Contract Review

Contractual Liabilities and Insurance Implications

There is a tendency for consultants to just sign contracts without fully appreciating the risks to their business that come with the signing of the contract. The common thought is that their insurance policy provides ‘all the cover’ they need.

The issue is that all insurance policies have exclusions, and a contract may go beyond what is covered by insurance, even breach insurance policy conditions, and push risk and any resultant financial loss onto you with serious ramifications.

A thorough contract review will uncover risk issues. It will allow you to provide a letter to the Principal you are undertaking work for, in order to negotiate and request reasonable and fair amendments to your contract clauses.

We provide an example of the level of detail undertaken in one of our standard contract legal reviews below. In this particular case, twenty-three recommendations in total were made to the client arising from the one contract – we provide the first two recommendations only.

The Contract is the Australian Standard AS 4122-2000 - General Conditions of Contract for Engagement of Consultants.  The Policy wording was the client’s Professional Indemnity policy.

Contract Review Example

1. Nature of Contract clause
The Consultant shall perform the Services to that standard of care and skill to be expected of a Consultant who regularly acts in the capacity in which the Consultant is engaged and who possesses the knowledge, skill and experience of a Consultant qualified to act in that capacity.

Whether covered under Insurance Policy
The Professional Indemnity policy we provided covers you for a standard of care that is the degree of skill and care that is reasonably expected of a person who is a competent consultant experienced in acting as a consultant in your professional business. The standard of care in this clause may not be consistent with that covered by your policy, and your policy may not respond.

There is also a legal drafting error in this clause because you are required to have the standard of care expected of a ‘Consultant’ and ‘Consultant’ is defined to mean you, so the definitions are ‘circular’ and make no sense for the purposes of legal interpretation.

How to Fix
Negotiate to have this clause modified as follows: “The Consultant shall perform the Services to that standard of care and skill to be expected of a reasonably competent consultant Consultant who regularly acts in the capacity in which the Consultant is engaged and who possesses the knowledge, skill and experience of a consultant Consultant qualified to act in that capacity.”

2. Responsibilities and Obligations of the Consultant clause
The Consultant shall: (c) with due expedition and without delay and in accordance with the Program if any, provide all professional skill and advice required for carrying out the Services;

Whether covered under Insurance Policy
This clause contains no element of reasonableness. You will be liable under this clause if you fail to provide the Services with due expedition and without delay, regardless of whether you exercised reasonable skill and care in providing your Services or whether there were other factors beyond your control which contributed to the delay. Your policy may not respond in all cases because this clause may result in the assumption of a duty that exceeds your duty of care in the absence of the contract. It is reasonable and fair for you to exercise reasonable care and diligence to take reasonable steps to complete the work in accordance with the program but not to assume an absolute obligation to do so in all cases.

How to Fix
Negotiate to have this subclause (c) modified as follows: “The Consultant shall: (c) take reasonable steps to, with due expedition and without delay and in accordance with the Program if any, provide all professional skill and advice required for carrying out the Services;”
 

For any client of Business Insurance Specialists, we are happy to obtain and provide a written legal review of your contract in relation to your insurance in order to ensure there is minimal gap in cover, and your uninsured risk is reduced. In order to obtain this review, please provided the following below, and hit submit.