Purchase contracts may be filled with risks. In this article, we provide a useful checklist to make sure all major contract risk areas are identified and mitigated with proper actions. Contract risks may come from purchase orders and the attached (or referenced) General Terms and Conditions of Purchase. A useful read for suppliers dealing with EPC Contractors, End Users and other professional buyers of project materials.
Table of Content
CONTRACT RISKS REVIEW
The elements to double check in a purchase order are listed below.
SCOPE OF WORK CLARITY
The scope of services/supply is a detailed description of those goods o services you will provide to the client, those you can provide for an additional fee and those you will not provide.
It should be as precise and complete as possible. It should leave no ambiguity or question as to whether or not some duty or deliverable item is included in the PO or the contract price.
Unless your scope is carefully defined, you may not be able to differentiate included services or materials from extras not contemplated in your basic fee after the start-up of the contract. This makes it difficult to charge for any additional services or deliveries you are required to perform, as the contract is accepted and initiated.
- Any client-drafted clauses that ask you to agree (or even certify) that the scope of supply includes anything that will be “adequate to meet the project needs,” or that you will “provide any and all the services and materials necessary for the completion of the project” or similar deceptive language
- Contracts missing detailed lists of all potential goods or services to be delivered for the agreed price
STANDARD OF CARE CLAUSE (FOR PROFESSIONAL SERVICES)
Your contract should include a clause that affirmatively defines the standard of care to which you will perform.
The standard of care for professionals requires only that you perform your services with the degree of skill and care ordinarily exercised by other members of your profession under similar circumstances, at the same time and in the same or a similar locale.
Any contract language that seeks to raise your standard of care increases your risk.
Your professional liability insurance will not cover you for this increased exposure since it represents an assumption of additional liability for which you would not otherwise be responsible.
- A client’s contract language that requires you to “perform to the highest standard of practice.” Nor should you accept broad or ambiguous language such as “appropriate” or “necessary,” or provisions that would have the client making a unilateral determination as to the performance of your services, such as “to the satisfaction of the Client,” or “in the Client’s sole judgment.”
- Nowhere in the Standard of Care doctrine or definition is there any mention of “perfection.”
Contract language should address issues such as when payment is due, the penalties for late payment (e.g., interest, collection costs) and your rights in the event of non-payment (e.g., suspension or termination of services).
The more precisely you define and adhere to your payment terms, the more likely it is you’ll be paid promptly and avoid fee-related disputes.
Such disputes are often disagreeable and can even lead to the loss of future work from the same client.
- Language that would permit your client to withhold payment of disputed invoices.
- One of the most effective payment collection devices is to withhold submission of the client’s documents/goods for plan check or permit approval or for use by the client until you are fully paid.
Your contract should include a Waiver of Consequential Damages, those indirect expenses (e.g., loss of profit) that are remotely connected to a failure in delivery.
This should include a provision that makes it clear that neither you nor your client will be held responsible for consequential damages because of any alleged failures by either party.
If you are to be held responsible for consequential damages, you could be sued for damages totally out of proportion to your fee or grossly exceeding the cost of repairing the actual damage.
- Any language in a client-drafted contract that would make you responsible for consequential damages.
- If your contract remains silent about consequential damages, you can still be sued for them. Having a negotiated limit of liability does not take the place of the additional protection against liability for consequential damages. Be sure your Limitation of Liability and Consequential Damages clauses are coordinated with each other.
Include in your contract a Limitation of Liability clause, an agreement between you and the client to establish the maximum liability you will be responsible for if there is a claim by the client on the project.
Any professional firm that continually accepts unlimited project risks can eventually expect huge losses and, perhaps, financial disaster. A limitation of liability allocates a project’s risk in some reasonable proportion to the profits and other benefits to be derived by each party.
- As a general rule, reject any contract without a limitation of liability. (Some exceptions are projects for public entities, which almost never agree to a limitation of liability.) Also, don’t use a preprinted liability cap in your agreement, as it may weaken the premise that the clause was negotiated. You may have more success in obtaining a Limitation of Liability from your client if you use a preprinted form that contains a limitation of liability provision with a blank space you can use to specify the liability cap.
- Be sure to select a limit that is meaningful (e.g., an amount tied to your project fees) and takes into account potential damages on a project.
DISPUTES RESOLUTION (MEDIATION CLAUSE)
Mediation is an approach to dispute resolution, typically voluntary, that helps the disputing parties reach agreement among themselves, thus maintaining or reopening their communications. Your contract should include a clause that calls for mediation as the first step in settling disputes.
Litigation and arbitration proceedings can be both expensive and time-consuming, cutting into a firm’s billable hours, hurting morale and lowering productivity. These adversarial processes can also destroy client-consultant relationships.
- A contract that doesn’t call for mediation as the first step in dispute resolution. Otherwise, you’ll have a difficult time convincing a client to use mediation when the two of you are in the middle of a dispute.
- Mediation has a remarkable track record, especially when employed at the appropriate stage of the dispute. The average rate of settlement in mediated cases is nearly 85 percent
Your contract should include a termination clause that defines the circumstances (e.g., nonpayment of fees) under which either party may end its legal relationship and, depending on who initiates the action, specify the rights that each party has when the termination occurs.
A contract that does not adequately address the subject of termination is an invitation to a dispute. Reasons you may want to terminate include: client’s breach of any material condition, inability to reach agreement on additional services, changes in the parties or substantially changed conditions.
- Language that permits only the client to terminate or that transfers the ownership of documents.
- Your firm will incur substantial shutdown costs if you are terminated prematurely from a project to which you have heavily committed your resources. You might prefer to have the option to temporarily suspend your services and keep the contract in force until the client cures the breach.
WARRANTIES, GUARANTEES AND, CERTIFICATIONS
Your contract should never promise to assure the total accuracy of something (e.g., a subcontractor’s HVAC installation) or confirm absolute compliance with a standard (e.g., ADA compliance).
By certifying, guaranteeing or warranting something, you are assuming a level of liability well beyond the legally required standard of care.
Your professional liability insurance is not intended to cover breach of contract or warranty, the assumption of someone else’s liability or a promise to perform to a standard of care higher than legally required.
The smallest error, whether caused by you or someone else, could lead to a claim for breach of warranty.
- Other terms that, in effect, guarantee, such as “all,” “every,” “insure,” “ensure,” “assure,” “state” or “declare.” You can substitute contract language that reduces your risk, doesn’t jeopardize your professional liability insurance coverage and answers your client’s concerns.
- Certifications, warranties, and guarantees may also be found in the fine print of a client’s purchase orders.
THIRD PARTY CLAIMS
Your contract should include a provision that addresses the issue of third-party claims.If your negligence damages others who reasonably and foreseeably could have been damaged, you may be liable to them.
In most jurisdictions, they would not need a contract with you in order to file a claim and win.
- A contract that doesn’t address the issue, since, in the absence of such a clause, a court may follow what it believes to be precedent or it may make new law based on its predilections.
- The legal obligations of design professionals to third parties are difficult to interpret. Parties to a contract can establish many of their own rules to guide judicial interpretation. As with all contract issues, however, be sure to consult with your attorney and insurance agent or broker.