This document provides generic advice relative to common issues that can adversely impact on the cover provided by your Professional Indemnity Insurance policy. It is not intended to provide specific advice relative to any particular set of documents or project that you are currently, or have previously been, engaged in connection with.
You should always seek advice from both Watson Laurie as your Professional Indemnity Insurance Broker and your own legal advisors before agreeing to sign any documentation to ensure that you have received the correct advice.
Appointment agreements and contracts come in many different forms, including verbal agreements, exchange of letters, a formal letter of engagement, or prescribed terms of engagement created by your client.
Many professional bodies stipulate that their members are required to have formal terms of engagement in place with their clients.
The negotiation of such agreements provides you with an opportunity to carefully define the services you will provide and the basis upon which your services will be delivered, including fee payment provisions. Many clients will look to use their own forms of agreement to impose responsibilities on you – some of which may be extremely onerous and take you outside the scope of the cover provided by your current Professional Indemnity Insurance policy.
Standard Forms of Agreement
There are various standard forms of the agreement published by professional bodies in the UK that do not include clauses which take you outside the scope of the cover provided by your current Professional Indemnity Insurance policy as long as such agreements are not amended.
A Collateral Warranty is a contract entered into by you with a third party who is not your original client – such as a purchaser, tenant or funder of a development – and sits alongside your original agreement.
It establishes a direct contractual relationship between you and such third parties where no contractual connection would exist otherwise.
The clauses of such warranties can frequently create conflict between you and your client if they contain duties and obligations beyond those contained within your original agreement.
Most professional indemnity insurers agree, in principle, to provide cover for any claim arising out of entering into a warranty as long as the duty of care owed to the third party (beneficiary) is no more onerous and of no longer duration than that owed to your original client.
Any clauses that seek to extend the duty of care or the limitation period within your original agreement should be resisted as they may invalidate the cover provided by your current policy. Other matters that can invalidate your cover are:
- An express warranty regarding fitness for purpose
- A guarantee of performance relating to a protect period and/or project budget being met
- Assignment of a warranty more than twice
- Contractual obligations – such as wide ranging indemnity clauses
A common ploy adopted by clients/their professional advisors is to state that other parties have readily signed the warranty as originally drafted and that your objections, or required alterations, are unreasonable.
Please consider the following:
- Do you have to sign a Warranty? Only if you originally agreed to do so under the terms of your agreement with you client.
- Who do I have to provide a Warranty to? Only those parties specifically referred to within your original agreement – such as the first purchaser and the first tenant of the whole development (or a substantial part thereof) and the funder of the entire development.
- What should be the form of Warranty? It should be the form attached to your original agreement and the final version that you agreed with your client. If no form of Warranty was agreed to and you are happy for commercial reasons to enter into a Warranty then you should consider only a version produced by one of the following organisations as their terms are readily accepted by most insurers:
- British Property Federation
- CIC Collateral Warranty
- National Housing Federation
This section summarises Clauses that you should be mindful of relative to your current professional indemnity insurance cover and for the reasons outlined relative to each Clause.
The Clauses should always be approached with caution as they can considerably increase your exposure and/or take you outside of the scope of cover provided by your current Professional Indemnity Insurance policy.
It will be a condition of your professional indemnity insurance policy that you do not agree to accept a clause which states that you agree to accept the decision of an adjudicator as finally determining the dispute with no further reference to legal proceedings, arbitration or alternative dispute resolution.
Failure to comply with this condition will entitle your Insurers to refuse to provide cover under your policy for the dispute in question.
These clauses seek to make you liable to indemnify your client in respect of “all losses, claims, damages, expenses and costs” that are caused by a breach of contract or duty on your part when performing your services and considerably widen what your client can recover from you relative to what is normally recoverable at common law.
The best approach to indemnity clauses is to seek to have them removed from the agreement entirely.
Removing these clauses does not disadvantage your client in the sense that your client will not be precluded from bringing a claim for a breach of contract in the ordinary way.
In addition, your client’s position is usually protected by the usual requirement that you maintain professional indemnity insurance policy cover.
If your client will not agree to remove the indemnity clause altogether, then as a fall-back position, you should seek to amend the clause so that the recoverable losses are expressed to be “all reasonably foreseeable, legally recoverable and fully mitigated losses, claims, damages etc.”
Deleterious Materials clauses
The obligation in such clauses should be limited to you exercising all reasonable skill and care in the performance of your services and relative to those part of the project for which you are responsible, not to specify materials that are considered to be deleterious by your profession, as opposed to materials that are considered to be deleterious generally within the construction industry or by consultants generally.
Failure to amend such a clause, as stated above, may prejudice the cover provided by your policy.
Fitness for purpose and Express guarantee Clauses
Such clauses are extremely onerous as they elicit from you an absolute obligation and impose upon you a duty beyond the standard of exercising reasonable skill and care in the performance of your services.
Your current Professional Indemnity Insurance policy will not cover you for any contractual liability you incur as a result of accepting a fitness for purpose obligation within the terms of your agreement and should be avoided at all costs.
Likewise, your policy will not cover you for any contractual liability you incur as a result of giving any express guarantee relating to the satisfaction of a performance specification, or that the period of a project or project budget will be achieved, within the terms of your agreement and should be avoided at all costs.
Liquidated Damages and Penalty Clauses
Your professional indemnity insurance policy will not cover you for any contractual liability you incur as a result of agreeing to such clauses and again they should be avoided at all costs.
Contract Review Service
To ensure that you are not agreeing to onerous provisions within appointment documents and Warranties that could invalidate the cover provided by you current professional indemnity insurance policy we provide a contract review service. This service is designed to provide a one-off review of individual appointment and/or warranty agreements for obligations that may take you outside the scope of your current professional indemnity insurance policy and any advice or recommendations provided by us will be restricted to such matters. We cannot provide any commentary on any commercial aspects contained within such documents – such as payment provisions, `set off` clauses, scope of services and termination provisions, as we are not authorised or regulated to do so. For the same reason, we cannot act on your behalf in any contractual discussions with your client or their professional advisors.
If you need any legal assistance in negotiating commercial clauses contained within agreements or collateral warranties then please contact Sarah Maylor at Kennedys Law in their Sheffield Office, Tel: 0114 253 2050 or Email: firstname.lastname@example.org , as you will be offered favourable fee rates in recognition of you being a Watson Laurie client.
To benefit from the contract review service referred to above please contact Chris Fitzgerald at Watson Laurie, Tel: 01204 387111 or Email: email@example.com , and we will aim to provide our comments within 10 days from the date of receipt of the complete documentation. It is important to forward such documents to us as soon as possible to avoid a request for last minute/urgent advice which we cannot respond to within your required timescales.