This eBook is written for engineers and architects. After reading this eBook, you will have a better understanding of consulting contracts and how they operate within the practice of engineering and architecture in Australia.
This eBook is, however, not a substitute for legal advice and is for general information only.
While it is important to develop a general understanding and appreciation of consulting contracts, you should always consult with a commercial contract lawyer for legal advice. This is particularly so when it comes to contracts that are complex and of high value.
This eBook will dive into the (at times) seemingly complicated realm of consulting contracts.
But really, when you break everything down to its constituent parts, it’s really relatively straightforward. I don’t say that to sound like I find consulting contracts easy; just that if you take a concept, strip away the legal ‘fluff’ and go back to first principles, the logic shines through and you can see an issue or an opportunity for what it is.
CONTENTS
The beauty of an eBook (aside from it being economical and environmentally friendly) is that you can hit CTRL+F and skip to the keywords you want to learn more about. Even better, you can click one of the links below to skip ahead to a topic.
I would, however, take this opportunity to implore you – my curious reader – to read the whole thing. Much like a contract, many of the concepts discussed in this eBook relate to one another. There is an interrelationship between consulting contract terms that you may not appreciate without reading the whole text.
INTRODUCTION
Balancing risk
When you are negotiating a consulting contract, of the contract review process is to fairly and appropriately balance the risk between the consultant and its client. Where contracts are one-sided and place unfair risk onto one party (that has little control over the kinds of risk that are being imposed on it) It's arguable that this is not in the interests of either the engineer/architect or the client.
Placing contractual obligations on a consultant that they cannot possibly control or necessarily comply with, is opening the doors to a potential dispute. This is because if the consultant cannot comply with the contractual obligation or they cannot control it, the risk of failure and its potential severity may be high.
Different forms of consulting contracts
Consulting contracts can take many different forms. The forms most commonly encountered in architecture and engineering are:
Australian Standard contracts, such as AS4122-2010 (including Australian Standard contracts that have been heavily amended)
a bespoke consultancy agreement that is specific to a particular client
a consultant’s own terms and conditions (typically attached to or contained in a fee proposal)
What form of consulting contract is best? Well, when you’re looking at it from the perspective of the consultancy firm, the more involvement the consultancy has in the creation or amending of the contract, the better.
Clients are, of course, going to have their bespoke consulting contracts written in a way that is most favourable to them, followed by using an Australian Standard (that is usually heavily edited). The thing about using a client’s consultancy agreement or a heavily edited standard form consulting contract, is that they often include obligations that are unreasonable and unfair to place on the engineer or architect.
The problem, however, is that because cash flow is passing from and controlled by the client, it is the client that holds the leverage. This translates into engineering and architectural firms having less power to insist that the consulting services proceed under their own terms and conditions. Instead, consulting firms often acquiesce to the demands of the client and either sign up to or enter into negotiations in relation to the client’s preferred form of consulting contract.
KNOW YOUR CLIENT
New versus existing clients
If your client is new, it is (more so than existing clients), an unknown. However, you can ease the risks associated with dealing with new clients if you can reliably answer the following questions:
does the client pay their bills?
does the client have a good or bad reputation?
is the client trying to get more for less, at the expense of a good business relationship?
is the client owned by a trust or is it a project-specific corporate vehicle (in which case they may have minimal financial substance)?
is the client making promises about a future matter, without committing to a written agreement about that promise?
has the client indicated any concerns with cash flow or pushed back agreed invoicing milestones?
Sophisticated versus the other clients
There’s a big difference when you’re dealing with sophisticated clients compared to less sophisticated clients.
When I say ‘sophisticated’, I don’t mean larger client organisations. I’m actually referring to clients that:
have staff that are trained to read, write and negotiate contracts; or
have an in-house legal team that assists with contract negotiations; or
make use of law firms to negotiate their consulting contracts; and
are familiar with and anticipate entering into negotiations with professional consultants.
On the other hand, clients that are less inclined to negotiate consulting contracts or are less familiar with them can lead to protracted, combative and difficult negotiations.
Requests to negotiate terms can be met with:
rejecting amendments without explaining why
a combative response
ignoring the request
WHERE TO START
Get some context
It’s difficult to assess likely risks or problem areas within the consulting contract without at least having a basic understanding as to:
the fee and likelihood of variations
the scope of services and whether the client brief is well defined or vague
who the client is and whether there is a pre-existing relationship
the perspective of the architect or engineer about what they consider the risks and opportunities to be
whether the architectural firm or engineering firm will be engaging sub-consultants
other factors that may be relevant to ascertaining context
Having some background knowledge regarding the consulting firm’s engagement makes the contract review process much easier. Clauses that may have been a problem on one project may irrelevant on another.
But you can’t necessarily know that without understanding the context.
