What Should My Contract Say? (Conclusion)

My previous three posts have explained and illustrated four critical provisions that should be included in most design professional contracts. In this post I will explain a fifth critical provision and I will conclude my discussion on what your contracts should say.

ATTORNEY’S FEES

Let me start this discussion by being clear: you must have an attorney’s fee provision in EVERY contract you sign from now on. Why so adamant, you may ask? Why is it that critical? The prevailing party in any lawsuit will be paid its attorney’s fees by the losing party, right? So, wouldn’t including such a provision in my contract just be redundant? If you’ve ever wondered something similar to this, you’re probably not alone. But, these questions are based on a false assumption. Let me give you an example, which will help me make my point.

Recently, I represented a landlord in a dispute over a non-compete clause in a lease agreement. The landlord owned a grocery store that was the anchor tenant of a retail development. The landlord signed a lease with a tenant that wanted to operate a restaurant in one of the retail spaces connected to the grocery store. In the lease, the parties agreed that the landlord would not compete with the tenant by selling items in the grocery store deli that were similar to the restaurant’s menu items. Several months after signing the lease, and after some unfruitful negotiations, the tenant filed a lawsuit against the landlord for breach of the non-compete agreement. The tenant also sought a preliminary injunction, which if granted by the court, would force the landlord to stop selling the supposedly competing items in its deli.

Faced with the lawsuit, the landlord had to defend itself, particularly against the possibility of a preliminary injunction. We successfully defended against the injunction, and the tenant subsequently dropped its lawsuit against the landlord. The problem was, although the landlord won in court, it was still left with an approximately $10,000 bill for legal fees, which the landlord could not force the tenant to pay. This may seem like an illogical or harsh penalty for prevailing in a lawsuit, but that is the legal system we work in.

The outcome in that case, at least regarding attorney’s fees, was dictated by the “American Rule”.That rule, with a seemingly contradictory moniker, holds that both parties to a lawsuit pay their own way, no matter who wins. There are reasons for this rule. For one, we as a society do not want to discourage individuals from bringing meritorious claims for fear of having to pay the other side’s attorney’s fees. Related to that is the possible benefit society may lose if the party with a meritorious claim did not bring that claim because it did not want to risk paying the other side’s attorney’s fees. Whether we agree with these reasons is a debate for another day. But whatever the reason, the rule means that a plaintiff can file a lawsuit against a defendant, which the defendant may spend tens of thousands of dollars to successfully defend, and the defendant will be required to pay all of its own attorney’s fees. Undoubtedly, the defendant in that situation, similar to my landlord-client in the example above, will not be pleased with the effects of the rule.

Thankfully then, there are two exceptions to the general rule. The first is the statutory exception. This exception is that a prevailing party can recover its attorney’s fees (i.e., make the losing party pay for them) if a statute allows for it. For example, Utah’s mechanic’s lien statute states that the prevailing party on any action to foreclose a mechanic’s lien is entitled to an award of the reasonable attorney’s fees it incurred to prevail in that action. There are many statutes that similarly provide for attorney’s fees, but the problem is those statutes are out of your control. In other words, your situation may or may not fall within a governing statute, which is why the second exception should be your fall back.

The second exception is that a prevailing party can recover its attorney’s fees if a contract allows for it. This exception is entirely within your control, which is why every contract you sign should simply state that the prevailing party in any lawsuit or dispute that arises out of that contract will be entitled to be paid its attorney’s fees by the losing party. Every time you do not include an attorney’s fee provision in your contracts, you expose yourself or your firm to the risk of successfully bringing or defending a lawsuit and still being required to pay your own attorney’s fees. That risk can severely limit your options if you find yourself facing a lawsuit. You do not want to be facing the question of spending more in attorney’s fees than the amount of money you may be entitled to in that lawsuit. Spending $40,000 to recover $20,000 is throwing good money after bad—it is a bad business risk. Including an attorney’s fee provision in every contract will go a long way to eliminating that risk.

CONCLUSION

A fact of life in the world of a design professional is risk. Risk that you may be liable for not adhering to higher standard of care. Risk that you may be liable for losses that far exceed anything you or your firm are able to pay. Risk that you will have to indemnify another party, and even defend them, against claims that may not have been entirely caused by you or your firm. Risk that you may be personally liable for your own errors and omissions. And risk that you will prevail in a lawsuit, but be stuck with a legal bill that far exceeds anything you gained by prevailing in that suit. By recognizing these foreseeable risks and utilizing the contractual provisions I’ve discussed in these posts that reduce or eliminate those risks, you will help ensure you and your firm continue to survive and thrive in an uncertain industry.

