RICS draft guidance note - Risk, liability and insurance, 3rd edition

Risk, Liability and Insurance - 3rd edition

5 Contractual terms

5.1 Engagement letter

5.1.1 An engagement letter is the contract between the member and the client and sets out the scope of the appointment (i.e. what it is that the member/firm has agreed to do) and the terms governing the appointment.

5.1.2 It is also an important opportunity for the member to regulate the risks that attend the engagement, and that opportunity should not be passed up.

5.1.3 Before turning to the terms of engagement, it should be noted that ultimately there is no compulsion on the part of members to accept a professional instruction. Where, in the member's opinion, the risks and rewards are not balanced, the member should consider whether it is appropriate to accept the instruction.

5.1.4 In this section, there are the clauses of an engagement letter that are the most important from a risk perspective. Where appropriate, an example clause is given after the explanations. These clauses are generic examples only and will not suit all situations; members should consider taking legal advice on their requirements for specific situations.

5.1.5 Although the words 'clause' and 'contract' are used, the engagement letter can have the appearance of any other business letter. There is no particular form in which the clauses need to be set out, though it is important that clauses which exclude or limit a member's liability are reasonably prominent.

5.1.6 Many firms choose to prepare standard terms and conditions for all retainers. This enables engagement letters for individual matters to be prepared easily, by reference to those standard terms and conditions, and it will usually mean that negotiation with the client at the outset of each new matter can be confined to the key points specific to that matter.

5.1.7 Frequently, a client will ask a member to agree to provide services on the basis of the client's own standard terms and conditions, which might include a Service Level Agreement or Master Services Agreement, the terms of which will bind both parties for the duration of the specific agreement. The question of whose terms and conditions prevail is a subject for commercial negotiation with the client (and members should ensure that it is made clear which terms will prevail), but if the client's terms and conditions prevail, members should read them and bear in mind that, like every contract, their terms should be capable of negotiation. Where the client wishes to have a standard Service Level Agreement in place, this will help facilitate instructions for the period of its duration, but the member should still read its terms carefully prior to signature and, where appropriate, seek to negotiate those terms, to ensure that they fairly apportion risk and reward between the parties.

5.1.8  Even where a firm or member does have standard terms and conditions, there are at least three key terms that should be considered from a risk perspective in the context of every instruction, as set out below. These terms should be regarded as related, and therefore considered alongside one another in the context of each instruction.

  1. The basis on which the fee will be calculated.
  2. The scope of the work.
  3. The liability cap: liability caps are discussed in section 3.

5.2 Contracting entity/exclusion of personal liability

5.2.1 The engagement letter should state the entity that is entering into the contract to provide the services.

5.2.2 The firm's name shown on the front/back of any written report should be consistent with the engagement letter. This is important for the reasons given in section 2.7.

5.2.3 The engagement letter can include a clause that expressly prevents any of the firm's individual partners or employees being named as a defendant in any claim brought relating to the services. This requires wording along the following lines:

'None of our employees, partners or consultants individually has a contract with you or owes you a duty of care or personal responsibility. You agree that you will not bring any claim against any such individuals personally in connection with our services.'

5.3 Proportionate liability

5.3.1 Sometimes the services of a member are provided in a particular matter alongside those of other professionals, such as other surveyors, solicitors, architects, engineers, etc. If the client sues more than one of these professionals, all of the defendants can in some cases be categorised as 'joint tortfeasors', or both be held liable for the same damage. If that happens, and the claimant succeeds in a claim against more than one of them, the claimant can choose to enforce 100% of its judgement against as few or as many of the defendants as the claimant wishes to. If one of the defendants is unable to pay a fair share of the claimant's loss (for example, if that party has no insurance and/or is insolvent), the others are required to step in and meet the judgement in full. This may mean, for example, that even though an engineer was also responsible, the member has to pay all of the loss because the engineer has gone insolvent and does not have run-off insurance.

5.3.2 It is possible to contract out of this effect, by including a clause in the engagement letter which says that, even if the member is negligent, the extent of the member's liability is restricted to the loss which can properly be said to have been caused by that negligence. Note that such a clause is different from a 'liability cap' (see section 5.4). A proportionate liability clause would be along the following lines:

'If you suffer loss as a result of our breach of contract or negligence, our liability shall be limited to a just and equitable proportion of your loss having regard to the extent of responsibility of any other party. Our liability shall not increase by reason of a shortfall in recovery from any other party, whether that shortfall arises from an agreement between you and them, your difficulty in enforcement, or any other cause.'

