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RE: Clients & Credit

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A consulting engineer's small claims court war story involving E&O insurance
which may interest some subscribers:

I've only had to sue a client once.  I was asked to provide construction
phase services on a large project for which I was required to carry one
million dollars E&O coverage about the time I was setting up my practice.  I
had designed the building as principal of a firm I was leaving (which had
advised that it did not wish to continue with the project) and the client,
the L.A. office of a big mid-west architectural firm which will remain
nameless unless someone asks, really wanted me to follow through on the job
as E.O.R. during construction.

I agreed to do it, at my former partners' request, for the same construction
phase fee our firm had agreed upon at the beginning of design, but I was
worried about carrying the E&O premium, particularly since this was the only
one of the projects I had lined up which was going to require that I be
insured.  I asked for and the architect agreed to a $10,000.00
non-refundable payment upon excecution of the consulting contract, on top of
the agreed upon fee, to offset most of my first year's premium.  All this
was put in writing in a contract based on an AIA standard form, which the
client declined to sign until I actually got set up, got insured, and
provided  them with a certificate of insurance.

I borrowed money to make the premium, got the insurance, got the signed
contract and immediately invoiced for the initial payment.  As the more
savvy old hands among list subscribers will guess, the project went sour.
It's a long story which I won't go into unless someone asks, but the thing
dragged on for several years.  Construction never started.  The big
architectural firm first said they'd pay the $10,000.00 right away, then
said they'd  pay when construction got going or when the owner decided to
kill the thing, but finally decided to close its L.A. office and stiff me.
Fortunately, I had other good clients and made enough money to stay afloat,
pay back the loan and build my practice.

I decided I had to take these guys to court when I found out they were going
to skip town.  I hired an attorney to review the matter and advise me about
my chances with a real lawsuit in superior court.  I had documentation up
the wazoo.  He said they clearly owed me the $10,000.00 plus hourly fees for
pre-construction services I had provided over the period during which the
project was dying its slow death, but that the big architectural firm had
corporate counsel (in house legal) who would probably try to beat me into
submission by filing motions and delays, trying to get the case heard back
in the mid-west where they were headquartered, and etc.  I would have to pay
legal fees to deal with everything they could think of in their probable
effort to make it too expensive for me to continue.  He said that if I had
$200,000.00 to set aside for legal fees I would almost surely win judgement
for the inital payment and hourly fees, and probably even for the costs of
the suit, but  that it could easily take two years.  He thought I'd be
better of just going for the maximum in small claims court.

The case was heard in Santa Monica.  The architect's argument hinged on the
pay when paid clause within the AIA standard architect-engineer agreement.
They said they didn't have to pay me, even though they'd been paid over a
half a million dollars in fee on the thing, because none of that money had
been for the construction phase services I had agreed to provide (since
construction had never started).  I showed the guy my signed contract,
acknowledged the existence of the pay when paid provision, but argued that
it clearly did not apply to my initial payment.

The hearing officer verified that the initial payment clause said what I
claimed it did and told the architect he was familiar with pay when paid
provisions and considered them garbage.  He took less than five minutes to
award me the limit of his jurisdiction and tell the client that they were
lucky I didn't have the resources to sue them in superior court.  I signed a
quit-claim drafted by that in-house counsel (agreeing not to ask for any
further payment) and got the $5,000.00 a few days later.

I post this story to the list in response to both the discussion of small
claims hearing officers splitting the difference (I would encourage
subscribers not to let deadbeats get away with it -- O.K., I only got half,
but I believe this guy would have given me $25,000.00 if he could have -- I
think the key is to be able to prove your case a proper contract and
supporting documentation), and to the thread on E&O insurance being a waste
of money and a law suit attractant (my insurance has proven to be a
substantial asset to my practice -- I still carry it five years later --
helping to open doors which would otherwise be closed with corporate
clients, and I have never been sued or named in a law suit -- knock on

Drew Norman, S.E.
Drew A. Norman and Associates