What Should My Contract Say? (Continued)

This post continues the discussion I started in my previous two posts. In my last post I explained the virtues of limitation of liability clauses and how such clauses can significantly reduce bet-the-business risks that are often encountered in design professional contracts. This post adds to that discussion by briefly explaining indemnity clauses and sole remedy clauses.

INDEMNITY

Speaking of bet-the-business risks, perhaps nowhere are those risks more prevalent than with indemnity clauses. Indemnity is basically an obligation to make good any loss, damage, or liability incurred by another party. Most often, indemnity takes the shape of reimbursement or compensation for a loss or damage sustained by another party. (The most frequently encountered example of indemnity is in the context of insurance. When an insured person sustains damage for which they have insurance, the insurance company indemnifies the insured person by compensating them for the loss.) It is not surprising then that a design professional that has agreed to indemnify another party may not only end up with its own losses to bear, but also the losses of the other party. A risky situation indeed.

In light of the risky nature of indemnity clauses, it goes without saying that such a clause must be closely reviewed before signing the contract. Here are some items to look for. Be wary of any indemnity clause that is obligating you to not only indemnify the other party, but also to defend the other party. A promise to defend the other party means that you are agreeing to pay for the costs—including attorney’s fees and expert witness fees—to defend against any claim or lawsuits that are brought against that party. And depending on how the clause is written, it may also mean paying for the other party’s defense regardless of fault. So, if you see the word “defend” in an indemnity clause, you should look closely at what the clause is requiring of you. And more likely, you should simply delete the word and its accompanying obligation.

Another suggestion is to have your insurance company review the clause for uninsurable obligations. It is very possible that you may be asked to sign a contract with an indemnity clause that will leave you partially, or completely uninsured. For example, professional liability carriers generally do not insure you for your obligation to defend another party. It is possible that a general liability carrier may cover this obligation if the other party is listed as an additional insured on the policy. But in either event, you do not want to address that question after the fact.

If you must sign a contract with an indemnity clause, at least try to limit the indemnity to a clear finding of fault. You can limit the clause to a promise that you will indemnify the other party for any damages they sustain that are adjudicated to have been caused by you—and only to that extent. Draft the clause so that the indemnity obligation is only limited to your proportionate share of any damages caused by you.

A final suggestion is to just say “no”. Ultimately, the best business decision when faced with a particularly onerous indemnity and defense obligation may be to just walk away from the risk. You can’t bet the business if you haven’t put any chips on the table.

SOLE REMEDY

In many states a design professional can be personally liable for property damage or personal injury caused by the design professional. In Utah, neither the courts nor the legislature have answered the question. So, from a risk management standpoint (i.e., assume the worst), you should take steps to limit or eliminate the risk that you, as a licensed design professional, could be held personally liable for errors or omissions that you make on drawings that are ostensibly produced under the name of the firm you are associated with. Perhaps the best way to reduce that risk is the “sole remedy” clause.

A sole remedy clause simply provides that a client can only recover damages under the contract against the firm that is a party to the contract, and not against any individual employees, officers, or directors of the firm. This clause does not need any magic language to make it enforceable. It can simply say that the client cannot allege any cause of action arising out of the contract against any officer, director, or employee of the design professional firm. Such a clause will not only help to clarify expectations, but it likely will also help you sleep better at night knowing your personal assets are not on the line every time you perform services for a client under the umbrella of your firm.

Ultimately, contracts are simply about allocating risk. And to the extent you can shift risk away from you or your company by properly utilizing and drafting indemnity and sole remedy clauses as I’ve explained in this post, the more likely your business will be to stay profitable and protected.

What Should my Contract Say? (Continued)

In my last post, I began a discussion about some important provisions that I think design professionals should include in every contract they sign. This post continues that discussion and focuses on limitation of liability clauses.

