural services, the owner is the one that will most likely incur such damages. As a result, though it may initially sound fair or reasonable, any waiver of consequential damages will almost always be significantly more beneficial for the architect. The threshold issue for an owner with respect to consequential damages is whether to consent to a full waiver or negotiate for some other type of limitation on consequential damages. Below are proposed inserts that address several different approaches to this issue. Where an agreement for architectural services includes a full or partial waiver of consequential damages, there is still an issue as to what damages are properly categorized as consequential. Direct damages are often defined as damages that arise naturally or ordinarily out of a breach of contract. Consequential damages, on the other hand, are often defined as damages arising from special circumstances that are not ordinarily predictable. However, the line between what are considered direct versus consequential damages is not always clear and can vary from state to state. In the end, the distinction is a question of law that must be determined by a judge in the context of a specific case. As a result, to the extent an owner agrees to waive (in whole or part) consequential damages, it can make sense to insert language into the contract that better defines what the parties consider to constitute consequential damages for purposes of the waiver.
Sample Insert: Owner shall not be bound by any cap or similar limitation on Architect’s monetary liability set forth in the Form Agreement.
Sample Insert: Any provision in the Form Agreement pertaining to a general waiver of consequential damages shall not apply.
Sample Insert: For purposes of this Agreement, any waiver of “consequential damages” shall only be deemed to apply to consequential damages that, in the aggregate, exceed ____ percent (___%) of Architect’s fees under this Agreement.
Sample Insert: For purposes of this Agreement, the term “consequential damages” shall be limited to ________________________.
Sample Insert: Any waiver of consequential damages set forth in the Form Agreement shall not be deemed to negate or waive any liquidated damages provisions set forth in this Agreement.
Statutes of Limitation / Periods of Repose. In most states, design and construction claims are subject to both a statute of limitations and a statute of repose. Those two concepts are often conflated or confused, and I encourage anyone with questions as to the technical legal distinctions between the two to find an appropriate article on that subject. In general, a statute of repose is a period of time that runs from a specified event, such as completion of construction, while a statute of limitation is a time period that runs from the discovery of a claim. The application of both in the context of design and construction claims typically results in the following: any claims based on design and construction must be asserted, if at all, before the earlier to occur of a specified number of years after the completion of construction (statute of repose) or a specified number of years from the discovery of the claim (statute of limitation). In Minnesota, the applicable timeframes are ten years and two years, respectively (Minn. Stat. § 541.051(1)). In California, the statute of repose timeframe is ten years for latent defects and four years for patent defects, while the statute of limitations timeframe is one year from discovery of the claim (Cal. Civ. Proc. Code § 337.1, 337.15). Both architects and contractors have a strong interest in getting the clock started on the statute of repose as quickly as possible to reduce their respective exposure to claims by an owner. Most form construction agreements are produced by professional organizations consisting of design professionals and/or contractors (e.g., AIA and ConsensusDocs). As a result, many form agreements for architectural services provide that statutes of repose commence upon substantial (versus final) completion of the work. Other forms start the timeframes even sooner, as portions or phases of the project are completed. In addition to the earlier start time, some form agreements for architectural services specify a shorter overall period for claims than what is provided by applicable state law. To receive the full benefit of the applicable statutes, owners have an interest in waiting to start the clock on the statute of repose until the work is fully completed. The sample insert below addresses these issues.
Sample Insert: In the event that any time limitations on claims by Owner under the Form Agreement are shorter than the timeframes prescribed by applicable state law, the limitations set forth by statute shall prevail. All time limitations on claims shall run from final completion of the Work.
Attorneys’ Fees. Some, but not all, form architectural agreements include a provision that entitles the prevailing party in a dispute to its attorneys’ fees. Each owner must decide whether including an attorneys’ fees provision is the best strategy from its perspective. If the owner does not want to provide for attorneys’ fees, make sure that any attorneys’ fees provisions in the form document are deleted. Below are two sample inserts; one is for unilateral attorneys’ fees (i.e., only the owner gets the benefit), and the other is a bilateral provision. It is important to note that at least one state (California) has a code provision (Cal. Civ. Code § 1717) that automatically makes unilateral attorneys’ fees provisions bilateral.
Sample Insert (Unilateral): In the event that Architect should default in its obligations to Owner under this Agreement, Owner shall be entitled to recover from Architect, in addition to any other damages incurred by Owner, Owner’s reasonable costs (including reasonable attorneys’ and experts’ fees and costs) incurred by Owner to enforce this Agreement.
Sample Insert (Bilateral): In the event of any action or dispute between Owner and Architect arising out of this Agreement, the losing party shall pay the prevailing party a reasonable sum for attorneys’ fees incurred in bringing or defending such action and/or enforcing any judgment granted in such action.
Electronic Counterparts. It is getting less common these days to see blue ink original signatures on contracts or for both parties to sign the same original document. Instead, parties often execute an agreement through an exchange of originals or electronic copies of counterpart signature pages. The sample provision below accommodates that approach to execution of the form agreement and addendum. Another issue to consider is whether the parties want the ability to execute subsequent documents related to the construction contract electronically (e.g., change orders, lien waivers, etc.). The second sample insert is intended to be used in addition to the first sample insert to expand the ability for the parties to transmit signed documents electronically.
Sample Insert: The Form Agreement and this Addendum may each be executed in one or more counterparts, each of which shall be an original but all of which together shall be deemed to constitute a single document. Separate signature pages of either the Form Agreement or this Addendum may be attached to a copy of the Form Agreement or this Amendment, as applicable, in order to form a fully-executed document. Copies of signature pages delivered by one party to the other by electronic communications (e.g., fax or email) shall be deemed to constitute original signatures.
Sample Insert: The provisions of this paragraph shall apply to all documents generated in connection with this Agreement, including amendments, change orders, lien waivers and similar supplemental documents.
Wild Card Items. When using an addendum to modify a form agreement, it is often nice to have the addendum stand-alone without the need to mark-up or modify the form agreement to which the addendum applies. Often the form agreement, whether it is an AIA, ConsensusDocs or other form, will have some provisions that an owner will want to delete, in whole or part. One effective way to accomplish this task is to consolidate and list those changes in the addendum, using a provision similar to the sample insert below.
Sample Insert: The following provisions of the Form Agreement shall not apply to this Agreement:_______________________.
Andy Jacobson is a partner in the Real Estate Group at Maslon LLP in Minneapolis, Minnesota. His practice covers a broad range of commercial real estate issues, with particular focus on commercial and retail leasing, land use and telecommunications, as well as design- and construction-related agreements. Andy is a frequent author and speaker on real estate subjects and teaches Real Estate Transactions at the University of St. Thomas School of Law. A graduate of Boalt Hall School of Law at the University of California, Berkeley, Andy is also a registered architect, having earned his Bachelors of Architecture from California Polytechnic State University, and practiced architecture prior to attending law school. Andy is a member of both the Minnesota and California bars and can be reached at firstname.lastname@example.org.