Individuals and companies have a natural right to be treated fairly by those who owe them a duty of care, including construction professionals. However, professional indemnity insurance (PII) does not provide coverage where liability exists solely due to a contractual term. To reduce their risk of uninsured loss, consultants and sub-consultants should seek to follow risk management best practice. This should include taking steps to bring their contracts in line with PII, which should cover cases of negligence.
A recent decision handed down by the Technology and Construction Court (Lendlease Construction (Europe) Limited v Aecom Limited (2023) EWHC 2620 (TCC)) (the “Lendlease Case”) is set to have significant implications on the drafting of appointment contracts within the construction sector. It has further demonstrated the care and attention that needs to be given to the terms in any contract or sub-contract, in particular when considering the impact of contractual terms on PII coverage.
Liability for negligence
Under English law, individuals and companies have a natural right “not to be wronged” by those who owe them a duty of care. When a party breaches a duty of care that it owes to another person or company then the offending party is “negligent,” and the wronged party can bring a claim for compensation. This area of law if known as “tort” law (from the latin “tortum”, meaning “something twisted, wrung, or crooked”).
While there are nuances, a professional is generally thought to be negligent if they fail to exercise reasonable skill and care in the performance of their professional services. Subject to specific policy terms, PII is designed to provide coverage for a claim like this against the insured.
Contractual liability
In contrast to claims for negligence, PII does not provide coverage where liability exists because of a contractual term, unless the insured would have been liable under tort law or under legislation in the absence of that term.
In practice, this means that consultants and sub-consultants must avoid agreeing to terms that impose a higher standard of care than the obligation to exercise the expected skill and care. Where they do agree to more onerous terms, they must do so in the knowledge that their PII policy is unlikely to provide full coverage in the event of a breach.
Navigating contractual terms
Over the years, many arguments have developed on how to best prevent contractual terms by imposing a higher standard than that enforced under the area of tort law.
Take the following example:
Clause 2.1 – in performing the services the Consultant shall exercise the reasonable skill and care expected of a member of its profession.
Clause 2.2 – the Consultant warrants that the Services will comply with the Programme, and any designs will meet the specifications contain in Schedule 1.
Many consultants will see clause 2.1 and think their obligation is to exercise reasonable skill and care in the performance of its services; if it does that then it will not be liable. However, the Lendlease case has confirmed a principal initially established in MT Hojgaard v Eon (2017).
Clause 2.1 and 2.2 as currently drafted would likely impose two separate and parallel obligations, meaning that the consultant would be under an obligation to exercise reasonable skill and care, while ensuring the services comply with the programme and the relevant specifications.
Therefore, the consultant could still be liable despite not being negligent. In this instance, PII would not provide coverage as its liability would only exist because of a contractual term.
Lessons from recent case law
Fortunately, a recent decision handed down by the Technology and Construction Court (Lendlease Construction v Aecom Limited 2023 (opens a new window)) has provided guidance on how to deal with this, and is set to have significant implications on the drafting of appointment contracts.
In the Lendlease case, the Court held that where the reasonable skill and care clause contained an additional sentence – which showed that all the consultant’s obligations under the contract were subject to the duty to exercise reasonable skill and care – then the consultant would only be liable for failing to comply with a strict liability clause if they had been negligent.
Based on the judgment in the Lendlease case, the following amendment may be recommended to help bring these terms in line with coverage provided by professional indemnity insurance:
Clause 2.1 – in performing the services the Consultant shall exercise the reasonable skill and care expected of a member of its profession. Notwithstanding any other clause in this Agreement or term implied by statute or common law, the Consultant shall not be construed as owing any greater duty in relation to this Agreement than the use of necessary reasonable skill, care, and diligence pursuant to this clause.
Clause 2.2 – the Consultant warrants that the Services will comply with the Programme, and any designs will meet the specifications contain in Schedule 1.
A word of warning
Although greater clarity has now been provided by the courts, consultants should be conscious that a judge will look at the full context of a contract. Therefore, while adding this wording into a contract does not guarantee that a judge would not interpret the intention of the parties differently to the judge in the Lendlease case, by following best risk management practice in respect of the contractual terms they agree to, consultants can greatly reduce their risk of uninsured loss.
For further information, please visit our Construction Professionals (opens a new window) page, or contact:
Nick Rains, Advisory, Contracts, and Technical Specialist