Design contracts can be exhaustingly complex, to say nothing of the complexity of the project being designed. Consequently, even the most conscientious design professional may agree, or expose itself, to a risk it was not aware of or willing to take. In some cases, these risks can be so great that an entire firm’s continued existence is at risk. Given this reality, aside from consistently and meticulously reviewing a contract before signing it, a design professional can include one provision that may significantly reduce, or eliminate entirely, this bet-the-business type of risk: a limitation of liability clause.

Such a clause does nothing more than it says: it sets a limit on the liability that a design professional will be exposed to under a contract. In other words, it is an agreement between you and your client that establishes the maximum liability you or your firm will be responsible for if there is a claim against you by your client on a project. It can be as simple as including a provision that says “under no circumstances will the design professional’s liability under this agreement exceed $50,000.”

This concept seems easy enough. But to ensure the clause is enforceable, here are a few pointers. Don’t just copy-and-paste some language you’ve seen in another contract. Doing so will make the clause appear “boilerplate” and may weaken your argument that you expressly negotiated the limitation of liability with your client. Try to make the clause as conspicuous as possible (although, as a style preference, I avoid the ALL CAPS, BOLD option)—just don’t put it in the fine print. Also, try to set a reasonable, meaningful dollar figure for your limitation of liability. Often, the dollar figure is tied to the design professional’s fee. To further increase the odds of clause’s enforceability, you may even want to require your client to put its initials by the amount, which will provide strong evidence that the clause and the amount were expressly agreed upon.

Limitation of liability clauses can be complex, but the ultimate goal is, again, reducing the world of risk that you or your firm is exposed to on any given contract. Such clauses are not guaranteed to eliminate all possible claims against you or your firm, but they can eliminate many claims and can significantly reduce the likelihood that you or your firm will be irreparably damaged. So, don’t “bet the business” on every contract, remember to include a limitation on your liability.

Stay tuned for this a continued explanation of other critical clauses to include in your contracts.

What Should My Contract Say? Clauses to Include in Every Design-Professional Contract

If you work in the design and construction industry, you have no doubt been told–or learned from sad experience–that you should only do work under a written and signed contract. For many of you, a written contract is standard procedure. The more important and difficult question then is, what should that contract say? In the next five blog posts,  I will attempt to partially answer that question. Specifically, I will explain five provisions that I think design professionals should put in every contract. Of course, many or most of these provisions should be included in every construction contract as well, but I am going to tailor my explanations and discussions to design professionals such as architects and engineers. Including these provisions in every contract, and writing them in a beneficial manner, will greatly reduce the world of risk that you or your firm are exposed to.

The Standard of Care.

The good news is, if there is one provision that is frequently included in design professional contracts, it is this one. The problem however, is the clause is often drafted in a way that exposes the unwitting design professional to unnecessary risk. So first, make sure the clause is in your contract. But second, and perhaps more importantly, make sure it does not obligate you to a higher standard.

A standard of care clause typically states that the design professional will perform its services with the same care and skill that other competent, reputable design professionals typically exercise under similar circumstances. By expressly including this provision in your contracts, you are largely eliminating any question about how competently (or not) you must perform your services. That, again, is the easy part.

The more complex aspect of this suggestion is that you do not obligate yourself to a higher standard of care. That is, by not carefully reviewing and drafting your contracts, you might end up promising to perform your services at a higher level than the typical standard of care. For example, in a recent case out of Florida, a court held an architect liable for damages incurred by an owner to repair and replace portions of a building that were built from drawings that were not code compliant. The problem for the architect was the contract included the typical standard of care clause, but there was an added obligation to comply with all codes, laws, and ordinances.

The court in that case stated that it is arguable whether a design professional, under a typical standard of care, is obligated to produce drawings that are code compliant—particularly because codes, laws, and ordinances are so easily subject to differing interpretations. However, because the parties expressly stated that the architect was required to produce code-compliant drawings, the court found the architect breached the standard of care.

The point is, if you do not carefully review your contract, you may be unwittingly raising the bar on the standard of care you are agreeing to. You should certainly try to avoid this. You can do so by eliminating the easy words that raise the bar. Delete words such as “highest”, “best”, “warrants”, “certify”, and “guarantees” when referring to the standard of care, or phrases such as “to the satisfaction of the client” and “in the client’s sole judgment”. Also, be careful of the more stealthy ways the standard of care can be raised, such as the comply-with-the-code example in the Florida case I mentioned above. Further, if a client insists on raising the standard-of-care bar, then you should at least ask for a higher fee for assuming a higher risk.

