The allocation of risk in construction projects is a constant source of disputes.
Often the stronger contracting party will push the risk downstream, even where the recipient has little ability to mitigate or control such risks.
It is not a secret that agreeing to bad contracts leads to more claims, poor outcomes in litigation and taking on risks which could be uninsured.
I set out below the six key things every consultant should have on their risk radar when contracting on a construction project. It is by no means an exhaustive list, but hopefully a useful starting point for consultants looking to protect their business and manage legal and commercial risks.
Tip one: client selection
Have you ever had a client you knew would be trouble, but took them on against your better judgment?
Red flag clients may include those with grandiose ambitions unmatched by project budgets, those operating in high risk industries or poorly equipped or unskilled project staff or a poor record of paying bills.
Understanding the risk profile posed by a prospective client should inform how you engage with them contractual (if at all!). If proceeding with a red flag client, you may wish to consider charging a commercial premium or taking additional steps to protect yourself contractually.
Tip two: scope of works
What are you being engaged to do? What are you not being engaged to do?
It sounds obvious, but you would be surprised how many consultancy agreements fail to spell out this critical information in the contract.
If the contracting parties are clear at the outset about who is and is not doing what, the risk of a dispute arising down the track is minimised. Further, if a dispute does arise, you will be better placed to defend such a claim if your contract clearly spells out the scope of work.
Tip three: when things turn sour
Dispute resolution clauses are a common feature in construction contracts. Consultants should consider which dispute resolution mechanism is most appropriate from project-to-project. For example, arbitrations may be suitable for a major construction project, however, it may be inappropriate for a smaller, low-cost project as they are costly to run. In this case, a simple mediation clause, which reserves the right to litigate may be preferable.
How would you prefer to try and resolve a dispute? Does your insurer agree with your contractual preference? These are both important questions to consider.
Tip four – ceilings for your risk appetite
Whilst not always bulletproof, limitation of liability clauses can provide powerful protection if properly drafted. If properly drafted they can limit or exclude a consultant’s liability. Some examples include:
- capping the amount payable in damages for a breach;
- restricting the types of loss or remedies available;
- setting timeframes for claims to be made.
Such clauses are particularly important to consider in the context of high-risk projects or with high-risk clients.
Tip five: don’t mess with your insurance!
There are numerous ways a contract can bring you unstuck when it comes to cover being available under your professional indemnity insurance policy. For this reason, it is important to know:
- what your insurance policy covers; and
- whether what you are signing will interfere with your cover.
A common area in which consultants come unstuck is with respect to contractually assumed exclusions. This is because most professional indemnity policies will exclude cover where you contractually assume additional liabilities, i.e. an insurer will generally not cover you where you have taken on more risk contractually than you otherwise would have at law.
For instance, if you agree to waive your proportionate liability rights (where you would have been up for only 10%) and you are now up for 90% and your insurer is unlikely to pick up the 80% differential.
Tip six: learn how to drive your insurance policy
Your insurance policy is a bit like a car or a fridge – you generally get what you pay for. It is therefore important to understand what your policy does and doesn’t cover, so that you can make commercial decisions accordingly.
A common recent example is the prevalence of cladding exclusions. Without boring you with the detail, the practical effect of these exclusions is that many consultants are uninsured for claims involving cladding on the external walls of the building, whether the problem may relate to fire risk or water ingress (unless of course they’ve lodged a valid bulk notification).
Taking this example a step further, if you know your policy does not cover you for cladding claims, you would need to carefully weigh up taking on risks involving cladding, as you may be uninsured for such work / projects. If you understand this risk, you may decide not to take on any cladding work, or conversely, agree to get involved but for a commercial premium. Again, it all comes down to making informed commercial decisions.
Understanding legal risk and your insurance policy/ies is a key part of doing business. By understanding them, you can make more informed commercial decisions.
Whilst insurance brokers and lawyers can always help in navigating these issues, it is really up to you as the gatekeeper, to understand key liability risks and your insurance.
Put differently, whilst a lifeguard (aka lawyer or broker) may provide some valuable assistance from time to time, learning how to swim will always provide a more effective safety net.
By Natasha Stojanovich, Partner of Lander & Rogers
With thanks to Kerry Ioulianou and Simone Karmis of Lander & Rogers for their assistance with the drafting of this article.