When you are initially engaged by a client to work on a new design/build, you are no doubt keen and itching to get started on crafting your design. But before you do, there is something vital you need to consider – has your client signed the agreement you initially sent to them, together with your scope and fees?
We know it is probably the least exciting aspect of a project, but alas, it is also one of the most crucial. Why? Although you would have already sent your client your own tailored terms and conditions which are favourable to your practice, often your client will subsequently provide you with their agreement to sign. This agreement may contain onerous terms that have both insurance and commercial risk implications for your practice.
Clients, particularly commercial or even government clients, often try to include clauses in their agreements which increase your liability over and above the duty and standard of care imposed by legislation and common law. Sometimes these agreements just aren’t suited to the type of services you are providing and/or contain clauses that could make you responsible for work that you simply aren’t qualified (or insured) to do. Unsurprisingly, such agreements often lead to uninsured risks by increasing your liability above that at law or waiving certain rights. That is, if something was to go wrong and you have agreed to these sorts of clauses within your client’s agreement, you might only be partly (or possibly not) covered under your professional indemnity insurance policy.
To prevent such a situation from happening, you should consider having your own (written) consultancy agreement that you and your client sign. Most consultants have a standard form agreement that they used. This might be an Australian Standards agreement, or a proforma agreement endorsed by your industry representative body. However, you might want to consider going one step further and drafting a proforma agreement that is more tailored to meet your business priorities and project risks, and ideally avoid clauses which could infringe your professional indemnity insurance policy.
If you are an architect who practises in New South Wales, Queensland, South Australia or Victoria, you will also need to consider your applicable Code of Conduct. These codes require you to enter into a written agreement before you provide your services and the agreement must cover particular items.
When considering what to include in your own agreement, although not an exhaustive list, at the very least, you should:
- Identify the contract parties and project, ensuring that the entity named in the agreement with your client is the same as the entity noted on your professional indemnity insurance policy (otherwise you will not be insured);
- Clarify your scope with care and detail, making sure that you limit your services to those services covered by your policy. If performing additional services outside those services noted on your professional indemnity insurance policy, you will need to speak to your broker. Consider expressly stating what services you are not performing;
- Explain how you will charge for your services including the time and procedure for payment, bearing in mind that fees and fee recovery are commercial matters generally not covered under your professional indemnity insurance policy. It is therefore important you carefully consider such clauses;
- Discuss timeframes;
- Consider limiting your liability as this may offer some protection against claims by reducing, excluding or capping your liability to the other party;
- Include clauses that clearly set out your rights regarding variation, termination, extensions of time, intellectual property, and dispute resolution. With dispute resolution it is important that you do not include clauses which make it mandatory to undergo binding methods like arbitration and expert determination as such obligations would deprive you of your litigation rights;
- Consider clauses which require your client to assume responsibility for issues related to uninsured areas. For example, most professional indemnity insurance policies have a broad exclusion of claims for asbestos, or claims arising out of aluminium composite panels with a polyethylene core;
- Cover any requirements under the relevant Code of Conduct;
- Be relatively simple;
- Not overpromise, especially as to the timing of deliverables and the standard of care.
Further, if using your own proforma agreement, it is important you consider tailoring it for each project.
In a perfect world, your client would sign your agreement and you would then commence work. However, often the client will instead provide you with their agreement to sign. You will need to read the agreement very carefully, and you should seek legal advice. Not only do you need to consider legal and commercial risks, but you need to be mindful of clauses that impose obligations outside the cover of your professional indemnity insurance policy (and therefore leave you with potentially uninsured risk). By way of examples, we would suggest that you be wary of clauses that relate to:
- Warranties, particularly of an outcome such as fitness for purpose warranties;
- No-fault indemnities;
- Performance standards of care that exceed common law;
- Limitations on your client’s liability;
- Contracting out of proportionate liability;
- Set-off and excessive compensation;
- Waivers of right to recover from your client including time bars or deeds of release; and
- Disclaimers of liability (for example, a clause whereby the client disclaims or excludes its liability, such as where your client is seeking to deny responsibility for breach of contract or negligence).
In this article it is impossible to capture all of the insurance risks you should consider. There are many other risks that you should consider when drafting your own consultancy agreement (or considering one that your client has provided) and the above is just the starting point. We suggest that you receive legal advice when entering into any agreement with your client.
If you have professional indemnity insurance through Planned Cover, then you may be able to use our contract review service whereby we provide comments on clauses which may affect or limit your professional indemnity insurance policy.
Once you carefully settle on the terms of the agreement, both you and your client should promptly sign and date the agreement. It is important that you do not provide services until the agreement is signed. This essential step of execution will help provide you (and your client) with a clear set of obligations and liabilities as to what both parties have agreed to. This will mean less confusion and ambiguity about the various aspect of the project, the services and who is doing what and when, which in turn will hopefully mean a reduced likelihood of errors or misunderstandings arising.
That said, should a dispute arise, you will have a written record of what was agreed to. If you don’t have a signed agreement, it will be up to a court to determine what in fact is the contract. This could be a very costly and lengthy process. Plus, it will make your insurer’s role to defend your claim very difficult.
So, to recap, it is important that both you and the client sign an agreement before you commence your services. If your client does not wish to enter into your agreement, you should carefully consider their proposed agreement and seek legal advice. From a professional indemnity insurance perspective, it is important that you carefully consider clauses which could leave you with uninsured risk. Once the agreement is negotiated and settled, immediately sign and date it. Then, it is back to getting creative with your design!
If you are keen to learn more about contracts, you might like to attend our “Contracts Toolkit 2023” webinar which will provide an update on some essential aspects of consultancy agreements on behalf of informed Lawyers Pty Ltd (ACN 635 862 145). Click here to register for this webinar.
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.