Letters of Reliance and the potential risks involved
SIGNING AWAY YOUR LIFE
Whilst larger scale projects will often include the requirements to provide a full range of contractual documents, the smaller scale matters tend to slip through the cracks a little in terms of the paperwork involved.
As a general starting point, to safeguard your position, it would be our recommendation that you always ensure that there are formal terms and conditions in place with regards to any Services you are providing.
If the Client does not have a specific contract that they require, ensure that your own terms and conditions are used in their place.
However, one question that is raised frequently, is the request from a third party to provide a Letter of Reliance with respect of your work, which in this instance will usually be limited to provide a report on a project.
DEFINTION: What is a Letter of Reliance?
Reports are often commissioned by parties involved in the design and construction of built assets that another party (other than the original client) then has to rely on to support or inform their own activities. Under such circumstances, the author (“you”) of the report might issue or be requested to issue a reliance letter, confirming that the third party can rely on the contents of the report, or can rely on a specific part of the report.
For example, an organisation selling a site might commission an assessment of geotechnical or environmental conditions that a purchaser later relies on when deciding whether to buy the site and at what price. Under these circumstances, the author of the report (“you”) might issue a letter confirming that the purchaser can rely on the contents of the report.
Whilst the Client or third party may push for the use of such a Letter, there are several things that should be considered before accepting anything put forward by the Client.
You can’t always get what you want.
The first question to be considered on receipt of such a request is – do you have to provide one?
Whilst the Letter of Reliance may only be a brief document, it is still a contractual document that provides rights in respect of your work. So, the first thing to establish is, if the terms and conditions agreed with the Client provide for a Letter of Reliance to be provided. If the answer to this question is no, then you are under no obligation to provide a Letter at all.
If the answer is yes, then the terms of the letter itself need to be considered further.
Death of a thousand papercuts.
As a contractual document, care needs to be taken to ensure that the Letter of Reliance does not include any terms or conditions that are not present in the original appointment.
Whilst this is not an exhaustive list, the following examples highlight the potential dangers to your practice:
Executed as a Deed
If your original appointment is a simple contract signed under hand (i.e., it is not expressly stated to be executed as a Deed), then the Letter of Reliance cannot be executed as a Deed. If you do, this creates an additional period of contractual liability that is not owed to the original client and would, as a result, fall outside the scope of the cover provided by your professional indemnity insurance.
‘From the date of this letter’
The liability in respect of your work runs from the date you’ve completed the Services, which will usually be the date of the report itself and would last for at least six years. However, if you are asked to sign a Letter with the obligations stated to run for six years from the date of the letter, this could again extend your liability beyond the scope agreed with the original client and leave you exposed to an uninsured liability.
Protecting your position
When you are asked to provide a Letter of Reliance, run through the following checklist as a starting point:
- Does my appointment include the use of a Letter of Reliance?
- Is it to signed/executed on the same basis as my original appointment?
- Do the liabilities and obligations run from the date of my Report?
If the answer to any or all of these questions is no, the Letter of Reliance should not be provided in its current form and these issues should be raised with the Client.
If the Letter can be provided, we would suggest that you submit a copy to us for review to ensure that there are no further insurance issues that may impact on your position.