Sword Or Shield? Using Your Contract To Mitigate Risk

Professional services agreements often are treated as a formality—boilerplate documents signed at the outset of an engagement and then forgotten. In reality, these agreements are among the most effective tools available for managing professional liability. A well-drafted contract functions both as a shield, deterring liability and narrowing claims, and as a sword, enabling professionals to recover fees and defend their work when disputes arise.

Understanding how to draft and deploy key provisions enables professionals to allocate risk more effectively, close the "expectation gap" for clients, and transform their engagement letters from routine paperwork into powerful risk management devices.

Clarifying the Relationship

The first function of a professional services agreement begins with identifying the client. Without a clear designation, affiliates, related entities, or even employees of clients may attempt to improperly assert rights under the engagement. By expressly naming the client, and sometimes by excluding others, professionals can avoid unintended exposure to claims from parties for whom they did not perform services and to whom they should not be liable.

Equally important is defining what services will and will not be performed. Liability often arises not from the work performed, but from alleged failures to do something never contemplated. For example, a compilation engagement is distinct from an audit; the former involves presenting financial information without providing assurance, while the latter requires substantive testing and opinions. If the distinction is not clear, clients may claim they expected audit-level work for a compilation fee. Similarly, an attorney engaged to file a workers' compensation claim, but who does not want to be responsible for a potentially related premises liability claim, should consider specifically carving a responsibility for such claim out of the engagement. The contract should not only describe what is included but also carve out what is excluded wherever possible.

Cost clarity is another area where it is important to be clear in order to avoid potential disputes. Many professional liability claims stem from fee disagreements that escalate into broader allegations about the quality of services. To reduce this risk, contracts should set out the basis for fees, payment schedules, and—when feasible—budgets or estimates ought to be provided to a client outside of the engagement letter in order to avoid surprises. Professional responsibility rules may dictate what fees can be charged, making careful drafting even more important.

Finally, the agreement should contain disclaimers regarding results. Professionals provide services, not guarantees, and the contract should reflect that distinction. A simple disclaimer that "no results are guaranteed" can go a long way toward aligning client expectations and protecting against claims of professional misconduct rooted in disappointment. These disclaimers should always be tailored to local law, as enforceability can vary by jurisdiction.

Provisions That Protect: Waivers and Limitations

Beyond defining the client and scope, engagement letters can significantly reduce liability exposure through specific risk-allocation provisions. Two stand out as particularly effective: waivers of consequential damages and limitations of liability.

Waiver of Consequential Damages

Consequential damages provisions eliminate exposure to losses that are remote, speculative, or vastly disproportionate to the professional's fees. Without such a clause, a relatively small engagement could lead to claims for lost profits, business interruption, or diminution in value far exceeding the compensation received.

Key drafting elements include:

• Using clear, express language that excludes consequential, special, incidental, and punitive damages
• Defining barred damages, such as lost profits or diminution in value
• Preserving exceptions only when required by law, such as for fraud or willful misconduct
• Ensuring reciprocity, so both parties are subject to the same limitations.

As an example, New York courts routinely uphold these waivers when negotiated by sophisticated parties, viewing them as legitimate risk allocations. The courts will invalidate a clause only if it is unconscionable—so one-sided that it shocks the conscience—or if the parties lacked meaningful choice.

Meanwhile, California law is similar, though courts pay closer attention to public policy. Under California Civil Code §1668, parties cannot exempt themselves from liability for fraud, willful injury, or statutory violations. In consumer settings, courts are especially cautious, but in commercial contracts between sophisticated parties, consequential damage waivers are often enforced.

Limitation of Liability

Limitation of liability provisions cap total exposure to a predictable level, often tied to the fees paid or the professional's insurance coverage for some professionals such as design professionals. This protects professionals from open-ended claims and provides greater certainty for both parties.

For these professionals, effective drafting should:

• Tie the cap to insurance coverage or a multiple of fees
• State explicitly that the cap applies regardless of the theory of recovery, including negligence
• Pair the cap with shortened limitations periods, where enforceable
• Ensure internal consistency with indemnity, insurance, and dispute-resolution provisions.

New York courts enforce limitation of liability clauses that are clear and not contrary to public policy. However, they cannot limit liability for gross negligence, willful misconduct, or intentional wrongdoing. For sophisticated commercial parties negotiating at arm's length, courts are generally deferential to these provisions.

In California, courts likewise uphold limitation of liability clauses but construe them strictly against the drafter. The provisions must be unambiguous, fair, and consistent with public policy. As in New York, they cannot excuse fraud or intentional wrongdoing.

Together, waivers of consequential damages and limitation of liability provisions narrow the scope of recoverable claims, align client expectations with professional obligations, and help manage litigation risk.

Structuring Dispute Resolution

Even with clear definitions and risk allocations, disputes may arise. Venue and arbitration provisions provide a framework for resolving them efficiently and predictably.

For enforceability, these provisions should be:

• Conspicuous: prominently displayed in bold, all caps, or a separate section.
• Acknowledged: separately signed, initialed, or otherwise accepted in writing.
• Consistent: free of contradictions with marketing promises or other contractual language.
• Comprehensive: defining client responsibilities, required representations, and internal controls.
• Practical: spelling out fee arrangements, mediation or arbitration procedures, and jury trial waivers.

Updating agreement templates periodically is essential, as statutes and case law evolve. A clause that was enforceable five years ago may now be subject to new restrictions or judicial interpretations.

Conclusion

An engagement letter should never be viewed as boilerplate. When drafted with care, it becomes the professional's first line of defense against liability and a strategic weapon for enforcing rights. By precisely defining the client and scope; clearly setting costs and disclaimers; and incorporating waivers of consequential damages, limitations of liability, and strong dispute resolution provisions, professionals can transform a simple contract into both sword and shield.

Ultimately, a well-crafted contract not only manages risk but also reinforces professionalism, strengthens client relationships, and ensures that disputes—when they do arise—are resolved on terms that are fair, efficient, and predictable.

Originally published by PLUS Blog, 6 October 2025

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.