The practice of adding clauses to increase the other contracting party’s obligations has serious and far-reaching implications, writes Samantha Peat.
The primary concern is that standard form contracts issued by bodies such as JCT, ACE, and RIBA are rarely used, and even if they are, they are amended beyond recognition.
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The norm is for a client’s solicitor to recommend that they are altered to include clauses that increase the other contracting party’s obligations and responsibilities far beyond the standard terms.
There is a reason the standard terms are written the way they are. It is to clearly set out the underlying common law and statutory liability of the contracting party which would have applied in the absence of a written contract – most usually, to act with “reasonable care and skill”.
Insurance implications
This is also the level of liability that the professional indemnity insurer of the contracting party will want to underwrite. Insurers do not like it when standard form contracts are widened with performance guarantees, indemnities, warranties, promises to “ensure” that something will be done.
Why would they? Some of these terms are akin to writing a blank cheque and allowing the client to say, “I’ve suffered a loss and it’s your fault – I don’t have to show that my claim is reasonable, could reasonably have been anticipated at the time we negotiated the contact, and I have done nothing to mitigate the loss – now pay up”.
When clients’ solicitors recommend that standard term contracts are amended with onerous conditions this makes the contracting party a poorer insurance risk. Often, therefore, the onerous liabilities will simply not be insured because they go beyond the liabilities that would exist in the absence of the contract.
The client and their solicitor may have scored a pyrrhic victory, because if a claim arises for breach of the onerous terms and they fall outside the policy cover, the insurer will not have to pay a resultant PI claim. The insured may well not have balance sheet assets to cover the claim in the absence of an insurance recovery.
Services and responsibilities
The CLC’s concerns also apply to the services and responsibilities that are agreed between the client and the contracting party.
I say agreed, sometimes they are imposed if the contract and services schedule is being “negotiated” once the work has started or – as was the case with Studio E and the Grenfell Tower refurbishment project – after the work has been done.
It is pointless having reasonable and insurable contract terms without also having a Design Responsibilities Matrix (DRM) but, like the contract, this should set out clearly who is responsible for each element of the design and construction with a fair and proportionate allocation agreed in advance. The DRM should be negotiated with an open conversation about who has the competency to do the work, who is responsible for oversight, and what levels of professional indemnity insurance cover each party has, or should have, proportionate to their contribution.
Don’t get me started on joint and several liability and fair contributions. Without a net contribution clause in every contract, contracting parties and their insurers will continue to pick up the tab where others have gone under or don’t have the professional indemnity insurance cover to pay their share of a client’s claim. We’ll leave that for another day.
Samantha Peat is chair of the CLC PII-subgroup and group board adviser at Meridian Risk Solutions.
