So, you’ve recently won a key piece of work that should prove lucrative for your business for many years to come. Congratulations!
The truth is, however, that the job and the price are often only the beginning of the story.
For example, have you considered the terms on which that work will be provided? If you were tendering, did you accept the included contract terms unaltered? Did you run the contract terms past your insurer before you tendered? The reality is that when it comes to contracts, the devil’s in the detail.
Here we outline FIVE common contract matters that can cause significant problems for engineering practices.
One of the main functions of a contract is to apportion risk and liability and if you are not careful, you may find yourself not getting paid or facing liabilities for something that is not your fault and possibly not even being covered by your insurer.
The best way to protect yourself is to use a set of standard terms and conditions that you have developed in conjunction with your legal advisor and with input from your insurer. Generally, if you do this and do not overpromise in terms of scope, time frame and cost, then you can be reasonably certain that you will be well protected.
However, this is not something that you are always able to do, especially if you are dealing with a large corporate entity or developer where they may have significantly more bargaining power or where you are lodging a tender and there will be an included form of Contract.
In those instances, while you always need to review the entire contract in detail, there are some common contract matters that can cause significant problems for engineering practices.
#1 Not getting paid
Should you be getting any money upfront or at least being paid progressively, rather than waiting for one lump sum payment?
Do you have any form of security against non-payment and what are the contractual barriers to payments, such as acceptances, testing and certifications? Are there other practical barriers to payment? Should you seek security for payment?
Are you agreeing to unrealistic timeframes that may result in you not being paid or having to pay potentially significant sums back in liquidated damages?
#2 Information risk
Specifically, you need to beware of information clauses. If you receive incorrect information from the client or another contractor, does the contract make you liable for checking/querying it?
Does the risk of incorrect information sit with you, even though you may have had nothing to do with it?
These clauses often look standard or innocuous, but they can place you in an unreasonable or impossible position.
#3 Standard of works and warranties
Check the clauses around the standard that deliverables must meet. Are they to meet the level of a reasonably skilled person performing the type of work you are doing or are you falling into the trap of promising works will be 100% perfect?
And be doubly careful when warranties are involved. Contractual warranties should generally only be given about the past or present and not the future.
Check the list very carefully to ensure that you can provide each and every warranty as written.
An indemnity is a contractual agreement to cover a loss suffered by someone else. If you provide an indemnity that is too broad, you can be liable for loss you had nothing to do with or which is someone else’s fault.
As a general proposition, any indemnity should be an appropriate and accurate assumption of risk. Things within your control and limited to the extent that they are caused or contributed to by third parties.
Ideally, an indemnity should only make you liable for things that you would probably be liable for at common law, namely your own misconduct or negligence.
Generally, if you accept liability by contract over and above what your liability would be at common law, your insurer will not cover you for that liability.
You also can’t sign up for a contract that requires you to get levels of insurance that you don’t have, or which require policy extensions that your insurer will not provide.
Often you can pass draft contracts on to your insurer and they may suggest amendments to improve your position or they may be able to arrange special coverage for larger jobs so you have the comfort of knowing that you will be covered.
So, how can you protect yourself from making serious mistakes with your contract?
Before you put your signature on a contract, ask for help if something is not clear.
Never just assume a contract will be right because it’s a big client or organisation. They are the most likely to include oppressive terms and conditions in the contract.
Generally, a large contract that is not on your own standard terms should always be reviewed by a lawyer and by your insurer.
In the performance phase, make sure you diarise and update key dates, keep written records and detailed file notes of conversations, followed up with confirmation emails. If an issue arises, don’t try to fix it yourself and don’t talk to your client before you get expert advice and talk to your insurer.
Most importantly, take the clear and simple step of seeking help earlier rather than later. Why? Because it could save you tens or hundreds of thousands of dollars.
For help with new contracts, to review existing contracts or to discuss any aspect of your mining & resources contracts, please contact me, Craig Hong, on +61 (0)7 3007 2000 or email@example.com
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No responsibility will be taken by Hillhouse Legal Partners for loss occasioned directly or indirectly to any person acting or refraining from acting wholly or partially upon or as a result of the material in this publication.