Important Factors To Look For When Negotiating A Contract
All contracts, whether verbal or written must meet the following five criteria to be considered a binding contract:
- Agreement: Both Parties to the contract must come to a "meeting of the minds", whereby one party will provide goods or services and the other party accepts the goods or services for an agreed consideration (fee or goods)
- Fee or Consideration: An item or monetary reward must be exchanged between two or more parties entering into the contract.
- Contract Must Be Legally Enforceable: The Contract conditions must be legally enforceable in the jurisdiction to which the contract is to apply. For example in the USA, some States indemnification language is not enforceable due to anti-indemnity statutes.
- The Purpose for the Contract must be Legal: The Contract must be for a legal purpose. A Consultant who is not a licensed Professional Engineer, Licensed Land Surveyor or Licensed Architect and signs a contract to provide such professional services, would be signing an illegal contract and accordingly such a contract could not be enforced.
- Mentally Competent Parties: The signatories to the contract must be mentally competent and not be impaired by insanity or intoxication. They must be authorized by their respective companies to sign the contract. These persons can typically be company officers or specifically authorized personnel with a mandate to sign the contract.
We frequently see consulting companies entering into business agreements without arranging a written contract to record the undertaking between the two parties. A written contract will help a court to determine the outcome quicker, avoiding any disagreements at a later date over what was agreed upon and thus not just rely on your memory. All staff should be encouraged to use written contracts or at least provide their clients with written letters of confirmation.
Client sometimes attempt to impose insurance requirements in contracts that either don't make sense, or are contrary to the interest of all the parties involved in the proposed contract, insurers might not be able to accommodate some of these requirements. We suggest that this is generally due to the lack of understanding of the nature and scope of professional and commercial general liability insurance policies in general. It is now up to your firm to ensure that any written contract you enter into, has been correctly written.
- Indemnity Clauses
Problems with Indemnity Clauses on contracts normally arise when your client shifts the risk to the design professional's liability policy. The contract should not include indemnity clauses by which the consultant assumes liability of others or exceeds their normal legal duty. In law, consultants are responsible for their errors and omissions and those of their sub-consultants and employees. The policy insuring agreements read "any negligent acts, errors or omissions…" and in some American wordings reads "any acts, errors or omissions".
Contracts may ask you to indemnify your "Client" from "any and all claims". All insurance policies have exclusions and this terminology may leave the design professional's firm exposed to a loss, which is specifically excluded under the policy. Are you being asked to pay for your client's legal costs in any suit they may bring against you? If so, be advised that your insurance policies will not cover your client's costs to sue you. The policy will only respond to costs awarded by a Court of Law, which may only be a fraction of the real costs. Some clients will insert the words "any wrongs", by adding these words you might assume a contractual obligation that extends beyond your professional services, and therefore outside the coverage provided by your insurance policy.
Beware of standard of practice language that includes such phrases such as "highest standard of practice". Accepting such phrases can increase your liability. You can only be judged by the standard of practice that exists at the time the services are provided and as set out by you Provincial Association.
- Notice of Material Change or Alteration
Some contracts will impose notice requirements of any "Material Change or Alteration" to the policy wording. The principal reason most insurers will not agreed to endorse the policy providing Third Parties with notice of material change or alteration, is that no one knows what these terms might mean, particularly not in connection with policies written with aggregate limits of liability, which is the case with all Professional Liability policies. Your insurers would have to notify your "Client" of any potential claim or actual claim made during the policy term that will mitigate the limit of liability available. By doing so the insurer might alert another party of potential reserves or settlement on a claim that could still be under negotiation. Your professional liability underwriter will NOT agree to these requirements.
- Adding a Client or Owner as Additional Insured
It is not uncommon for the client to request that they be added as Additional Insured under your insurance policies. Most insurers will endorse the general liability insurance policies but only with respect to your "vicarious" liability arising from your operations on behalf of your client at no additional cost. However, under professional liability insurance if the client is to be added as an Additional Insured they will be unable to collect under the policy for damages suffered because the insurer pays on behalf of the Named Insured, as they would technically be suing themselves. Owner alleging that the Consultant has made an error triggers Professional Liability policies. Therefore adding the Owner as a Named Insured under a Professional Liability policy cannot be accomplished due to the fact that the Owner is not providing the professional services insured under the policy.
- Waiver of Subrogation
Most insurance policies contains a clause inferring that after the insurer has paid for any damages covered under the policy terms and conditions, the insured will automatically transfer their rights of recovery against any other party to the Insurer to the extent of the payment made. On some contracts there is a provision for a "Waiver of Subrogation", which is committing the insurer to agree to waive their rights of recovery against your client. Under Professional Liability policies issued in Canada underwriters and in some cases General Liability insurers will decline this request. Some American insurers might agree to endorse their policy to waive their rights of recovery, as their wordings are different to Canadian wordings.
- Express Warranties, Guarantees or Penalty Clauses
Another common problem in owner-generated contracts is that the contract was drafted for a "Contractor" and it is now being used for the "Consultant". The contract should not include any Express Warranties, Guarantees or Penalty Clauses, as they will generally nullify coverage provided under your professional liability insurance policy. Your professional liability insurance policies contain exclusions concerning these clauses.
- Contract Law
You should check the clause that dictates the contract law on your agreements. It should be either the law of your province or at least Canadian law. Should the contract be applicable to laws outside Canada you must verify that your insurance provides coverage for your operations in that particular country. Many Canadian Insurers will not provide any cover outside of Canada.
We have to stress at this point that we are unable to provide any legal opinions, as we are not qualified to do so. It goes without saying that it is always wise to contact your friendly legal counsel to discuss the true impact of your proposed insurance requirements and get them to modify them to coincide with what your underwriters are prepared to or can offer.
At Jardine Lloyd Thompson we provide a free contract review service as it relates to your insurance coverages. We will review your contract and advise on how it may impact on the insurance policies that you have in place. We would be happy to discuss this further with your "Clients/Owners" should you request us to do so.
Jardine Lloyd Thompson is part of the world-wide Jardine Lloyd Thompson Insurance Brokerage Group. Jardine Lloyd Thompson and its subsidiaries specialise in professional liability insurance, handling of professional liability insurance claims and arranging captive insurance companies.
The information contained herein is believed to be accurate, but individual circumstances, local business and insurance practice and the Law can vary extensively and Jardine Lloyd Thompson and its associated and subsidiary companies are not responsible for any errors and omissions or any loss or damage arising from the use of this information. In the event of situations such as are described in this bulletin, the reader should seek legal counsel and specific advice from Jardine Lloyd Thompson or your Insurance Broker.
© 2004 Jardine Lloyd Thompson Canada
