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Name that place: designating dispute resolution settings in contracts

A/E_location of lawsuits matters

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When a project dispute arises, you could be forced to fight an uphill battle if the state designated for dispute resolution isn’t your own.

It may not come up very often, but if it does, it could result in an avoidable loss for a design professional. The issue? Agreeing to resolve a dispute in a state other than the one where you normally work, particularly if that other state’s laws lean against the interests of design professionals.

This issue is most often found in the U.S. In Canada, as a general practice, a project-related dispute is resolved in the jurisdiction where the project is located. In the midst of negotiating the myriad elements that go into a professional services agreement, the designation of the state in which dispute resolution will take place is probably not one of your top-10 concerns. But that doesn’t mean you can ignore it.

We recently saw a situation that could have had major consequences for an architecture firm. The firm, based in Washington, D.C., was retained by a major California-based tech company to design a retail space in D.C. The owner-architect contract stated that any dispute resolution would take place in California and be subject to California law. Apart from the fact that the firm was not familiar with California law and had no idea how California law might differ from the laws the firm is used to dealing with, the designation of California as the setting for dispute resolution also could have involved travel expenses for several people for a lengthy period.

State laws and principles vary
The differences in applicable law among the states can have a significant impact when it comes to settling a dispute. For example, say a design firm normally works in a state in which the courts traditionally uphold the economic loss doctrine. This doctrine prevents third parties (parties who don’t have a contract with the A/E) from seeking damages from A/Es for economic loss (rather than bodily injury or property damage) in a tort action. But what if a dispute is resolved in a state that has ruled that two parties don’t have to have a contract in order for one to claim damages from the other for economic loss because of negligence? It’s possible that a court may permit a third party to recover damages from the A/E, a risk the A/E might not have considered when agreeing to the project.

Other differences in law can also have an effect on the outcome of a dispute. These include:

  • Comparative fault vs. contributory negligence. Some states allocate damages in a bodily injury claim according to the percentage of fault assigned to each party, while others apply modified comparative fault, in which the less-negligent party can collect damages from the other. But some states bar a plaintiff from recovering any damages if the plaintiff is shown to have contributed even one percent to his or her injuries.
  • Pre- and post-judgment interest. The way states calculate interest to be added to a verdict varies. In New Jersey, for instance, the rate for pre-judgment interest changes every year because it’s dictated by the state supreme court. In other states, the amount is statutory and never seems to change, allowing formidable pre-judgment interest rates of nine to 12 percent!

Do your homework
The lesson here is to do your due diligence. First, make sure you read all the fine print in your contract with the owner. If the contract designates a state other than your own (or one you’re familiar with) as the setting for dispute resolution, then you’ll want to:

  • Research the law of the designated state as it relates to your profession. Contact a peer in that state to ask about its dispute resolution climate and speak with a lawyer familiar with the designated state’s laws.
  • If the laws of the designated state are more favorable to design professionals than your home state, you might agree to that section of the contract (although travel costs might be a stumbling block).
  • If the laws of the designated state are less favorable to A/Es, speak with the owner about changing the designated state to yours. Explain that, given your unfamiliarity with the designated state’s laws, you would be at a distinct disadvantage should a dispute need to be resolved. Also, explain that the costs of having the relevant staff members and attorneys travel to another state could significantly cut into your profits on the project. Offer to compromise by designating the state in which the project is located.

 

" The lesson here is to do your due diligence. 

 

Inconsistent contracts
The issue of which state is designated as the setting for dispute resolution becomes even more complicated when the state named in your contract with the owner is not the state named in your contract with your subconsultants.

In the case of the D.C.-area architecture firm described above, any contracts the firm had with subconsultants should also have designated California as the setting for any dispute resolution. In other words, the law and location for resolution between the owner and design firm should be the same for any resolution between the design firm and its subconsultants.

There’s a good reason for this. If the dispute resolution setting isn’t consistent among your contracts in a project, there could be a problem if a claim is filed against you and, subsequently, you need to involve your subconsultant in the dispute. You could end up having to prepare for mediation, arbitration, or a trial in two different states and, depending on the states, end up defending in one state and prosecuting in another.

Again, look over the contracts with a keen eye. Make sure the same state is designated in both contracts, and if it’s not, attempt to make it so. And while you’re at it, choose the state most favorable to you and your firm.

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