5.4 Liability caps

5.4.1 Section 3 is devoted to liability capping clauses, and the subject is also addressed in Appendix B and Appendix C . However, these clauses are also included in this section, because, together with the fee clause and the scoping clause, liability caps are one of the three clauses of engagement that RICS members should consider from a risk perspective in accepting every instruction, rather than being left for inclusion in standard terms and conditions.

5.5 Fees

5.5.1 The fee to be charged should be considered in the context of every instruction, and not left for inclusion in standard terms and conditions, even with regular clients.

5.5.2 The size of the liability risks attendant on professional services can be disproportionate to the fee charged. Accordingly, those members who are responsible for pricing professional work within a firm should ensure that they are aware of the cost to their firm of buying and maintaining professional indemnity insurance, as well as all other costs of the business.

5.5.3 See Appendix C8 if asked to issue a fee invoice to a third party.

5.6 Scope of work

5.6.1 The firm should consider the scope of work that it is intended will be provided for the fee, and then ensure the client's expectations in that regard are the same as the firm's. For example:

  • What is the nature of any inspections or investigations to be conducted?
  • Will the work include any measuring services?
  • Will the member need to call on other specialist input (for example, from other surveyors) from within the firm?

5.6.2 Frequently, claims arise because of a mismatch between the work the member intended to do to provide the services, and the work the client anticipated the member would do. The engagement letter is the member's opportunity to ensure that the client's expectations match those of the member as to what the member is going to do and, just as importantly, what the member is not going to do.

5.6.3 The 'scoping' process should be aligned with the process of calculating an appropriate fee and liability cap (see section 3).

5.6.4 The scoping process is also a good opportunity for the member to state those areas of specialist work the member is not going to deliver in this instruction. The member may believe the client knows that these specialist works are being provided by other specialists, but it is preferable to state this in express terms.

5.7 Dispute resolution

5.7.1 If no other provision is made, the default position in England and Scotland is that disputes between members and their clients are to be referred to the courts, for litigation. Appendix E addresses this subject.

5.8 Third party reliance

5.8.1 Section 4 is dedicated to the subject of third party reliance. RICS members should include a clause in their engagement letters that prevents third party reliance. This can be included in a firm's standard terms and conditions. For completeness, this clause should be replicated in a prominent position in the body of any report as well. The clause can be along the following lines:

'Our advice is provided for your benefit alone and solely for the purposes of the instruction to which it relates. Our advice may not, without our written consent, be used or relied upon by any third party, even if that third party pays all or part of our fees, or is permitted to see a copy of our advice. If we do provide written consent to a third party relying on our advice, any such third party is deemed to have accepted the terms of our engagement.'

References to advice should be amended as appropriate - for example for valuation work they should reference 'our valuation'.

5.9 Governing law and jurisdiction

5.9.1 Some clients (or third parties who bring claims against a member firm) may try to bring claims in their 'home' jurisdiction. If successful, members might find themselves being judged under a different system of law from that with which they are familiar or had in mind when they accepted the relevant instruction. It is also possible that the member's PII will not cover the claim, if the policy contains geographical limitations on cover.

5.9.2 Members can prevent this happening in the majority of cases by including a simple clause stating that the contract, and any claims arising from the professional services, are subject to the exclusive jurisdiction of the courts of England and Wales, and English law. This is even necessary within the United Kingdom: for example, if valuing a Scottish property, or sending a valuation to a client in Northern Ireland, this may create uncertainty as to governing law and jurisdiction, so it is recommended to include an express choice. The clause can be along the following lines:

'Our contract with you for the provision of these services is subject to English law. Any dispute in relation to this contract, or any aspect of the services, shall be subject to the exclusive jurisdiction of the Courts of England and Wales, and shall be determined by the application of English law, regardless of who initiates proceedings in relation to the services.'

5.9.3 This clause can be adapted for Scottish use by replacing 'English law' (in both places) with 'Scots Law' and 'the Courts of England and Wales' with 'the Courts of Scotland', though in Scots law, there are differences as to what makes up the contract with a member and how the contract is concluded; specialist Scots law advice should be sought.