The ultimate goal of a contract is to divide risk and accountability between the parties: the risk of financial loss in the event of failure, the risk of unanticipated circumstances, the duty for decision-making, and the obligation to secure specific outcomes. By acknowledging their risks and duties and taking action to either accept them or transfer them to other parties, the parties to a contract can decrease or eliminate some types of risk during the contract negotiation phase and throughout the performance of the contract.
The principles of contract law only serve as a general guide for parties and courts in understanding contractual risks and obligations; the parties themselves must do the remaining interpretation work. Risks and obligations that are not sufficiently covered by a contract are subject to the jurisdiction of the courts. The law assumes things and inserts clauses into contracts by default. Similar to this, a party may unintentionally assume risks due to specific contract language. However, if parties are aware of them and knowingly allocate them, they can readily avoid such unintentional dangers. A party’s dissatisfaction considerably increases the likelihood of confrontation. Poor communication may cause party unhappiness rather than poor service, incompetence of the owner in carrying out their commitments, or expertise of the professional or contractor providing the service.
Risk Assessment
When parties are preparing to enter into agreements, they frequently do so in a spirit of fervour, hope, and expectation of gain. However, both parties must temporarily adopt a pessimistic mindset during the contract negotiating stage in order to appropriately identify hazards. It’s acceptable to wish for the best while yet preparing for the worse. Lawyers who specialise in contracts are taught to think through potential problems and then come up with solutions. This strategy needs to be adopted by architects, engineers, and geoscientists during the project planning phase, before the contracts are signed. Professionals must pose extremely specific questions when determining risks, such as the following in the context of a technological contract: For each day that the project is delayed, what losses would each party experience? Who should be responsible for the danger of the technology failing? What if the technological obstacles prove to be trickier than anticipated? In the event that the technology provider fails, who will finish the job?
Parties can come up with rational answers just by posing these questions. The agreement should outline, for instance, if insurance should be bought to cover the risk of fire or theft, whether performance bonds should be set up to cover the risk of contractor default, and whether bonus or liquidated damages provisions should be introduced to deal with delays. After discussing the risks and potential remedies, the parties can determine whether to transfer the risks to third parties, such as suppliers, subcontractors, bonding agencies, and insurance companies, or they can mutually agree to assign the risks to the contractual parties.
Common Law
Courts typically perceive professionals as relatively sophisticated parties in contract disputes. In other words, if a geoscientist consented to include a particular condition in a contract, he or she should be held to that term since the law typically assumes that the terms of a contract signed by a geoscientist were fairly negotiated. A court is rarely persuaded that a professional behaved under financial constraint or difficulty. Professionals who contend that if they had understood the terms better, they would have rejected the contract and someone else would have won it are unlikely to succeed. In the majority of cases, courts assume that the parties had the choice to enter into a contract and the option to withdraw during talks if the terms were unfavourable: They could have chosen to accept the onerous terms or allowed someone else to do so. The law also assumes that if a risk is mentioned in the contract, the parties had thought about it beforehand. As a result, courts are hesitant to replace the parties’ choice with their own risk distribution. Courts typically allow the contract to determine the outcome if the risk has been addressed in the agreement.
Although clients frequently assume that specialists will guarantee the outcome of their work, the law does not assume this. The law stipulates that a professional shall behave with the degree of competence and care expected of the typical practitioner in that field in the absence of contractual language to the contrary. Professionals should therefore take great care to avoid any contractual language that would put them in the role of guarantor or surety.
Given the rarity of perfection in the performance of any professional services, clients frequently include contingencies in their budgets. However, a court may hold a professional accountable if they claim to a customer that outcomes are guaranteed in a contract or in a letter, email, or other communication. The contract may also imply certain warranties, even though the law does not always assume that it will deliver the outcomes the customer wants. For instance, the law in most countries presupposes that the final result in a contract for the design or construction of a dwelling would be suitable for occupancy. Additionally, the law will imply a minimal level of competence, expertise, and care.