The standard-of-care clause is necessary, but it need not be evil. By taking simple steps such as deleting troublesome words, you will be keeping the standard at a manageable level. Put simply, include the clause and make sure it does not obligate you to unnecessary risk.

In my next posts, I will continue this discussion on “what should your contract say” by explaining contract clauses such as limitations of liability, indemnity, sole remedy, and attorney’s fees.

Does Your State Have a Lien Recovery Fund? It Should.

All those who’ve hired a contractor to build or remodel your home raise your hand. For most of you, I’ll assume the experience of building or remodeling your home was a pleasant one–paint color and flooring  arguments notwithstanding. But for some, it’s safe to say you ran into trouble–either through shoddy workmanship or a price that ended up being much higher than expected. Perhaps you ran into the dreaded “L” word: lien. For those of us in the design and construction industry, that word may seem commonplace, but for an inexperienced homeowner–or even a homeowner who works in the industry–having a lien recorded against their property is not a pleasant experience. I begin this post from the homeowner’s perspective not because I intend an inexperienced homeowner as my audience; rather, I start there to illustrate a problem. The solution will follow. After reading this post, ask yourself this question: does my state have a lien recovery fund? If not, I suggest you advocate for a change.

The Problem

Say you hire a general contractor to build your dream home on your dream piece of property. That contractor then hires multiple subcontractors to build portions of your new home.  Either you or your bank pays the general contractor as construction progresses. Unknown to you, the contractor–either because he’s unscrupulous or just bad at business–doesn’t pay some of his subcontractors for their work. What is an unpaid subcontractor to do? One common remedy is to file a mechanic’s lien. But what does that mean for our inexperienced homeowner? In some cases it means the homeowner must “pay twice” to remove the lien from encumbering their property. To illustrate, the homeowner pays the general contractor for the home’s plumbing, but the contractor does not pay his plumber and the plumber is forced to file a lien.  Assuming the lien is valid and has priority, perhaps the only way the homeowner can remove the lien is to pay the plumber directly, even though the homeowner already paid the general contractor for the plumbing. In other words, the homeowner pays twice.

Put yourself in that homeowner’s shoes, even if you’re a seasoned construction-industry professional, no doubt the specter of paying twice would be alarming. Particularly if you don’t have the money. Unfortunately, that scenario  happens all too often. But thankfully, some states have passed laws that protect both the unwary homeowner and the well-meaning subcontractor in these circumstances. Those states who have yet to consider a solution, would do well to follow the model described below.

A Solution

One particular law that addresses the problem is Utah’s Residence Lien Restriction and Lien Recovery Fund.  Stated briefly, Utah’s lien recovery fund attempts to solve the problem by allowing: (1) a homeowner to obtain protection against liens, and (2) an unpaid contractor to obtain money from the recovery fund when a homeowner qualifies for the lien protection.

Under Utah’s model, to obtain protection against liens, a homeowner must:

• Contract in writing with a licensed contractor;
• Pay the general contractor in full;
• Occupy the residence as a primary or secondary residence within 180 days after construction ends; and
• Prove that the contractor did not pay its subcontractor or supplier.

A homeowner submits evidence of those items to the lien recovery fund, which is operated by the state. If the homeowner’s evidence is sufficient, the fund issues a “certificate of compliance”, at which point any lienholders must release their lien against the property. The unpaid subs or suppliers then must seek payment from the fund rather than from a lien foreclosure.

To recover money from the lien fund, an unpaid contractor or supplier must provide multiple items to the fund, including:

• A copy of a civil judgment against the general contractor containing findings of fact;
• A copy of the written contract between the homeowner and general contractor;
• Proof that the general contractor was properly licensed;
• Evidence that the homeowner fully paid the general contractor;
• A copy of a supplemental order issued after the civil judgment and a return of service on the supplemental order; and
• Copies of invoices for work performed.

The preceding list is not exhaustive, but is meant to provide a snap-shot of the type of proof Utah’s lien fund must review before it will payout on a claim.

The state views the lien fund as a payment source of “last resort.” That is, an applicant for payment from the fund must show that it has exhausted all other avenues for payment before the fund will pay a claim. To some, this fact is frustrating. Indeed, when considering that the lien recovery fund is subsidized by contractors themselves (both through a one-time fee at the time they obtain their license and through periodic assessments), critics argue that it is overburdensome to require so much from potential lien-fund claimants. But, the state views the money in the fund as public money that must be protected and wisely distributed.

