MOCK NEGOTIATIONS: WAIVER OF CONSEQUENTIAL DAMAGES

Transcription

1 MOCK NEGOTIATIONS: WAIVER OF CONSEQUENTIAL DAMAGES DPRCG Loss Prevention Role Play Exercise a fun and effective tool to help you convey important negotiation tips and loss prevention info to your staff CASE SUMMARY Client: ACME Processing Plant Project: Large Manufacturing Facility Total fee: $123,000 Construction Value: $1,500,000 Services to be Rendered: Design Ceiling Crane System INSTRUCTIONS: The following script is a role-playing exercise that demonstrates how to negotiate a contract clause in a client agreement that will reduce liability for consequential damages. This exercise is designed to be an in-house, self-administered session led by a design firm principal or risk manager and delivered to the firm s professional staff. The role-play exercise requires three participants. Generally, a principal or risk manager plays the part of moderator. The moderator introduces the topic, sets up and sometimes participates in the role-playing scenario, and leads a group discussion of lessons learned after the completion of the play. We have provided samples of lessons learned at the end of the script, which the moderator can use to stimulate discussion. ROLES Moderator Freddy Foundation: The Design Firm s Representative Ollie Ornery: The Client Representative Delivery time: 5-10 minutes Lessons Learned discussion: 5-10 minutes When to deliver: staff meetings, etc. Two participants are needed to play the roles of the design firm representative and the client representative. Typically, these roles are played by two of the firm s design professionals. It is possible to assign these roles at the beginning of the presentation. However, it is preferable that the participants be selected prior to the presentation. That way, the role players can read their scripts in advance and have the opportunity to practice their parts together. This leads to a smoother, more comprehensible presentation. We believe that you will find this role-playing exercise both informational and enjoyable for your staff. Your feedback regarding how well this presentation was received by your group is always appreciated. Should this exercise generate questions for which you do not have ready answers, contact your insurance agent, who will be able to provide additional information. The script follows. Have fun and good luck! Page 1 of 5, Mock Negotiations: Waiver of Consequential Damages

2 MODERATOR: Hello everyone. Today s role-playing exercise addresses a very important loss prevention topic: consequential damages. As the name implies, consequential damages are indirect or secondary damages that a client may Let me introduce our players. This is Freddy Foundation, a representative of Stanley s Structural Engineers. Over here is Ollie Ornery, the client representative of ACME Processing Plant. Our project is an ACME manufacturing facility with a construction value of 1.5 million dollars. Stanley s Structural Engineers has been hired to design a ceiling crane system that will be used to move raw materials into the manufacturing process. The total fee earned by our designer is 123,000 dollars. Freddy s goal is to retain a contract clause that will eliminate the engineering firm s liability for any consequential damages that may arise from the project. It was a dark and stormy night suffer due to the errors or omissions of a design professional. For example, suppose a design error causes a substantial amount of rework on a project. The cost of fixing the error would be considered a direct damage. Now suppose that this error and rework causes a delay in project completion. Let s say, a retail store is unable to open on time, or a production plant can t turn out goods on schedule for its customers. The client could claim that the design error and in turn the project delay resulted in a loss of income due to its inability to operate as scheduled. A client s lost income is an example of consequential damages. Sorry to hear about your travel delays, Ollie. Fortunately I ve only been waiting two hours. Oh, that s a shame, Freddie. Well, let s get on with finalizing this contract. Time is money! Sure Ollie. I think we re pretty close here as long as there are no major changes to the last round of revisions I sent you. Fortunately, design firms can protect themselves by limiting or eliminating their liability for consequential damages through specific contract language. In our role-playing exercise, we will demonstrate how a design firm might negotiate such a contract clause with a client. Well just about everything looks to be in good order. There is one question I have, though. What s that? 2007, X.L. America, Inc. Page 2 of 5, Mock Negotiations: Waiver of Consequential Damages

