Having a badly Drafted Contract is Worse Than Having No Contract At All

Rinat B. Klier Erlich

I. Benefits of a Well Drafted Contract

Contracts can insulate professionals from liability. They can impose a shorter statute of limitation, impose a requirement to mediate (as a pre-requisite before filing a lawsuit with the detriment that failing to do so will prevent the prevailing party for recovering attorney’s fees) and they can even provide limitation on the defendant’s scope of work. Other useful contractual limitations may include for example, waiver of jury, limitation on damages to the contract amount (courts have held that in the most part this is not unconscionable) and choices of venue. Even choices of venue can be debilitating on parties when they need to litigate in a State or in a County that is not close to the plaintiff’s principal place of business.

A. Shorter Statute of Limitation

In Brisbane Lodging, L.P. v. Webcor Builders, Inc., 216 Cal.App.4th 1249, 157 Cal.Rptr.3d 467 (Cal.App. 1 Dist., June 03, 2013) a hotel construction project owner filed an action against the builder relating to latent construction defects. The contract at issue stated that the statute of limitations began to run on date of substantial completion, not the date of discovery, as is usually the case with unknown latent defects. The Court held that a contract provision abrogating the delayed discovery rule was enforceable. Thus, the action was barred by the statute of limitations. The provision was not contrary to public policy, inasmuch as any public policy relating to statutes of limitations relates to the shortening of time to bring an action, not lengthening it. Moreover, it was freely entered into by parties represented by legal counsel, engaged in a sophisticated commercial construction project, and the parties were on equal footing in the negotiation.

B. Limitation on Scope of Duties

Often, plaintiffs will attempt to impose duties that are not specifically enumerated and the professional must rely on the contract to limit its scope of work. In Bonadiman- McCain Inc. v. Snow (1960) 183 Cal.App.3d 58, the owner argued that his architect did not give proper advice for the selection of the general contractor and engineer. The court held that this “did not fall within the duties ordinarily assumed upon an architect.”

Similarly, in Picozzi v. Wesketch Architecture, 2014 WL 3510782 (N.J. July 17, 2014) plaintiff complained that the architect produced plans for a home approximately 6,000 square feet more than called for in the contract, with an estimated construction cost of $6-$8 million more than anticipated. The Court found that plaintiff was consulted regularly regarding the plans and approved same, and the contract expressly provided that the estimate of cost in the contract was a “benchmark.” Therefore, having a clearly defined and narrow scope of work is important. However, if contracts are vague or broad, they may expand the professional’s duty to anything related to the matter in the contract. An overbroad scope of work can read like “Architect will furnish to owner all professional services necessary or appropriate for the development and construction of the project. Architect agrees to perform the services in accordance with the owner’s approved program, objectives and criteria.”

II. Contracts With Unintended Result

A. Defending Projects Where There is a Contract But it is Not Followed

The greatest risks are in projects where the professionals work on the fly and exceed their contract terms. Examples are where there may be a beneficial contractual provision but the professional goes beyond it. Another example of going beyond the contract, is where the professional has a statute of limitation but then he provides additional services afterwards. In Regency Club at Wallkill, LLC v. Appel Design Group, P.A., 2013 WL 6246394 (N.Y. App. Div. Dec. 4, 2013) the court held that plaintiff’s arguments for the continuous representation exception to surveyor and architect’s limitations argument could not be resolved on a motion to dismiss where defendants provided additional services in connection with a government investigation of a project after the time of the project’s substantial completion. The same is true with attorneys who continue to provide services or do not terminate the relationship clearly.

In Beacon Residential Community Ass’n v. Skidmore, Owings, & Merrill, LLP, 2014 WL 2988058 (CA 7/3/14) a homeowners association sued the architects of condominium project over design defects. The architects did not make the final decision on how the homes would be built, but the Supreme Court held that “an architect owes a duty of care to future homeowners in the design of a residential building where … the architect is a principal architect on the project—that is, the architect, in providing professional design services, is not subordinate to other design professionals.”

B. Contradictory Language

Having a contract is not the ultimate end all. Not only can the contract expand the duty or be ignored at a great risk as discussed above, but contractual provisions can be contradictory as the relationships in the construction setting are complicated. Some parties have indemnity agreements that are contradictory and sometimes they will enter into multiple contracts with different agreements.

Ultimately, sorting these issues becomes challenging when there are many parties and different contracts like in construction defect cases.

C. Risks of Adding Unintended Indemnity

Indemnity agreements are particularly complex. Indemnity can be “specific” or “general.” “Specific” are actually broader than “general” indemnity provisions. To analyze an indemnity agreement, one must look at the indemnitor, the indemnitee, what t riggers the action causing the obligation to indemnify, and the scope of claims or damages from which there is indemnity.

There can be active or passive negligence that triggers the indemnity. Passive negligence is mere non-feasance. Non-feasance may be vicarious liability, failure to discover a dangerous condition, or failure to provide a duty imposed by law (for example, failing to provide a safe working environment.) Active negligence requires an affirmative act which falls below the standard of care, i.e. breach of a duty. Maryland Casualty Co. v. Bailey & Sons, Inc. (1995) 35 Cal.App.4th 856 held that strict liability of developer does not equate to “active” negligence.

Courts analyzing these provisions typically look at the express language. If it does not specifically state that something will be indemnified, then the court will assume it is not being indemnified. Indemnity provisions are to be strictly construed against the indemnitee. Rossmoor Sanitation, Inc. v. Pylon 13 Cal.3d 622. California Civil Code §2778 provides that the indemnitee defend the indemnitor after a demand is made upon the indemnitor, and that any judgment against the indemnitee is conclusive on the indemnitor if the indemnitor failed to defend. In view thereof, if the subcontractor refuses to accept the defense pursuant to an indemnity agreement, it assumes the risk of any judgment imposed against the indemnitee, if it is found that indemnification was owing.

Crawford v Weathershield Mfg. Inc. (2008) 44 Cal.4th 541 was an important case for indemnity agreements. Therein the court held that the duty to defend requires an immediate defense. Even if the indemnity contract requires a finding of fault, the duty to defend was triggered upon demand. Subsequently, UDC-Universal Development, L.P. v. CH2M Hill 2010 DJDAR 794 interpreted design professionals duty to defend under an indemnity agreement following Crawford. The court held that the design professional was obligated to defend the developer even though CH2M Hill was found by a jury not to be negligent. This was based on the language in their agreement that CH2M Hill would “defend any suit, action or demand brought against Developer of Owner on any claim or demand covered herein” to the extent it arose out of or was in any way connected with any negligent act or omission by CH2M Hill.

III. The Risks (or Benefits) of Having No Contract

An unintended expansion of duties can also happen when there is no contract. Where there is a contract, there is a risk that a court will insert expanded provisions if the scope of duty is not well defined, but when there is no contract there is absolutely no control over the extent of the professional’s duty.

As discussed above, a well drafted contract can limit the scope of the professional’s duties. However, when the contract language is broad, the Court can find, as a matter of law, that the duty was extended. This will not happen where there is no contract.