November 2017 – PROFESSIONAL LIABILITY UPDATE

Construction contracts are unique in some ways among legal contracts. They anticipate and plan for changes during the project not included in the original contract. In fact, some industry surveys suggest the typical commercial project will involve as many as 50 change orders or more.

All design changes will be governed by the “Changes Clause” in the contract. The “Changes Clause” could be the most important clause in a construction contract because it specifies how the owner can make changes or other alterations the owner deems necessary to complete the work.

The design professional, on the other hand, is obligated by the changes clause to perform changes to the work according to the owner’s instructions, provided the contract provides for the contractor to be compensated.

To avoid claims and potential lawsuits, a design professional should pay special attention to the “Changes Clause” in both the design professional’s agreement – and in the prime contract. Before taking on a project, a design professional should clearly understand what is required and how they will be compensated for design changes during the project.

Some design changes may be minor. But too often, design changes lead to costly claims and lawsuits because the design professional relies on an handshake agreement with an owner or contractor regarding the design changes to be made.

Any design professional who fails to obtain a written change order may find it difficult to prove the change was not his fault and even more difficult to get paid.

In my experience, most design changes occur to correct faults in the original contract and several other common factors, including:

a poorly defined scope of work;
compressed project schedules;
unrealistic cost constraints;
time and material changes; and
owner-directed acceleration.

A design change simply is the difference between what is called for in the original contract and what is requested after construction begins. Changes can be requested by an owner, contractor or any third party. Changes may be directed changes or constructive changes. Such changes typically are expected and are accounted for in the contract.

Direct changes usually are easier to identify. These changes usually originate from the owner. They may include changes such as: additions or deletions of work, or a change in materials or scheduling.

Constructive changes are typically caused by the action or inaction of the owner or others involved in the project. They may arise from such things as a failure to disclose conditions on the job site, untimely inspections by government entities, or a failure of a subcontractor to meet a deadline.

Constructive changes frequently give rise to claims because the owner or contractor may be unwilling to acknowledge that a design change is necessary, or the design professional was not at fault for foreseeing and planning in advance for the changed condition.

A “Cardinal Change” arises where the purpose of the original agreement has been frustrated or made impossible by the extent of the requested change. A “Cardinal Change” amounts to the owner breaching the contract, and the design professional would be relieved of performance.

For example, assume the design contract called for the construction of a restaurant with an outdoor playground. Should the owner choose to eliminate the playground, the original purpose of the restaurant would not be violated, and the design change likely would be permissible under the contract. But if the owner sought to elimination of the restaurant entirely, it would violate the purpose of the original contract and constitute a breach of the contract.

Most claims from design changes can be avoided. Never relay on a verbal design change or promise to pay by a contractor or owner. Always document design changes in a written change order. When the need for a constructive change arises during construction, check the contract immediately to determine any deadlines to provide notice to the owner or contractor.

Typically the contractor owes the duty to put the owner on notice, But if in doubt, confirm that the responsible party has provided the owner timely notice. The notice clause prevents a contractor or design professional from prejudicing the owner’s rights to investigate, mitigate, and document the change.

Never rely on the contractor without confirming notice was provided in writing. A design professional who relies only on the contractor, depriving the owner of rights to object to the change, may find it difficult to get paid for any work performed related to the design change. At worse, the design professional may become the subject to an owner’s claim or lawsuit for damages.

Confirm the scope of work anticipated by the design change. Confirm the amount of reimbursement and the terms of payment are clearly spelled out before work on the change begins. When a potential change is identified, create a potential change order file. It is important to correctly classify the nature of the change early in the process.

Review the contract to determine whether the change meets the minimum contract requirements. Be sure to follow the correct procedures to document the change. Be thorough.

Documentation Is the key to avoiding costly claims and future lawsuits. At the beginning of a project, the project management staff should insure the use of standardized procedures and logs. The project team should maintain a documents log that includes all relevant contracts, specifications, proposed changes, reports, analysis, or other documents..

In addition, create an issues log. At a minimum it should contain the date created, a description of the issue, the party responsible for the issue’s resolution, personnel or work affected by the issue, documents involved, and the date closed.

Implementing best practices to systematically document the need for design changes, confirm authority to proceed, and define the scope of the design change and reimbursement, can avoid future costly claims and potential lawsuits against you.

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Timothy B. Soefje is the Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at www.realclearcounsel.com or contact him at tsoefje@realclearcounsel.com.

The law surrounding attorney’s fees continues to change rapidly, posing a serious risk of legal malpractice for any attorney who fails to keep abreast of this developing area.

For example, in Texas, any portion of work performed on a case must be segregated in claims where attorney’s fees are recoverable from the work on claims where attorney’s fees are not recoverable.

The Texas Supreme Court first set forth the basic standard of care for segregation in 2006 in Tony Gullo Motors v. Chapa. A reviewing court can reverse the award and remand the case for new trial on attorney’s fees if fees are not segregated as required by Chapa.

Other state courts also have emphasized the importance of segregation of unrecoverable from recoverable fees. In Seeley v. Seymour and Johnson v. Grayson, two California courts reversed an attorney’s fee award and remanded a case, holding the plaintiff failed to submit billing statements to distinguish between prosecution of a slander of title claim and services performed to remove cloud on title because it was possible to separate the claims and the issues were not too closely related.