Read. The. Whole. Contract
It is vital to read the whole consulting contract, not just one section or one page. Oftentimes, clauses within a contract are interlinked and the context of a clause cannot be fully determined without referring to another clause. A good example of this is where a definition clause gives context to an operative clause (that specifies a right or an obligation and makes use of a definition). Without reading the definition, the clause will only tell half of the story.
And just like any story, you might miss an important part of the plot if you skip over sections or don’t read the whole thing. The same is true of any contract, including a consulting contract.
Edit the contract
There are lots of different approaches taken when it comes to editing contracts. Personally, I have found it easier to edit the consulting contract using tracked changes (this may involve converting a .pdf to a .doc so the document is editable).
I use this ‘tracked change’ version to inform a schedule of departures so I can easily refer back to the originally edited document at a later point.
However, I don’t usually provide this edited version to the counterparty. This is because:
an edited document won’t necessarily provide context to the other party about why the changes are being requested; and
if the negotiations are complex or protracted, it can become difficult to determine which comments belong to who and how the negotiations have progressed over time.
Create a schedule of departures**
After editing the consulting contract, I then start drafting a schedule of departures in a Word document. I avoid using excel to record contract departures because:
excel cells generally do not provide an easy snapshot of the contents;
the table generally ‘skips’, making it difficult to navigate
excel spreadsheets do not allow for tracked changes
When creating a schedule of departures in Word, I recommend using a table, identifying the relevant clause, the requested amendment and the reasons for the amendment.
A word to the wise: if you skip over the ‘reason for amendment’ section, you should expect a lot of ‘no’ responses. This is because when starting out negotiating changes for a consulting contract, it is the why that is the most important part. Words mean little when the underlying basis for the change is not agreed to by both parties.
After understanding and agreeing to the why, the wording of the clause becomes easier.
Also, by setting out a departures schedule in a table, it is easy to track the parties’ position for that item.
Reach out to the client
To avoid someone playing middleman, it is easiest for the contract reviewer to send the comments directly to the client.
When sending comments to a client, it is important to consider what should be included in the cover email. For example:
if there are a significant number of changes to the consulting contract, flag this in the cover email and provide a general explanation for the volume
if the consulting contract contains terms that are not suitable for professional design services, highlight this
if there are fee and scope changes that are not being sent with the schedule of departures, if fee and scope is yet to be reviewed, tell the client so that they understand further comments may be provided
The back and forth
Some clients want to quickly arrange a call to discuss departures. However, it is recommended that clients first respond in the schedule of departures so that both parties understand each other’s position regarding changes to the consulting contract.
Additional columns may need to be added to the schedule of departures, placed in landscape view and resized to A3.
At some point, no further columns will be able to be added to the departures table. This is a good indicator that an impasse may have been reached on certain contract amendments or that there is controversy or fundamental differences regarding aspects of the consulting contract.
If an impasse appears to have been reached at any stage during the contract review process or there is an urgency to close out and sign the consulting contract, the next step is to get the client on the phone…
Get them on the phone
The key to negotiating over a call is to prepare. Understanding the issues and why a change was requested in the first place, as well as any potential fall-back positions, is key to productive verbal negotiations.
I have often found negotiating over the phone or a video call to be quicker and easier than the (sometimes) protracted process of emailing back-and-forth.
Negotiating over the phone can cause people to drop their guard and encourage problem-solving and outcomes. Even if the contract negotiations are not closed out at the end of the call, you may find that there has been significant progress and the parties can then focus on the final contentious items.
Close it out and get it signed
Once all of the changes to the consulting contract have been agreed, the next step is to have the final agreement issued for checking and signing.
There are a few important steps to take before putting pen to paper:
check that all agreed contract changes have been incorporated into the contract, either through special conditions or changes to the clauses themselves
ensure that the architect or engineer responsible for the project has signed off on the fee and scope (and there is a written record of this)
ensure there are no issues that have come about on the project or recent variations that haven’t been addressed in the contract
Once the consulting contract is signed and returned to the client, keep a record of the contract and save it somewhere that is accessible by the engineers and architects working on the project.
SUBJECTIVITY AND OBJECTIVITY
Standard of reasonableness
Sometimes there is a misconception that the phrase ‘reasonable’ does not have any legal meaning. People will throw their hands in the air, scoff at the word and decry ‘what does reasonable mean anyway?’.
Contrary to this common misconception, the standard of reasonableness and the meaning of ‘reasonable’ is somewhat well defined by law.
INDEMNITIES
What is an indemnity anyway?
An indemnity refers to an obligation for one party to reimburse another for certain specified losses they may incur on the happening of certain events. Indemnity clauses can be worded in many different ways and it is always important to ensure that an indemnity is only provided for things that are within the indemnifying party’s ability to control or avoid.
