When a client approaches you to start work on a new project, one of the first things that you need to do is formalise the terms of the engagement. Obviously, the best way to put yourself in the most favourable position, from a risk management perspective, is to be engaged under your own terms and conditions, tailored to suit the particular requirements of each project. Another risk-averse option is to utilise one of the industry standard contracts for consultancy engagements, such as the AS4122-2010 or the CAA 2019 from the Australian Institute of Architects.

In some circumstances, however, especially in relation to larger projects, clients will insist that you be engaged under a client drafted agreement, which may contain any number of obligations which are inappropriate for you to assume, and which may also be drafted in such a way as to raise significant insurance concerns. If you are being engaged as a subconsultant, your client may seek to engage you on a “back-to-back” basis with their own head contract. Subconsultancy agreements may also contain a clause that you are required to assume all the obligations and responsibilities contained in the head contract. This scenario can be particularly risky as you will generally have little or no ability to influence or negotiate the terms of the head contract for the project, and in some cases may not have even been provided with a copy.

DANGER – Contractual Terms to look out for!

Contractual terms can raise a professional indemnity insurance risk if they:

• Are outside the scope of the professional services that you are insured to provide; or
• Contain terms or impose obligations that could enliven one of the exclusions contained in your policy, such as a waiver of rights exclusion or and assumed liability exclusion.

Mind your “Business”

So, how do you determine whether the services that you are agreeing to provide fall within the scope of services that you are insured for?

Your professional indemnity insurance covers you for claims arising from the conduct of your professional ”business”.  “Business” generally means the carrying out of those functions normally associated with the conduct of the members of the profession stated in your policy schedule.

An example of clauses that can pose an insurance risk by requiring you to undertake contractual obligations beyond the scope of your insured professional business are clauses which impose a defects liability period on you and use terms such as “rectify” or “make good”.  This does not include clauses which require you to remedy your own services, but rather clauses which refer to the project as a whole, and impose greater contractual obligations on you in relation to the construction process.  Another example are those clauses which require you to supply goods or be involved in the manufacture or installation of goods or equipment.

But is this clause Excluded?

Most professional indemnity insurance policies will contain certain exclusions of cover.

A common exclusion that is found in most professional indemnity insurance policies is for contractual terms which contain a “waiver of rights”.  An example of a “waiver of rights” clause is one which releases your client from future claims, or limits in any way your insurer’s ability to claim against your client in the event of a future claim.

An example of a clause which may “trigger” the waiver of rights exclusion is any clause which limits, places a “cap” upon, or completely excludes your client’s liability under the Consultancy Agreement.

A clause of this nature would infringe the waiver of rights exclusion as it could limit the amount that your insurer would be able to recover from your client in the event of a future claim.

As with the waiver of rights exclusion, most professional indemnity insurance policies will contain an “assumed liability” exclusion, which will be triggered when an insured agrees to take on greater obligations or accept greater potential legal liability than the law would otherwise impose.

Perhaps the most common “assumed liability” style clauses that appear in most client drafted consultancy agreements are indemnity clauses. An indemnity is an agreement to pay money in the event of a loss.  In most circumstances, a client drafted Consultancy Agreement will contain an indemnity in your client’s favour, providing that you are liable for your client’s loss, without any consideration to whether they may have caused some, or maybe even all, of that loss by their own actions.

We recommend that you delete any indemnity that is drafted in your client’s favour from consultancy agreements.  Without any indemnities, your client would still have legal rights against you for breach of contract or negligence, as well as the protection of legislation like the Competition and Consumer Act.

Contract Negotiations – Negotiating like a Boss

As we noted at the start of the article, it is always favourable to be engaged under your own terms and conditions, sent out with the Fee Proposal at the start of any project. In the best case, your client accepts them, and you can move forward with the project immediately, or the worst that can happen is the client rejects them and sends its own terms – but at least you are in a better position to negotiate at this early point.

If you receive a draft consultancy agreement from a client, the most important first step in any contract negotiation is to read it, in full. Make sure to read past the execution page to the very end of the contract as often there will be (sometimes multiple) annexures which are still binding on you such as certificates, statements, confidentiality deeds or novation deeds.

If you are happy with your client’s consultancy agreement, and don’t believe that it poses any major legal, commercial or insurance risks to you, you can sign it and return it, keeping a copy for your records. If you do have concerns with some of the terms within the consultancy agreement, you should seek clarification from your client and then send your client details of the amendments you wish to make. You can then expect to receive a response from your client either accepting, rejecting or proposing an alternative to your proposed changes.

This negotiation stage is vital as it is important that both you and your client are on the same page when it comes to the work you are undertaking on the project and your contractual obligations. Your negotiation strategy will probably vary for each contract, and will depend on the complexity of the issues, the type of project, the number of negotiating parties, and the personalities involved, as what works for one client may have less success with another.

At the outset, we would suggest that you carefully consider each of the contract terms in contention, and divide them into the following three classes:

• Deal-breakers – Risks so serious that you will walk away from the project rather than accept the clause.
• Important changes – Serious risks that you would strongly prefer not to accept.
• “Nice to have” changes – Clauses that you would like to change but can afford to concede.

It is unlikely that your client will agree to all the changes that you have proposed, and you should expect that both sides will concede some points in order to “meet in the middle”. In that scenario, your aim is to concede on the “Nice to have” changes, to generate momentum towards compromise and allow you to obtain amendments on the other two classes.

Should you find yourself in the middle of a difficult dispute over contract terms, our Practice Guide – Contract Negotiations, which contains some more detail on skills and strategies for successful contract negotiation may be of assistance.

Our next webinar – Negotiation: Putting your Practice in the best position from well renowned Barrister and Victorian Bar Advanced Mediator, Tony Horan, will delve into the world of contract negotiation and discuss strategies for managing commercial and insurance risks. The webinar will also discuss tips and risks around resolving disputes with clients, including pursuing payment of outstanding fees.

Nina Stone
Risk Manager

This article is only general advice in respect of risk management. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.