3 It s this waiver of consequential damages. I don t think I quite understand what it is exactly. But I know what a waiver is, so it can t be very good. MODERATOR: Here is the contract clause Ollie is talking about. It reads: Consequential Damages: Notwithstanding any other provision of this Agreement, and to the fullest extent permitted by law, neither the Client nor the Consultant, their respective officers, directors, partners, employees, contractors or subconsultants shall be liable to the other or shall make any claim for any incidental, indirect or consequential damages arising out of or connected in any way to the Project or to this Agreement. This mutual waiver or consequential damages shall include, but is not limited to, loss of use, loss of profit, loss of business, loss of income, loss of reputation or any other consequential damages that either party may have incurred from any cause of action including negligence, strict liability, breach of contract and breach of strict or implied warranty. Both the Client and the Consultant shall require similar waivers of consequential damages protecting all the entities or persons named herein in all contracts and subcontracts with others involved in this project. And here is Freddie s response to the objection. Well, I think it s a pretty good clause for both of us, Ollie. It provides mutual protection for me and for you against having to pay for consequential or secondary damages that either of us might claim against the other. Basically, it limits my responsibility to those direct damages I may cause due to my errors and omissions and limits your responsibilities to those direct damages that you may cause to my firm. We both get protection. OLLIE That s all well and good, but what types of consequential damages could ACME be responsible for? Well, suppose you decide to cancel the project, or you void the contract in any way. I could claim consequential damages for lost income, for loss of future jobs or for damage to my reputation. If you terminated our agreement and then went on to use any of my design elements, I could claim copyright infringement. We d both be liable for about an equal range of consequential damages in the event there was a claim or dispute. I see. But aren t the size of my potential losses much greater than yours? I suppose on a potential dollar-for-dollar basis, yes. But aren t the potential rewards of this project much greater for you as well? My total fee is a fraction of your benefit, and my potential profit is even smaller. You ll benefit from a state-of-the-art manufacturing system for years to come. I don t get to share in those profits, correct? 2007, X.L. America, Inc. Page 3 of 5, Mock Negotiations: Waiver of Consequential Damages

4 True, Freddie, I m not taking you on as an ACME partner. But this is a 1.5 million dollar investment for me. What if you screw up and I m left holding the bag? Well, as you know, I have a 4 million dollar aggregate, 2 million dollar per claim professional liability insurance policy. Unless I happen to have multiple claims in the same year as your claim, there should be enough insurance to totally cover your 1.5 million investment. The consequential damages waiver doesn t affect my insurance limits at all. Well why haven t I heard of this type of waiver before, Freddie? Is this something new you design firms have dreamed up? You guys are always dreaming things up. Waivers for consequential damages are not new and, in fact, are used in all types of industries. That late flight you were complaining about? Look at the back of your airline ticket. I bet if you read the fine print you ll find some form of waiver for consequential damages. The airline can t afford to reimburse every passenger who claimed they suffered a loss because their flight was late. That makes sense, but I still don t know.if there is a problem or a delay and ACME ends up losing business because of you, I want you to make it right. Tell me Ollie, have you ever heard of the duty of mitigation? Nope. Sounds like some mumbo jumbo lawyer talk to me. Well duty of mitigation is a legal principle that basically says you cannot recover for any losses you could have prevented by exercising reasonable care and taking reasonable actions. That would put a burden on you to show that any consequential damages you claim could not have been avoided. You d have to show that there was no reasonable way for you to avoid a loss of income, for example, because the crane wasn t operating on time. I didn t know that sounds like a lot of time and trouble. But still I d take my chances that I could prove a loss of income. What do I have to lose? Besides legal fees? Well, now that you mention it I put together my bid, my design, my schedule and my scope of services based on the assumption the mutual waiver of consequential damages would be in our contract. Without that protection, I d have to go back to the drawing board. I may need to re-engineer the design to make it bullet-proof, extend the schedule, and increase my scope of services to include contract administration during construction and installation. If I m taking on responsibility for consequential 2007, X.L. America, Inc. Page 4 of 5, Mock Negotiations: Waiver of Consequential Damages

5 damages beyond the project work itself, then I need to protect myself accordingly. That sure puts things in a different light. Plus, you d lose your protection from me filing a claim for consequential damages. Don t forget, this is a mutual waiver that benefits both of us. Well when you put it that way, I suppose I can accept the agreement. I still have the insurance, right? Correct. The available professional liability insurance limits are not affected by the waiver. You drive a hard bargain, Freddie. But it s a deal. (Freddie and Ollie shake hands) MODERATOR: Thank you Freddie and Ollie. Now, let s take a look at some of the lessons learned from this exercise (List and discuss the major lessons of this exercise. Ask your staff what they have learned. Use the list below to stimulate discussion.) Design firms can limit or eliminate their liability for consequential damages through specific client contract language. A Consequential Damages contract clause provides mutual protection for the client and the design firm. The consequential damages waiver doesn t reduce your limits of professional liability insurance. Keep in mind the total risk and reward profile of the client and the design firm when allocating risks through contract negotiations. Waivers for consequential damages are not new and, in fact, are used in all types of industries. The duty of mitigation can make it difficult to win a consequential damages claim. The Consequential Damages clause can be a bargaining point e.g., if the clause is removed the design firm increases its scope of services and resulting fees. A Consequential Damages clause in a client contract does not apply to third parties. Developed by DPRCG members working in collaboration with the Design Professional group of the XL Insurance companies. Please send your feedback to DPRCG@xlgroup.com. "XL Insurance" is the global brand used by XL Group plc s (NYSE: XL) insurance companies. Coverages underwritten by Greenwich Insurance Company, Indian Harbor Insurance Company, XL Specialty Insurance Company, and XL Insurance Company Limited Canadian Branch. Coverages not available in all jurisdictions 6425_01/ , X.L. America, Inc. Page 5 of 5, Mock Negotiations: Waiver of Consequential Damages