Will Your Contracts Protect You From Liability? Gosh, I Hope So!
January 22, 2009
In “Will Your Contracts Be Used Against You? Gosh, I Hope Not!” in the fall 2008 issue of R&R, I explained that many restorers continue to use inadequate contracts. In fact, some are not contracts at all, such as archaic “Work Authorizations” which do no more than grant permission to perform work while obligating the customer to absolutely nothing.
The article explained the vast benefits of fixed-price contracts over rate-and-materials contracts, methods of preparing estimates for emergency service, the proper selection of the individual to sign the contracts, and some scenarios where someone (an “agent”) can execute a contract on behalf of someone else. Each of those strategies is geared toward using the contract offensively, that is, securing the right to payment. However, a restorer’s contract has another vitally important purpose: to help minimize liability. This is using the contract defensively.
It’s 8:30 a.m. on Monday, a day like any other day, and the phone in my office rings. “Mr. Cross, this is Joe from ACME Restoration in Tunafish, Wyoming. I need an ironclad contract that will keep people from suing me.” This is déjà vu from a call I received the week before, and virtually every week since I started doing this 10 years ago.
“Hello, Joe,” I reply. “I’m sorry to report there’s nothing anyone can write in a contract that will prevent all lawsuits.” Ten seconds on the phone and Joe already thinks I have some sort of calcium deficiency.
“You see, a contract can limit liability and deter many types of lawsuits,” I say. “But if someone wants to sue you, they will.” I go on to explain that the laws of many states, especially California, are pro-consumer and anti-contractor, and that just because a contract states there is no liability for a certain type of damage does not mean it will be enforced by a court.
Nonetheless, a restoration contract can include a variety of disclaimers, releases, indemnity provisions and other powerful tools to reduce liability for some claims and perhaps eliminate it entirely for others. Unfortunately, many restorers’ contracts fail to include anything that limits or curtails customer lawsuits. Depending on the laws of the state where the project is being performed, a restorer may be able to enforce provisions that include the following, each of which should be explained orally before the contract is signed:
- A provision limiting the restorer’s total liability in relation to the size of the job, which can be determined by the contract price or the price actually paid to the restorer.
- A waiver of consequential damages. Consequential damages are “indirect” damages. This can be explained as follows: “We will be accountable for damage we directly cause. If we drop and break a drinking glass, we will pay for the glass because it is direct damage. But if you walk on the glass in bare feet and cut your foot, we’re not responsible for the cut on your foot because that’s consequential damage.” After all, you broke his glass, but you didn’t cut his foot. Most reasonable customers will be okay with this. If not, it may be a red flag.
- A disclaimer of responsibility for providing security for the property. They can hire Rent-A-Cop if they’re concerned about security. Caveat: you still need to take reasonable steps to protect the property. Don’t do what one of my clients did and use Visqueen instead of wood to board-up a large window opening.
- A disclaimer of responsibility for mysterious disappearance of personal property or the customer’s failure to protect and safeguard small valuables, cash, cocaine, assault weapons or other such trinkets. Without the word “mysterious,” the provision could arguably be construed as a waiver of liability for criminal conduct, and would be unenforceable.
- A recommendation that the customer seek medical advice about health issues from a qualified health care professional, and advice about environmental science from a qualified environmental consultant. Don’t specify whether the consultant should be a CIH, CIE, an “IEP” or anything else. You may inadvertently exclude qualified professionals.
- An indemnity provision where the customer holds the restorer harmless from acts of third parties, other contractors and industrial hygienists. You can explain it like this: “The hygienist is like a doctor that writes prescriptions. As the restorer, I’m like a pharmacist. Your pharmacist is not liable if your doctor failed to determine your drug allergies, and the pharmacist properly fills the prescription.” However, a restorer is liable for following a protocol that contains errors or omissions that a reasonably-trained restorer should have noticed. Don’t be shy about questioning protocols.
- Disclaimers of liability, loss or delay arising from pre-existing damage, code violations, acts of God and circumstances beyond the restorer’s control.
- Other stuff I don’t have space to fit in here.
As a general rule, most courts will not strike an entire contract just because it finds one provision unenforceable. However, the laws of some states enable judges to do just that, so it may be beneficial to include a clause stating that if any provision is found to be unenforceable or invalid, that the remainder of the contract shall survive in full force and effect. It’s also a good idea to include a clause indicating that the contract was negotiated and prepared jointly by the parties. Otherwise, ambiguities may be construed against the drafter (you’re the drafter).
The law is somewhat gray. The interpretation and enforceability of contract provisions is a subject of ongoing debate between attorneys, judges and appellate courts. The result is often fact-based, depending on the circumstances of the situation, so it may be difficult to predict whether certain disclaimers will be enforced. However, even if a disclaimer or limit of liability may not survive the scrutiny of a judge, it may still have a deterrent effect. It takes time and money to convince a court that a clause should be stricken from a contract. When in doubt, put it in, and let them argue it later.
If the customer strikes out certain provisions or refuses to sign, weigh the benefits of going forward with the project. What is the profit margin? How extensive are the proposed deletions? Are there other red flags? Is this going to be a problem customer? Keep in mind that customers are on their best behavior on day one, and it may be downhill from there. Even when business is slow, it’s better to avoid taking high-risk, low profit work. Refer them to your least favorite competitor.
Despite all my brilliantly conceived disclaimers, a restoration contract should not be viewed as the first line of defense. Don’t be like Joe from Tunafish. The best defense remains good quality workmanship. They can sue you all they want, but if the job was done properly and is well documented, there will be defense costs, sure, but the claimant will usually walk away with nothing but a sense of defeat.
The second best defense is good customer relations. Happy customers don’t file lawsuits. Their happiness is often in direct proportion to the personal chemistry they share with the restorer. Make them angry and they’ll sue you even if your work was perfect. Stay in this business long enough, and you’re bound to screw up at least one job. But if you are diligent and professional and treat the customer with respect and sympathy, you will deter lawsuits. I guarantee it.
I want to reiterate that neither restoration nor remediation should be performed until the customer has signed a written contract custom-tailored to the laws of the state in which the work is being performed. Ideally, it would be customized to the project, as well. It must be customized to the project where there are peculiar circumstances, limitations or complexities that may impact the health or safety of the occupants, the restorer’s ability to achieve the goal of the project, or the final price.
Finally, a word of caution: some of my clients are suffering from the use of weak generic form contracts they receive as free handouts from organizations that have good intentions but are not engaged in the practice of law. These forms often fail to commit the customer to payment, fail to limit the restorer’s liability and are not in compliance with the laws of some states. Like other professions, the practice of law has become highly specialized. I assume you wouldn’t ask one of your water damage technicians to prepare your tax returns. This brings to mind a saying from my grandfather (a Missouri businessman from the 1920s to the 1960s) who said, “Don’t buy your groceries from your auto mechanic, and don’t let your butcher work on your car.” Be sure to have your contracts reviewed by a competent construction lawyer at least once per year.