Preparing for Repeat Business

Attorneys: Schoumacher, Bruce H.

Related Practices: Corporate/Commercial

Related Industries: Construction

 
Winter 2014
 
Design professionals and contractors look forward to repeat business from satisfied clients.  A satisfied client which regularly does construction projects insures a steady flow of work for the designer and contractor. 
 
With any client, design professionals and contractors must negotiate fair and profitable agreements with their clients.  The initial contract with a new client is extremely important because it invariably serves as a template for the contract for “follow on business.”  Accordingly, if the designer or contractor agrees to unfavorable terms in the first contract, the designer or contractor may not be able to change those terms in the subsequent contracts for future work.
 
Although design service agreements and construction contracts serve different purposes, there are some common terms and provisions.  One of the critical details a designer or contractor must consider when entering into an agreement is how to handle the responsibility for consequential damages in the event the designer or contractor breaches the agreement.
 
If a designer or contractor delays performance of the contract, the client may seek damages for late performance.  Under such circumstances, the client may seek to recover its consequential damages, such as lost profits, from the architect or designer.
 
If an agreement is silent on consequential damages, then the court or jury may award consequential damages, if the client can prove it is entitled to them.  To recover consequential damages or lost profit, the client must show that the parties contemplated such a loss when they contracted, that the lost profits resulted from the breach of contract, and that they can be calculated with a reasonable degree of certainty.
 
If a designer or contractor delays use of the project by the client, the client may sustain horrendous lost profits, especially if it is a major project, such as a hotel.  Accordingly, designers and contractors often insist that the client waive its right to collect consequential damages.
 
In a Virginia case, because a residential developer waived the right to collect consequential damages in the written agreement with an infrastructure contractor, the developer could not recover damages for increased taxes and interest, increased engineering costs, and increased cost of land planning due to late performance by the contractor.  There, the contract contained a provision that stated, “In no event shall any Party be liable for consequential, punitive or exemplary damages hereunder.”
 
When a design professional or contractor has entered into a contract with a client, it should determine whether the draft contains a mutual waiver of consequential damages as done in the agreement in the Virginia case.  Many common industry standard forms now contain mutual waivers of consequential damages, including the professional service agreements and construction contract forms of the American Institute of Architects.
 
This benefits both the client and the service provider.  If the draft does not contain a mutual waiver of consequential damages, then the designer or contractor should request that a waiver be included in the contract. 
 
If the designer or contractor hopes to obtain future business from a client, he or she must do a good job drafting, reviewing and negotiating the initial contract with the client.  The rules for the game must be set down at the beginning.  If the designer or contractor waits until the second, third, or later projects, to change the rules, it will be easier for the client to reject the request.
 
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Reprinted with permission from  Business Development: Helping AEC Firms Win New Business, Volume 1, Issue 2, November/December 2013.
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