An obligation on one party to indemnify another does not necessarily require the indemnifying party to have done anything wrong. This is why a consulting contract will often include an indemnity clause because unlike a claim for negligence or breach of contract, the indemnified party does not need to prove the elements of the cause of action.
Instead, all that the indemnified party needs to show is that the event for which the indemnifying party has agreed to indemnify the other party has happened and has (or depending on the wording of the clause, may) caused the indemnified party to suffer some kind of loss.
Worst of all from the perspective of the engineer or architect are reversionary indemnity clauses. These are indemnity clauses that require the engineer or the architect to reimburse the client for loss that the client has caused itself or someone else to incur. Seems unfair, right? While that may be the case, they are still legally enforceable.
Why are indemnities a problem for engineers and architects?
Indemnities that are contained in a consulting contract may be problematic for engineers and architects. The extent to which they are problematic will heavily depend on the wording of the indemnity clause.
Here are a few of the reasons why an indemnity clause may create issues:
the loss covered by the indemnity is not insured
the loss covers acts or omissions of third parties for whom the consultant is not legally liable
the loss has been caused by the client or their other contractors or consultants
the loss may be contingent or prospective and not actually incurred by the indemnified party
the consultant cannot avoid the indemnified event or loss by taking reasonable care or is otherwise outside of their control to avoid or overcome
LIMITATION OF LIABILITY
Limitation of liability
A limitation of liability is a clause in a consulting contract that limits the amount of loss or damage that can be recovered by one party against another. While the term "limitation of liability" is usually used to refer to a clause restricting a defendant's liability, other parties may also have limitations on their own potential recovery (for example, some contracts contain provisions limiting an indemnitor's duty to pay).
In general, you should expect to see this type of provision where there could be significant exposure for one party if they were held fully responsible for their actions (or inactions). This includes situations where a building or part of a building becomes damaged due to negligence on the part of an engineer or an architect. For example, an engineer or architect may:
limit their overall liability to a specific amount of money
limit their liability for negligence, but not for personal injury or death
Why are limitations of liability used?
Limitations of liability are a risk management tool for consulting businesses. It is one of the contractual mechanisms that engineers and architects often use to reduce the risk that their business is exposed to, and it has other benefits as well.
Limiting their liability may cause knock-on effects such as reducing the cost of legal representation and insurance premiums (particularly for professional indemnity insurance).
Is a limitation of liability the same thing as a consequential loss exclusion?
A clause excluding the liability of one or more parties for consequential loss is a form of a limitation of liability. By excluding certain categories of loss, the party benefitting from the exclusion clause is reducing their potential legal exposure.
Sometimes a consequential loss clause will modify liability by limiting the damage recoverable to that which is reasonably foreseeable. This mirrors the Common Law definition of consequential loss, which is generally recognised as not being recoverable by one party against another (ref: Hadley v Baxendale (1854) 9 Ex 341).
However, although consequential loss is not recoverable under general legal principles, an indemnity clause contained in a consulting contract can change this. If an indemnity clause requires one party to reimburse another for certain consequential loss, the contract will override the Common Law definition and the courts will respect the bargain reached between the parties.
Consequential loss exclusion clauses that are contained in or negotiated for consulting contracts are usually expressed to be mutual so that both parties exclude liability for indirect/consequential loss.
ABOUT THE AUTHOR
Farrah Motley is an Australian-qualified lawyer. After graduating from the Queensland University of Technology with a degree in Law (while continuing her second degree in Business (Accounting major)), Farrah undertook a traineeship with HWL Ebsworth.
Farrah quickly moved in-house, working as legal counsel for the global engineering powerhouse, Robert Bird Group (now a member of the Surbana Jurong Group). After several years, she began working for Genuine Parts Company in Melbourne and Brisbane as in-house legal counsel.
Yearning to return to the building and construction industry, Farrah became the APAC legal counsel for Populous, a global architecture firm.
Farrah now provides inhouse legal counsel services to professional consulting firms in Australia, with a particular focus on engineering and architecture firms.
Known for being friendly, pragmatic and results-driven, Farrah has carved a niche practice helping professional consulting firms to:
provide legal and contracts training to staff
negotiate consulting contracts with a spectrum of clients, including property developers, small, mid-tier and tier-one builders, government entities, joint ventures and international consortiums
develop precedents, template contracts and fee proposals
provide ad hoc M&A, employment law, corporate and compliance advice
Author: Farrah Motley, Legal Principal of Prosper Law.
How can Prosper Law help?
Prosper Law’s legal services are provided by Farrah Motley, an Australian commercial contract lawyer that provides legal advice to business and consulting firms across Australia.
Contact the team at Prosper Law today to discuss how we can provide you with legal advice for a fixed fee or at affordable hourly rates.
Farrah Motley | Legal Principal
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