Contractual Observation

Taking on a new client? Break out your magnifying glass.

December's Insurance Trend discussed the potential liability issues that waste firms may face when hiring contractors to work on their behalf or when other vendors operate on their facilities. This month, it is time to put the shoe on the other foot. Waste firms contract out their services, so they too must be careful that the business they are taking on does not put them out of business.

A new contract is certainly a reason for celebration, but it also could present new exposures. Going beyond the scope of work outlined in that contract may leave your firm susceptible to additional liability. Ideally, companies should develop their own standard contract or terms and conditions and attempt to use them for each project or client. But even if your business has its own form, you may have clients who require the use of their own contract form. Client-generated contracts need to be examined very closely because they sometimes contain clauses that cause more problems than a verbal agreement. For example, many client-generated contracts feature a broad-form indemnification clause that requires your company to indemnify the client for its own negligence.

Some contracts may contain “standard of practice” language, which includes words like “warranty” or “guarantee,” or phrases such as “highest standard of practice.” Due to the nature of the service waste firms provide, most should avoid offering warranties. Accepting such clauses and phrases increases potential liability, holding the firm to standards that are difficult to achieve. Instead, a waste firm's work should be judged by the acceptable standard of practice that exists at the time that the services are offered. A contract is defined as “an agreement between two or more parties for the doing or not doing of some definite thing.” Whether your company decides to develop its own contract form or use the standard contract forms available, it's important to note that to be considered binding, the contract — whether verbal or written — must address these five elements:

Agreement: The parties to the contract must come to a “meeting of the minds” whereby one party will provide goods or services and the other party accepts the goods or services for a fee or consideration.

Fee or Consideration: Something of value must be exchanged between the two parties. This could be recorded as a monetary fee or a consideration for goods or in-kind services.

Legally Enforceable: The conditions of the contract must be legally enforceable in the jurisdiction where the contract is applicable. For example, in some states, indemnification language is not enforceable due to anti-indemnity statutes.

Competent Parties: The signatories to the contract must be mentally competent and not impaired due to insanity or intoxication. The signatories also must be authorized to sign contracts by their respective companies. Typically, company officers or other specifically authorized personnel can sign contracts.

Legal Purpose: The contract must be for a legal purpose. If a consultant who is not a licensed professional engineer (P.E.) signs a contract agreeing to provide P.E. services, he is signing an illegal contract.

Because of the increased risks of signing client-generated contracts, a company should have specific review requirements. This preparation should include contract review training as part of your company's overall risk management program. Most managers have had little or no contract review training. Legal counsel should always be asked to review any unfamiliar language.

Without the benefit of a binding contract, you leave your firm vulnerable to financial losses as well as loss of time used to settle the inevitable contract disputes.

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Matt Gartner works for XL Specialty Insurance Company.