Selling a fair and equitable contract

FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Selling a fair and equitable contract Nicola Grayson National Policy Manager Association of Consulting Engineers Australia Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? What is a contract? ■ An agreement that the law will enforce. ■ An agreement creating and defining obligations between 2 or more parties. ■ This is an area of private law – the parties are free to establish the terms. ■ What laws apply? Seminar 6A - Does Risk Transfer Threaten Quality? ■ Statute law; ■ Common (case) law. FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? What does a contract look like? ■ Formal – signed documentation, the written word. ■ Informal – words, handshakes etc. ■ Theory: Parties freely coming together to negotiate a fair bargain. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Purpose of a contract (theory) ■ Consistency, clarity, certainty between the parties. ■ A document (not necessarily) that: ■ Allocates rights and obligations; ■ Contains the entire agreement. Seminar 6A - Does Risk Transfer Threaten Quality? ■ A process that creates a business relationship. ■ Establishes expectations. ■ Lowers the risk of dispute and magnitude of dispute. FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Theory versus reality ■ A contract is a fair and equitable bargain between two parties? ■ Reality: Inequality of bargaining power between the individual and companies, insurers, the government. ■ Erosion of the purpose of a contract. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Where has it gone wrong? ■ Significant costs associated with failure to eliminate/mitigate risk. ■ Typical costs/losses; ■ ■ ■ Personal injury; 6A - Does Seminar Risk Transfer Threaten Property damage; Quality? Economic loss. ■ Inequality in bargaining power exposes consultants to risks that are outside the professional’s duty of care, skill and knowledge. FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Example of contractual risk transfer ■ “Without limiting the Consultant’s other obligations under the Contract the Consultant must, clean up and restore the Environment, including any Contamination or Environmental Harm arising out of or in any way in connection with the Services, whether or not it has complied with all Statutory Requirements or other requirements of the Contract for the protection of the environment.” Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Selling the benefits of a fair and equitable contract ■ So what do you do? ■ Demonstrate the costs to the client of accepting risks outside your control. ■ Send the market signal that something is wrong: ■ Price the risk; Seminar 6A - Does Risk Transfer Threaten Quality? ■ Be prepared to walk away. ■ Explode the myth that risk transfer means that the risk is managed. FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Selling the benefits of a fair and equitable contract (cont) ■ Explain the gaps in insurance; ■ Highlight the liability exposures; ■ Negotiation now will save litigation costs down the line. ■ Sell your services and develop solid client relationship. ■ A more equitable contract will encourage, collaboration, quality and innovation. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Proportionality ■ What does the client really want? ■ Acceptance of failure to exercise your professional standard of skill and care. ■ Proportionate liability by contract: ■ At the very least is the client prepared to reduce the claim by the amount that they contributed to the loss. Seminar 6A - Does Risk Transfer Threaten Quality? ■ Three little words..... FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Australian Defence Design Services Contract “The consultant must indemnify the Commonwealth against: (a) Any liability to or claim by a third party including a subconsultant or other contractor; and (b) All costs and damages suffered or incurred by the Commonwealth, Seminar 6A - Does Risk Transfer Threaten Quality? to the extent arising out of or in connection with any breach by the consultant of a term of this contract.” FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Limitation of liability ■ Why not try for a limit of liability (loss and time)? ■ Note: if you have achieved a fair and balanced contract you may not need to rely on it. ■ Argument for: all liability is in effect limited, so this gives greater certainty of what losses can be recovered. ■ Argument against: if the party has behaved so recklessly and negligently, why should there be a limit on the amount recoverable? Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? What will the Courts do? ■ Courts will consider: ■ The background facts; ■ The setting in which negotiations took place; ■ The negotiations; ■ The facts objectively known to the parties; ■ What they said, wrote and did or did not do; ■ Any other matters which bear on the question. ■ Conduct of the parties and the written word is key. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? ACEA Standard Consultant Contract ■ Hyder Consulting v Wilh Wilhemsen [2001] NSWCA 331 ■ Hyder (engineer) put in writing, “We propose that our appointment be in accordance with the ACEA Conditions of Engagement”. ■ Wilh Wilhemsen (architect) confirmed the engagement and replied, “Please forward to Mr G Northausen [client] a copy of ACEA Conditions of Engagement, for his information and approval at your earliest convenience.” Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? ACEA Standard Consultant Contract (cont) ■ Engineer did not provide a copy of the ACEA conditions of engagement. ■ Were the ACEA conditions of engagement incorporated into the contract? ■ A$500,000 question. ■ Court of Appeal held that the engineer performed the work, the client paid and took the benefit: by conduct the terms had been accepted. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Outcome of case re ACEA limitation of liability ■ The ACEA contract contains a limit of liability, both in quantum and time. ■ Case was dismissed because the case had been brought after the expiry of the 1 year limitation of liability. ■ Success for standard terms and conditions, Court noted that copies were readily available from ACEA and they were known in the market place. Seminar 6A - Does Risk Transfer Threaten Quality? FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Standard conditions of contract ■ Are they a help or a hindrance? ■ Issues: ■ Are they fair and equitable? ■ Have the parties to the contract negotiated them? ■ How regularly are they reviewed? Seminar 6A - Does Risk Transfer Threaten Quality? ■ Major role for Member Associations in encouraging the use of fair and equitable standard terms. FIDIC 2008 Québec Conference :: 7 – 10 September Seminar 6 Does Risk Transfer Threaten Quality ? Benefits of Standard Contract - Checklist ■ Consistency, clarity, certainty between the parties. ■ A document (not necessarily) that: ■ Allocates rights and obligations; ■ Contains the entire agreement. Seminar 6A - Does Risk Transfer Threaten Quality? ■ A process that creates a business relationship. ■ Establishes expectations. ■ Lowers the risk of dispute and magnitude of dispute.