Negotiating a contract can be difficult and time consuming, but it is important to take the time to understand the obligations being entered into and their implications on your Professional Indemnity Insurance. Here are some key considerations to remember when undertaking contractual negotiations relative to your PII.
Duty of Care
Professional Indemnity Insurance policies will typically exclude cover for contractual obligations that go beyond the duty to exercise reasonable skill and care. It is therefore important to resist agreeing to a higher standard of care within contracts. It is a common misconception that because the duty of care is outlined in the contract as 'reasonable skill and care' that this automatically applies to all obligations in the contract but this is not necessarily the case. The duty of care clause would need to be overarching, specifically stating that it is to apply to all obligations, which generally it does not. Similarly, obligations outlined in the Schedule of Services are not automatically subject to the standard of care outlined in the main appointment. In the case of MT Hojgaard v Eon, the duty of care described in the appointment was not deemed to apply to a fitness for purpose obligation noted within the Schedule of Services. It is important therefore to review the services you offer to provide carefully, particularly in respect of any performance guarantees or fitness for purpose obligations.
Capping Liability
It is prudent to include a financial cap on your overall liability for each project. It is important to remember that while there will usually be an obligation within the contract to maintain a certain level of professional indemnity insurance for a certain period of time, this in itself will not cap your liability to that amount. You should therefore incorporate specific financial cap wording within the contract. The limit of indemnity you agree to provide should be proportionate to the size of the contract and reflective of the profitability to your business. For example, if a smaller project for which you are earning a relatively small fee you should try to cap your liability at a proportionately lower figure too. Just because you carry a £20m limit, does not mean you have to provide this limit for every project and it is perfectly reasonable to provide lower limits where the circumstances warrant.
Net Contribution Clauses
Try to negotiate a net contribution clause. Where more than one party might be responsible for a particular loss, a net contribution clause could help to restrict your liability to the proportion of the loss or damages that would be fair and reasonable in the circumstances. Without a net contribution clause, 100% of the loss or damages could be recovered from you, even though you were not solely responsible for causing that loss.
No Greater or Longer Lasting Obligations under Collateral Warranties
PII policies will sometimes exclude claims arising out of or relating to collateral warranties where the obligations owed to the beneficiary are greater or longer lasting than that provided under the original appointment. The obligations under a collateral warranty therefore need to be considered carefully in line with the appointment. We recommend that any warranty contains an 'equivalent rights of defence' clause to allow you to raise the same defences under a collateral warranty as would be available to you under the original appointment.
It is important that the liability period in a collateral warranty is no longer than that provided within the original appointment as this would potentially exceed the scope of cover provided under some PII policies. Be mindful if entering into a warranty which is to be executed as a deed, particularly if the appointment was executed as a simple contract, as these two documents will generally adopt different limitation periods. It is therefore crucially important to compare the limitation period set out in both your original appointment and the associated collateral warranty.
There has been conflicting case law in the English and Scottish courts around whether the existence of the 'no greater liability' clause is enough to bind a beneficiary to the limitation period under the original appointment. Given the inconsistency in current case law, we would encourage you not to rely solely on the 'no greater liability' or 'equivalent rights of defence' clauses as a safety net and ensure the limitation period in the warranty does not exceed that provided under the original appointment.
Indemnity clauses
Indemnity clauses are usually onerous and may seek to impose additional layers of liability over and above that which would ordinarily be legally enforceable by a claimant. It is essentially an agreement to compensate another party for 'any and all' types of loss that may arise and these can be incredibly wide ranging. PII policies are not designed or intended to respond and provide cover for all loss your client may sustain. For this reason, indemnity clauses need to be considered very carefully. If indemnity clauses cannot be avoided, there should at least be wording incorporated to restrict the recoverable loss to legally enforceable losses only which have been suffered as a direct result of the Consultant's negligence. Agreeing to an unrestricted Indemnity has been compared to the handing out of a blank cheque and can leave you at risk of uninsured loss if agreed to without restriction.
Can you refuse?
Remember that you can say 'no'. Whilst we appreciate that commercially, this is not always possible or appropriate, you can decline to provide collateral warranties or reliance letters where an obligation to do so has not been expressly included in your appointment.
Sub-Consultants
If you are engaging sub-consultants and they cannot be engaged by the client/employer directly, ensure you have back to back obligations with those sub-consultants. It is also advisable to include within their appointment an obligation to provide collateral warranties at your request. You may then request your sub-consultant provides a collateral warranty in favour of the client/employer directly. Whilst you could still be pulled into litigation and this risk is not eliminated, the client has the ability to pursue a claim against the sub-consultant directly, without the need for your involvement.
None of the above constitutes or is intended to be relied upon as legal advice nor does it give rise to a solicitor/client relationship.