Attorneys also must be careful to timely disclose in discovery how fees are segregated to ensure evidence is admissible at trial. The Federal Rule of Civil Procedure 37(c) states a party cannot use information to supply evidence on motion, at a hearing, or at trial, if the party failed to provide that information. Similarly, Texas Rule of Civil Procedure 193.6 provides that a party who fails to make, amend, or supplement a discovery response in a timely manner may not introduce such material

An attorney must segregate his time unless the legal services performed are so intertwined that they advance both a recoverable and unrecoverable claim. As recent at October 2017, the United States District Court for the Southern District of Texas in Cypress Engine Accessories v. HDMS affirmed the requirement to strictly comply with the standard set out in Chapa. The Court held that HDMS failed to segregate recoverable fees earned in defending a DTPA claim from unrecoverable fees earned in defending tort claims.

HDMS’s claim for attorneys’ fees was based on two theories: (1) Section 38.001(8) of the Tex.Civ.Prac. & Remedies Code provides for recovery of reasonable attorneys’ fees for a breach of contract claim; and (2) Cypress Engine brought its DTPA claim in bad faith, which entitles HDMS to fees and costs under Section 17.50(c) of the Tex. Bus. & Com. Code.

In response, Cypress Engine argued that: (1) HDMS failed to plead its attorney’s fees as special damages; (2) Texas law does not support recovering attorney’s fees as actual damages, not only as damages incidental to actual damages, which HDMS cannot prove; and (3) Section 38.001(8) does not apply to Cypress Engine because it is a limited liability corporation.

The Court held that a claimant must segregate recoverable fees from unrecoverable fees and that the facts in Cypress Engine were not so sufficiently “intertwined” as to make the tort fees recoverable. The court held that regardless of how nominal, an attorney must segregate unrecoverable fees that do not advance a recoverable claim for attorney’s fees, and a failure to do so, subject the award of attorney’s fees to reversal.

Several other states impose similar requirements. For example, Illinois has set out similar rules for disclosure and segregation of attorney fees in discovery. Article II, Rule 201(b) of the Illinois Supreme Court Rules states that full disclosures are required for any matter relevant to the case and Illinois Rule 219(c) provides that failure to comply with orders or rules of discovery could result in varying punishments from a stay of proceedings to default judgment.

So how does an attorney comply with the standard of care set forth in Chapa? In general, attorneys are not required to keep and produce separate time and billing records for separate claims, but doing so may well be the best practice until the courts further clarify the outer limits of the requirement.

Opinion testimony is a commonly used method to prove the amount of recoverable attorney’s fees. Testimony may come from disinterested attorneys or from the attorney whose fees are in question. Generally, the testimony of an attorney whose fees are in question merely raises a fact issue to be determined by the jury. However, the testimony of an interested party may establish facts as a matter of law if the testimony is accurate, clear, and uncontroverted.

Any attorney preparing to present evidence of attorney’s fees at trial should be aware that a trial court may demand more than mere opinion testimony, however, including an ability by the party seeking to recover attorney’s fees to identify specific evidence in attorney billing records on which the party’s expert’s opinion is based.

The failure to object to the opposing side’s failure to segregate also can serve as the basis for a future legal negligence claim. Best practice requires an attorney to object at trial during the presentation of evidence on attorney’s fees, but an attorney at minimum must object to a party’s failure to segregate at the time the issue is submitted to the jury and include an appropriate jury charge.

Attorneys who do not ordinarily prosecute claims where attorney’s fees can be recovered also are sometimes surprised to learn some states now permit the “lodestar method” to calculate fees in ordinary breach of contract claims. A failure to permit the court to consider a “lodestar” can result in a significantly lower award of attorney’s fees.

The lodestar method has two steps. First, the court determines the reasonable hours worked and reasonable hourly rate for the work performed. Second, the court multiplies the hours worked by the hourly rate, which equals the base fee or lodestar. Next, the court is free to increase or decrease the loadstar if the court believes such adjustment is necessary.

As set out in detail in Cypress Engine Accessories v. HDMS, some attorneys also are surprised to learn that Texas courts that have fully analyzed Tex.Civ. Prac. & Rem. Code §38.001 have concluded the some states do not provide a right to recover attorney’s fees from a limited liability corporation or limited partnership despite years of trial court’s allowing such recovery. An attorney’s failure to object to the submission of attorney’s fees against an attorney’s limited liability corporation or limited partnership is clear legal malpractice.

Statistically, we’ve known for decades that attorneys who sue clients to recover their fees invite counterclaims for legal malpractice.

Now, a rapidly changing area of law as to how and when attorney’s fees can be recovered creates even more risk of exposure for lawyers that fail to properly comply with the standard of care to segregate attorney’s fees and that fail to properly object in discovery and at trial when attorney’s fees should be denied.

To subscribe to the Professional Liability Update, click HERE, provide your contact information, and receive notice of our updates.

Nicole Ward graduated from the University of Oklahoma College of Law in May 2017. Her practice focuses on labor and employment law, professional liability, construction defect litigation, corporate law, and bankruptcy. She previously interned in-house for the general counsel at a nationwide building materials supplier and for an Administrative Law Judge at the Equal Employment Opportunity Commission (EEOC). At OU, she was a member of the Order of Solicitors, and won the Best Brief Award at the 29^th Annual Ruby R. Vale Interscholastic Corporate Moot Court Competition. She served as a member of the Organization for the Advancement of Women Lawyers and served as a CASA volunteer. Contact her at nward@realclearcounsel.com