Nevertheless, even in light of some criticism, Utah’s lien recovery fund is a relatively novel solution that solves a relatively common problem. The fund attempts to ensure that unsophisticated homeowners do not pay twice for construction work on their property. The fund also provides a means of payment for unpaid subcontractors or suppliers working in good faith under a general contractor on a single-family residential property. Certainly, Utah’s law has its nuances and areas for improvement, but states without a lien-recovery-fund law would be wise to consider a similar solution. Lest our intrepid subcontractor go unpaid or our proverbial homeowner pay twice.

Where a Drop of Water is a Drop of Gold: Water Law in Utah. Part 2 of 2

A Step in the Right Direction: Rainwater Harvesting

A new frontier so to speak with respect to water rights in the western United States, Utah in particular, is rainwater harvesting. Until recently, harvesting rainwater in many western states was illegal. At first glance that may have seemed unreasonable, but given the scarcity of water in the West and with the understanding of prior appropriation I discussed in part 1 of this post, to many it was a logical thing. That is, if rainwater is part of a watershed, and all the water in a watershed (particularly underground water which is replenished in part by rainwater) had already been allocated through prior appropriation, then someone harvesting rainwater is essentially stealing water from those who hold rights to that water. On the flip side however, allowing certain users to capture and store rainwater certainly provides water-conservation benefits. Considering this, like some western states, in 2010 the Utah Legislature passed a bill that formally allows for the capture and storage of precipitation.[1]

Although, Utah’s rainwater harvesting law is not without limits. For one, a property owner must register online with the Utah Division of Water Rights before harvesting any rainwater. Perhaps the more onerous and limiting requirements of the law are its volume restrictions. Briefly stated, the statute provides that a registered user cannot collect and store more than 2,500 gallons of water. And unregistered users can collect and store a maximum of 200 gallons.

To a design professional such as a landscape architect who attempts to design an efficient irrigation system, those volume limitations may seem overly limiting. And perhaps some industry associations may want to consider advocating for a change to those limits. But on the other hand, if we again consider how valuable water is in the West and how most of the water has already been appropriated into tangible property rights, then the new rainwater harvesting law seems fair. The law attempts to balance the rights of individual property owners to capture the rainwater that falls on their property with the rights of water-right owners. But even then some argue that, mathematically, the law is flawed: if existing water-right owners have already appropriated 100% of the pie, then rainwater harvesting takes a non-existent piece of the pie. In that light, maybe the volume restrictions should stay. Either way, while there could be some refining of the law, it is certainly a step in the right direction for water conservation.

Conclusion: A Starting Point

It is not possible in a two-part blog post to adequately address the breadth and complexity of water law in  the West, but I hope the items in these two posts have added to your understanding of the framework that water law operates under in the West, Utah in particular. And through that framework, I hope you better understand some of the steps you need to take and things you need to consider when trying to obtain water rights in Utah. In the end, design professionals can play an important role at consulting our clients on how best to manage their water needs and consequently how best to seek and obtain water rights to fulfill those needs.

[1] Utah Code Ann. § 73-3-1.5 (2010).

Where a Drop of Water is a Drop of Gold: Water Law in Utah. Part 1 of 2

In 1967, the Utah Supreme Court equated a drop of water to a drop of gold.[1] And why not? Water is arguably the world’s most valuable resource—it is essential to life, particularly in the arid west. Not only is it essential to life, water is an essential consideration in any building or development project. Consequently, design professionals must often help their clients obtain or otherwise manage water rights. While the specifics of these rights may be left to other professions, it is important for design professionals working in the western United States to have a fundamental grasp of water law so that they can help their clients navigate this often complex subject. To that end, in the first part of this post, I will attempt to explain the basis for water law in the western United States and I will discuss some ways that water rights can be obtained with particular emphasis on the state of Utah. In the second part of this post, I will discuss the relatively new practice of harvesting rainwater.

