Things to consider when contracting for professional services.

• Author: Saade, Renea I.
• Position: Legal Speak

Given that professional services often involve services that are specialized in some aspect and delivered by individuals, the liability and warranty terms and conditions that usually apply to other contractual arrangements are not always a good fit for a professional services transaction. Therefore, it is often helpful to evaluate and, to the extent necessary, address at least the following issues before entering into a contract to receive or provide professional services:

Parties' Relationship: Because personal services are involved, the parties' contract should describe the nature of the parties' relationship. Usually, this translates to a contract provision that confirms that the party providing the services is an independent contractor or subcontractor and not the other party's employee. Declaring the party a "contractor," however, is not enough. The contract should also state that the service provider is in control of his or her own work, insurance, taxes, finances, and risk so that the parties have a framework that meets the IRS's test for independent contractors. (See IRS Publication 15A for more details on the factors that will be analyzed by the IRS as well as many other governmental agencies that tend to follow the same test: irs.gov/pub/irs-pdf/pl5a.pdf.)

Allocation of Liability: How the parties will allocate liability for personal injury or property damage claims can be the most difficult term to negotiate since neither party is interested in taking on any unnecessary liability risk. To reconcile this, many contracts will allocate liability based upon the kind of claim at issue so that the parties can deal with certain claims one way and other claims another way. For instance, it is common for parties to agree to a complete "knock for knock," meaning that they each agree to indemnify, hold harmless, and defend one another for any and all claims for their own property damage or claims that may be brought by their own employees or contractors, but then agree to allocate liability for all other third-party claims based on each party's percentage of negligence. In some circumstances, a complete "knock for knock" or an agreement for one party to take on all liability other than liability for gross or willful negligence is more appropriate. The specific allocation terms that are best for the parties depend upon the type of services being provided and the totality of the circumstances.

Insurance: The kind and level of insurance...