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Do consultants really cover their risks?

25th July 2014

By: Creamer Media Reporter

  

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Determining who is best placed to carry risk is one of the fundamentals of negotiating any contract in the engineering and construction industries. Employers, contractors, consultants and suppliers pit their respective negotiating powers against one another with a view to shifting risk from themselves.

However, in an industry obsessed with assessing, managing and mitigating against risk, a blatant and very real risk seems to have passed unnoticed under the radar of most participants in the industry.

At the early stages of most large-scale projects, employers and engineering, project management and specialist technical consultants meet to compile tender documents, the form of contract and the supporting technical documentation. Following this, each tender is ordinarily adjudicated and a contractor is appointed, based on the contractor’s response to the documentation prepared by the consultants. Often, a negotiation phase with the contractor predates the signing of the principal agreements, after which the project proceeds on the basis of the agreed contracts. This simplified example of the contracting process is common to most participants in the industry, but it is during this period that employers and consultants may be exposing themselves to risk not contemplated in the negotiation process.

Here the lines between engineering and construction advice, on the one hand, and legal advice, on the other, can become blurred. The risk to the employer lies in the reliance placed on project contracts and documents that may be technically sound but legally challenged. The risk to the consultants is in their advising on or their drafting of the project contracts and documents, which is a task more appropriately entrusted to, or at least shared with, legal practitioners.

Like any professional, consultants take out professional indemnity insurance (PI) to cover any negligence in the performance of their professional services. What, however, happens when the lines between the consulting services and legal advice begin to blur? Can a consultant rely on the PI to cover advice negligently rendered, which is, by its very nature, legal advice?

Ordinarily, a consultant’s PI provides cover for claims arising out of negligence or error in rendering professional services. The professional services are most often than not defined in the policy – for example, professional activities and duties that the consultant is engaged or contracted to perform with regard to design, specification, technical information, management and supervision relating to a particular project.

This definition, in its various forms, may result in the consultant being exposed to liability for an uninsured claim if, in the preparation of or advice on contractual documentation, legal advice is intentionally or unknowingly rendered.

This gives rise to the question: How often do consultants actually advise on the legal aspects of project contracts and documents? It is common practice in the industry for consultants to provide particular conditions to standard- form contracts to assist employers and contractors in distributing risk during the negotiating phase of a project. Amending a standard-form contract may expose the parties to legal risks, such as interpretation issues that may be caused by poor drafting.

The second question that is: Why should the then employer be concerned? The simple answer is that the result may be contrary to what was intended and the consultant may, for want of the required legal qualification and skill, be without PI cover.

Without recourse to PI cover, the consultant may be at risk of being liable for a claim which it is not insured. As providers of professional services, with their greatest asset being their human capital, consultants may lack sufficient funds to satisfy a large claim, which could easily tip a consulting firm into insolvency. Nobody wins when insolvency is declared.

To cover the risks, it would be prudent for employers and consultants to call in the lawyers at an early stage to perform the legal professional services required in relation to the project contracts and documents. It is, after all, another way of distributing the risk in an already risk-averse industry.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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