How it Works Out West: The Doctrine of Prior Appropriation

For a design professional to successfully help their client with water-right issues, one must understand the basis of water law in the western United States. That basis lies in the doctrine of prior appropriation.[2] Because water is a finite resource, the prior appropriation doctrine evolved to determine water rights by priority of beneficial use. In other words, the first person to put water to a beneficial use will have first priority right to that water. As a result, the doctrine is often referred to as “first in time, first in right,” which means that water is allocated according to priority where water is distributed to the first person with the oldest water right, then to the person with the next oldest water right, and so on.  In effect, the doctrine takes the finite resource and allocates it to those who first diverted or otherwise claimed the water by beneficially using it.

Prior appropriation assumes, to some extent, that there is water available that is not being beneficially used. And that assumption makes sense if we still lived in the 1800s (when the doctrine originated). However, as you can imagine, with our current population and amount of development, there’s not much water left to be appropriated. For example, generally speaking, all the water in Utah is already appropriated to a beneficial use. What that means with respect to obtaining a water right in Utah (and most western states) is rather than appropriating unused water, you must obtain an already existing water right. If you use water without such a right, you are essentially stealing water from someone who has the right to use it.

As you may surmise, the doctrine of prior appropriation is complex and has an entire body of law and statutes devoted to it. Nevertheless, a basic understanding of prior appropriation will hopefully help you effectively consult with your clients as they seek to develop new land because you can help them recognize that they may need to purchase water rights. Perhaps more importantly, you can help them design a project in a way that will minimize the amount of water the project will require. Doing so will reduce the necessity of determining whether water can be appropriated for the project or whether your clients need to purchase additional water rights.

Obtaining Water Rights: More than One Way Under the Sun

In Utah, as in most western states, water rights can be obtained in a number of ways. Water rights can be obtained through conveyance by deed, or through a transfer of shares of stock, or in many cases they can be transferred with land. Because water is owned by the public at large, the person appropriating the water (i.e., putting it to a beneficial use) does not own the water; rather, that person owns a right to use the water. Nevertheless, that “right” to use the water is recognized as a property right the same as a piece of real property. Accordingly, those rights are afforded constitutional protection like any other property right. And in Utah those rights are administered by the Utah Division of Water Rights. In fact, if you practice in Utah and you expect to encounter water right issues in future projects, you should become familiar with the division’s website: http://www.waterrights.utah.gov/.

Under that division, all water rights in Utah must be authorized by the State Engineer. The State Engineer administers the state’s water resources and provides citizens the opportunity to beneficially use of the State’s waters while protecting prior rights and the welfare interests of the public.[3] As part of those responsibilities, the State Engineer maintains a public record of each water right the division administers.

Because of the complex nature of dealing with the Utah Division of Water Rights to determine if a water right exists and to determine the status of the title to that water right, my advice is to consult with a knowledgeable water-law attorney. One reason I suggest this is because unlike with title to real property, title insurance companies typically avoid providing title reports or title insurance for water. As a result, it is imperative to know the ownership status of a water right you or your client may be seeking. An attorney can help you determine title to a water right which will be necessary for the State Engineer’s approval of the water right transfer. An attorney can also help you determine what your water rights are to begin with and may save you the time of pursuing water rights you don’t need or going through a process you can avoid.

Yes, often you or your clients will not even need to go through the process of obtaining or transferring a water right through the State Engineer. If the nature of use, length of use, point of diversion, or place of use has not changed, then the transfer of a water right will not need the State Engineer’s approval. For example, if a water right is transferred with the land, is transferred by a separate deed, or is transferred by shares of stock, then the State Engineer does not need to be involve because the rights associated with that water right are not changing; rather, just the ownership of that right is changing. Ultimately however, you and your client must understand the water requirements of a potential project and you must research who holds title to the water rights you need. With that understanding, you can then proceed to obtain the necessary water rights.

This post was simply meant to provide a brief introduction to the basis of water law in the West and to point you in the right direction for obtaining information to assist your client with any water-right issue they may encounter. In the second part of this post, I will discuss a related and novel issue regarding the prior appropriation doctrine: rainwater harvesting.

[1] Carbon Canal Co. v. Sanpete Water Users Ass’n, 425 P.2d 405, 407 (Utah 1967).

[2] There are 17 states that operate under the prior appropriation doctrine: Arizona, California, Colorado, Idaho, Kansas, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming.

[3] Owning a Utah Water Right, Utah Division of Water Rights, http://www.waterrights.utah.gov/wrinfo/Brochures/division_brochure_101a.pdf (last visited June 16, 2014).

