Solve it before it is a problem

Craig Hong, Director, Hillhouse Legal Partners

Legal considerations for engineers signing contracts

You’ve just signed your name to a lengthy and detailed contract that should set your business on the path to prosperity for many years to come.

Congratulations!

But how much of the contract did you actually read?

And how much of that did you understand?

The reality is that too many engineers (and many other professional services providers) do little more than skim through a contract before signing it, potentially putting their business and their own long-term future at risk.

Many seem to forget that a contract is a legally binding agreement and the conditions contained in it can’t be simply waived later because they say, “I didn’t understand what I was signing”.

The list of things that can go wrong is extensive, including not getting paid for the services you provide.

To try and avoid that you need to seriously consider a few things.

• 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 any practical barriers to you being paid, such as your client having to wait on payment from someone else before they pay you?

• And do you have any leverage to ensure payment and how are variations during the term of the contract to be handled?

While not getting paid is a major risk, it’s not the only one.

If you are not clear about the details of a contract, you could be leaving yourself open to misunderstandings about what is required of both you and the other party.

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 it or 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.

I know it sounds like I’m stating the obvious, but are the time frames for the project contained in your contract realistic?

In the excitement of sealing a deal, one of the worst things you can do is overstate your ability to deliver by focusing on a perfect scenario, when the reality might involve delays perhaps caused by other providers or any number of unforeseen issues.

If you agree to a “best case scenario” time frame, you are setting yourself up for disaster, so pay attention to the items that allow you time extensions and especially look to build in time frames around client or third-party delays.

In particular, check the clauses around the standard that deliverables are to 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 they will be perfect in every way?

What about Warranties and Indemnities

Contractual warranties should generally only be given about the past or present and not the future – so be careful of all warranties being given under any contract.

Check the list very carefully to ensure that you can give each and every warranty and watch out for absolute propositions.

Similarly, 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. This includes 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 anyway (that is, your own misconduct or negligence).

Are you properly insured?

Check the insurance clauses of the contract. You can’t sign up for a contract that requires you to get levels of insurance that you don’t have or cannot obtain.

Also look out for any policy extensions that are required. Sometimes the other party will be looking for insurers to waive or limit rights that will not be possible or fit within the insurances available to you.

Insurance policies commonly have something called a “contractual assumption of liability exclusion” which, very broadly, means that if you sign up to a contract that exposes you to additional liability over and above what your correct liability would be at Common Law, you will not be insured for that gap.

Understand the benefits

To understand how this all works in real life and understand the benefits, consider these examples.

We had an engineer contracting with a large mining company. The contracts contained indemnities which were going to prejudice our client’s insurance. We pointed out those issues and spoke to the client’s insurer and eventually we were able to get in front of senior management at the large mining company   and advised them that insurance position put forward in their contract was untenable and our client cannot enter it as they will not be covered. We were able to have the offending clauses amended so our client was fully protected and their risk exposure massively reduced.

We amended a contract for the provision of a large piece of custom equipment. Later the purchaser attempted to avoid payment. Our amendments to the contract enabled the client to resist the purchasers attempt to renege on the contract and not pay for the equipment.

An engineering client receives regular advice from us on most engagements. Generally, this has resulted in very large risk reductions and the regularity of reviews has increased his contractual knowledge such that he is now able to identify ,large numbers of issues himself as a starting point and comes to us for final review. His improved knowledge significantly reduces his costs now as well.

So, how can you protect yourself from making serious mistakes with your contract?

Before you put your signature on a contract, ask for help for help if something is not clear.

Never just assume a contract will be right because it’s a big client or organisation. They can be the most likely to have oppressive terms and conditions in the contract.

In the performance phase, make sure you diarise and update key dates, communicate everything in writing including keeping detailed file notes of conversations and following 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.

Always talk to senior management, lawyers and/or your insurer to avoid potentially doing something that will void your insurance, such as admitting liability.

You might get away with a sloppy procedure sometimes but, when it goes wrong, it is going to cost the business money and you a lot of time and stress.

Make sure you ask for expert help earlier, rather than later. Getting help now might cost a few hundred or thousand dollars, but it will give you certainty. Leave it too long and it could cost hundreds of thousands or millions of dollars.

It’s a pretty simple choice.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.