Consultancy agreements are a cornerstone of the construction industry in Australia. Design consulting contracts govern the relationship between consultants and their clients. Whether you’re an engineer, architect, or quantity surveyor, understanding the nuances of these agreements is essential to protect your interests and mitigate risks.
This article was written by our consultancy agreement lawyers and provides an overview of key clauses and considerations in design consultancy agreements.
Key Takeaways
- Fitness for purpose obligations can impose higher standards than professional duties, potentially leading to uninsured losses
- Broad indemnity clauses can expose consultants to significant financial risks, including losses outside their control
- Properly drafted limitation clauses are crucial to capping liability and avoiding insolvency risks
- Poorly defined scopes of work can lead to unanticipated tasks and financial strain
Understanding Fitness for Purpose Obligations
Fitness for purpose clauses require design consultants to ensure their deliverables meet specific project objectives. These obligations can be problematic because they may exceed the standard professional duty of care.
Why Fitness for Purpose Clauses Are Risky
- Professional indemnity insurance typically covers breaches of professional duty but may not extend to fitness for purpose obligations
- Unrealistic expectations, such as requiring engineering drawings to facilitate quick apartment sales, imposes obligations beyond a design consultant’s control
- Breaching a suitability clause could result in significant financial exposure for design consultants
Mitigating Risks
- Negotiate clear and realistic fitness for purpose clauses
- Include language that aligns obligations with professional standards of care
- Seek legal advice to ensure insurance coverage aligns with contractual obligations
The Risks of Indemnity Clauses
Indemnity clauses can act as “open chequebooks,” exposing consultants to extensive liabilities without the need for the client to prove fault.
Common Indemnity Scenarios
- Intellectual Property Infringement: Liability for IP breaches may not be covered by insurance
- Liquidated Damages: Pre-estimated losses for delays or breaches can be financially crippling
- Errors by Other Consultants: Consultants may be held liable for mistakes outside their control
- Consequential Losses: These are often excluded from insurance policies but may still be included in indemnity clauses
- Hidden Indemnities: Indemnity clauses may be hidden in inspection or design certificates
How to Protect Yourself
- Limit indemnities to areas within your control and expertise
- Exclude indemnities for consequential or indirect losses
- Ensure indemnity clauses are insurable under your professional indemnity polic
The Importance of Limits of Liability
A well-drafted limitation of liability clause is essential to cap your financial exposure under a consultancy agreement.
What Does a Limitation of Liability Do?
- caps the total amount payable for claims arising from the agreement
- defines the types of losses covered, such as direct damages only
Example Clause
“The total liability of the Consultant to the Client for any loss or damage arising out of or in connection with the Contract and the Services shall be limited to $1,000,000.”
Key Considerations
- Ensure the cap is proportionate to the consulting fee and project size
- Negotiate carve-outs carefully, such as exclusions for fraud or confidentiality breaches
Avoiding Scope Creep
Scope creep occurs when consultants are required to perform tasks beyond the agreed scope of work, often without additional compensation.
Common Causes of Scope Creep
- Vague Definitions: Terms like “including but not limited to” create ambiguity
- Client Directions: Blanket obligations to follow client instructions can lead to additional work
- Value Engineering: Unclear expectations around cost-saving measures can result in excessive demands
How to Prevent Scope Creep
- Define “Services” clearly and limit obligations to those explicitly stated in the agreement
- Avoid open-ended language in scope definitions
- Include provisions for variations and additional fees for out-of-scope work
Frequently Asked Questions (FAQs)
What is a fitness for purpose clause in a consultancy agreement?
A fitness for purpose clause requires consultants to ensure their deliverables meet specific project objectives, potentially exceeding standard professional duties.
Can indemnity clauses make me liable for losses caused by others?
Yes, depending on the wording, indemnity clauses can hold you liable for errors caused by other consultants or even the client’s own actions.
Why is a limitation of liability clause important?
It caps your financial exposure, ensuring you are not liable for unlimited losses that could lead to insolvency.
How can I avoid scope creep in a consultancy agreement?
Clearly define the scope of services, avoid vague language, and include provisions for variations and additional fees for extra work.
Are all indemnities covered by professional indemnity insurance
No, indemnities for intellectual property breaches, liquidated damages, and consequential losses are often excluded from insurance coverage.