Betterment: Why You Can’t Replace a Chevy With a Cadillac. Part 2 of 2

This post is the second of a two-part discussion regarding the legal principle of betterment as it relates to contract damages. In the first post, I discussed how an owner, in a breach of contract case, is not entitled to recover for any enhancements they add to the project when they correct defective work.

To further illustrate this principle, if an owner elects a more expensive design as part of repairs, recovery is limited to the reasonable costs of repair according to the original design. For example, in a case out of Florida an owner sued a general contractor for building a leaky roof when the leaks became so bad that owner was forced to replace the roof.  After the owner removed the roof and replaced it with a more expensive design, the owner brought suit against the contractor for the costs of the more expensive roof. The court held that the owner was only entitled to the reasonable costs to repair the roof, not the amount to replace the roof with a more expensive design. Specifically, the court stated that if an owner elects to adopt a more expensive design, the recovery should be limited to what would have been the reasonable cost of repair according to the original design.  Such a rule allows courts to remove the possibility of a windfall to owners.

Likewise, courts will not award damages for repair or replacement of defective work that goes beyond the original scope of work. In a Louisiana case, a homeowner sued a builder for, among other things, damages to correct defective construction on an addition to her home.  The contract called for 12- or 15-foot concrete pilings to provide structural support to the addition, and those pilings proved to be defective. The homeowner then claimed she was entitled to the costs of replacing the pilings with 30-foot wood pilings. However, the court held that the homeowner was not entitled to have her addition constructed as it best should have been but only as her contract provided it should have been.  That rule is certainly in line with the general rule of placing the parties in the position they would’ve been in without the breach.

That general rule is limited though. When a contractor provides work to an owner that provides no benefit to the owner then the contractor may be liable for the costs to repair, replace, or re-do the work. In one case a contractor painted the inside of owner’s home for $1,100 and the paint later peeled, cracked, and flaked which required the entire interior of the home to be repainted. The owner hired a different painter for $2,411 to repaint the home. The owner then sought to recover that entire amount from the original painter arguing that it had obtained no benefit from the original painter’s defective work. The court agreed with that contention because the work performed by the original painter was “worthless” and had to be “completely redone.”The court reasoned that damages for breach of a construction contract are usually the cost of repairing the defective work, but that rule only applies the owner derives some benefit from the defective construction

The bottom line is an owner can’t contract for a Chevy and replace that Chevy with a Cadillac when the Chevy didn’t perform or wasn’t built as expected. In other words, when remedying defective work an owner is only entitled to damages that it incurred to meet the scope of work for its original contract (Chevy) and not for any betterment to that scope of work (Cadillac). Thus, any enhancements that gave an owner a better project than it originally bargained for must be excluded from its contract damages.

Betterment: Why You Can’t Replace a Chevy With a Cadillac. Part 1 of 2.

This post comes to you in two parts and will attempt to explain the legal principle of betterment as it relates to contract damages.

The purpose of contract damages is to place a nonbreaching party in as good a position as if the contract had been performed. In a construction contract, work that is done to remedy defective work often results in added benefits to the owner—also known as “betterment.” Betterment occurs when an owner receives more than what was originally bargained for or more than was intended and otherwise would have paid for if not inadvertently omitted from the original scope of work. The question of what constitutes betterment is often fact-specific because it involves analysis of the contracting parties’ expectations when they entered the contract. Nevertheless, as illustrated in this two-part post, the owner is not entitled to claim these betterments as part of their damages.

To begin, when an owner corrects defective work it cannot recover for an enhancement to the project. In other words, allowing an owner to purchase a Chevy and then replace it with a Cadillac after encountering some faulty design in the Chevy would result in a windfall to the owner. Courts generally disfavor windfalls like that. For example,  in an Illinois case a hospital filed claims against an architect, contractor, and the manufacturer of wall paneling because the wall paneling the contractor installed was not code-compliant and had to be replaced with the more expensive code-compliant wall paneling. At trial, a jury awarded the hospital the entire cost of repairs to the wall paneling–including the cost of the more expensive paneling. However, the appellate court overturned the jury’s decision by reasoning that if the hospital recovered the costs of the more expensive paneling, it would be unjustly enriched and placed in a better position than if the architect had fully performed the original contract. The appellate court reduced the hospital’s award by $116,000 which was the cost difference between the wall-paneling, associated hardware, and labor. The court stated that the hospital would be unjustly enriched if it did not have to pay for the more expensive paneling and more expensive labor to install that paneling. The court in that case reached its decision in part by following the decision in a similar case where a court relied on the general rule that compensation is the basic principle of contract damages and that under a breach of contract, the injured party is not entitled to be put in a better position than he would have been had the contract been fully performed.

