Consultancy Agreements in Building Projects: Key issues 01 Sep 2016
Any construction or building project will involve a number of people to make it a success. These could include architects, engineers, surveyors, contractors and landscapers. It is important to get the early engagement right on a project and this will generally take the form of a consultancy agreement.
The legal arrangement could be directly between the person who wants to develop the project or they could appoint someone who then engages with the different consultants. Duties will be owed by those consultants to the client and that is why the consultancy agreement is critical because that is where these duties will mainly (but not exclusively) be set out (duties are also inferred by statue and common law).
Generally standard form consultant agreements are drafted by bodies that will be looking out for their member base. Examples are the Institute of Professional Engineers of New Zealand and the New Zealand Institute of Architects. Such documents need to be checked closely and the exclusions and limitations analysed thoroughly to check what they say eg that limits of liability are not set too low.
Key issues for Consultancy Agreements
Some of the key issues to be considering when looking at a consultancy agreement are:
Standard of care: The standard of care in the consultancy agreement will generally be based on market practice. An example of this is in the Conditions of Contract for Consultancy Services 2009 (published by the Institute of Professional Engineers New Zealand Inc.) which says:
In providing the Services, the Consultant must use the degree of skill, care and diligence reasonably expected of a professional consultant providing services similar to the Services.
Scope of services: the services to be provided should be within the expertise of the consultant. When drafting the contract it is important to check if there is a gap between what the consultant is to do (to the standard of care mentioned above) and what others in the project will do. Clear discussions over who exactly does what is very important at the early stage.
Design warranties: These should be included where the design risk is high - eg bespoke buildings. Design warranties may help focus the parties on the key risks and ensure the contractor stands behind it’s work. It may be that a discussion is also needed with the contractor about what insurance it has in place (or needs to take out) so that there is insurance if a design warranty is breached.
Indemnity: These are often the subject of much discussion because a consultant will not want to give indemnities. They are a potential liability where the consultant will have to pay if something in particular happens - and continue to pay where there is ongoing loss. It is important to be clear about what exactly will trigger an indemnity, who it will cover and how much the indemnity will be for. There are a variety of indemnities which may be used and those should be discussed with your lawyer in advance to find the best combination that works in the particular situation.
Limitation of liability and exclusion clauses: These are commonly included and essentially involve one party trying to get out of, or limit, it’s liability. Wording used should be clear, particularly if trying to exclude "consequential" losses. For example, “consequential” may not include loss of profit which may be considered a direct loss. So the wording used will be critical and should be clear.
Insurance: Consultants may try to have their liability linked to their ability to recover funds under an insurance policy. However, that means there is an extra step involved and it may even be possible that the insurance does not respond because it has not yet been triggered by an actual legal liability. The insurance position of the consultant should be clearly understood.
Construction Contract Act: From 1 September 2016 the definition of "construction work" has been expanded and applies to many consultancy agreements eg design, engineering and quantity surveying. This means that certain provisions will be included in Consultancy Agreements eg default provisions relating to payment.
Other issues: Other practical points to be covered in a consultancy agreement are (very briefly):
- Key people: specify if a particular person is to be involved;
- Price and payments: how much is paid and when? This may involve setting out milestone and deliverables and a design program;
- IP: who owns what?;
- Novation: ability to novate or assign eg if you later want to novate to a contractor;
- Variations: how will these be requested and priced?;
- Disputes: how will these be handled?;
- Reporting: What reports are required and when?;
- Health and safety: Who is responsible for what and who is a PCBU?;
- Sub contracting: To what extent will this be done, and who is responsible for this?;
- and Termination: Ability to terminate and what happens then?
In New Zealand consultants will often put forward a set of the industry standard terms and say "this is non-negotiable” – or words to that effect. These agreements are often signed before a lawyer is even involved. This is in contrast to the situation overseas where consultancy agreements are often drafted for particular projects to address the unique set of circumstances of an individual situation.
We hope these comments help you as you think through the content of your consultancy agreement. We would be happy to discuss your specific situation in detail with you.