In another case, a court restricted an owner’s damage only to the original scope of work the parties agreed to. There, a homeowner contracted with a contractor to construct a sea wall on a riverfront portion of the owner’s property. The contractor improperly constructed the sea wall, which required repairs to the wall. When considering what the owner was entitled to recover for the cost of those repairs, the court held that it would be inappropriate to award the owner certain repair costs for design, grading, and work that was not included in the original contract.  Accordingly, courts are reluctant to award a nonbreaching party the costs of repair that result in a better project than the parties initially bargained for.

Stay tuned for part two of this post where I will conclude this explanation of “betterment.”

How Long to Keep Project Documents? It Depends.

You have piles of drawings around your office. Rows of file cabinets. Time for some spring cleaning! Not so fast, you might have to defend yourself: if you’re ever sued, you may need all those documents because memories fade and stories change. How long should you keep project records? Answer: it depends. It depends, among other things, on which state you practice in. So, before you throw out those old project documents, make sure you no longer need them–and err on the side of caution.

Which state you practice in will dictate the applicable statute of limitation and statute of repose. Every state has these statutes and they both provide time restrictions on when a lawsuit can be filed against you for any particular project. In other words, once the applicable timeframes for bringing a lawsuit against you have expired, then you can discard those project documents with a little more confidence.

A statute of limitation defines the timeframe for when a lawsuit can be filed against you following the date of an injury or the date when a former client discovered an error or defect in your work. Typically, that timeframe begins when the plaintiff knew or should have known that they had an available legal remedy. To illustrate, if a contractor’s defective work caused a foundation to start leaking three years after the contractor completed the work, then the statute of limitation generally starts to run on the date the owner discovered (or should’ve discovered) the leak. So, if the applicable statute of limitations were four years, then an owner would have four years on top of the three that had already passed before the foundation began to leak. Now, this is where the statute of repose comes in.

A statute of repose imposes a much more rigid deadline than a statute of limitations. Rather than being triggered by an owner’s discovery of some construction defect, the timeframe for a statute of repose begins to run upon the completion of a defined act. In construction, the triggering act is often when the project is substantially complete. For example, if your state has a statute of repose period of seven years, then an owner must file a lawsuit within seven years after the project was substantially complete, notwithstanding the fact they may not have known of a defect or the defect didn’t manifest itself until after seven years. The rationale of a statute of repose is that exposing a contractor or design professional to liability for acts they performed several years ago would create an undue hardship on the contractor or design professional. In effect, a legislature draws a line in the sand and says we want contractors to have some certainty that they won’t be sued for decades-old projects. So, you say, “then I only have to retain project documents for the period defined in my state’s staute of repose, right?” Not so fast.

Statutes of repose and statutes of limitations are interrelated to the point where a statute of limitation period can be added onto a statute of repose period. That is, if an owner discovers a defect during the last year of a statute of repose period, then the statute of limitations will begin to run–and can extend beyond the statute of repose period. For example, if the owner discovers a foundation leak in the sixth year after construction was completed (and the statute of repose period is seven years), then the owner will have the additional timeframe provided by the statute of limitations to file a lawsuit. Thus, if the statute of limitations were four years, then in that scenario the owner would have ten total years to file suit.

So what does this mean for your spring cleaning? It means you should likely consult a knowledgeable and experienced construction attorney in your state to advise you on your state’s applicable statutes of repose and limitations. And err on the side of caution: take the worst case scenario for both statutes and set that timeframe as the minimum amount of years you will keep documents.

If you are sued and you have mistakenly discarded critical project documents, you will have a difficult time defending yourself or your firm. Therefore, if you don’t have a current document-retention policy in place, consider implementing one. Your state’s statute of limitation and repose will be a starting point to deciding how long those documents need to clutter up your office. Next decision: whether and how to store those documents electronically.