Properly defining and referencing parties in a contract play a crucial role in avoiding problems down the road.
February 19, 2025
By Brett Stewart, Esq.
Manager, Loss Prevention Education, Design Professional
When drafting professional service agreements, one of the most important—yet often overlooked—details is correctly defining and referencing the parties involved. This may seem like a minor housekeeping task, but a mistake can lead to uncertainty, disputes, and even issues with your insurance coverage.
The most basic mistake
A common problem arises when the entities listed in the recitals (the preamble or “Whereas” section) don't match up with who is actually signing the agreement. For example, the preamble might refer to “Samantha Smith” as the client, but the signature block shows “S. Smith Developers LLC.” Or maybe Samantha is called the “Owner” elsewhere in the agreement. These kinds of discrepancies can come back to haunt you if you ever need to enforce the contract's terms.
Unauthorized signers
Another pitfall is when the person signing the agreement doesn't have the authority to do so on behalf of the client entity. Contracts signed by unauthorized individuals are more vulnerable to challenges or even declared invalid. This means you could be left without legal recourse if the client doesn't uphold their side of the bargain. (In Canada, the “indoor management rule” allows parties to assume that the individual signing a corporate agreement has the authority to do so in many circumstances.)
A mistake can lead to uncertainty, disputes, and even issues with your insurance coverage.
Expanded liability
It’s not unheard of to find inappropriate parties or newly introduced entities only distantly related to the client in a “Definitions” section or elsewhere. If you’re not paying attention, a new and entirely unrelated entity could find its way into your contract and increase your liability exposure. For instance, a seemingly innocuous definition of “Client” might encompass the client’s “agents, contractors, lenders, and consultants”—individuals or entities not inherently part of the client entity. Owing an indemnity obligation to a client-retained geotechnical engineer or general contractor could lead to disastrous results for your firm.
Unfamiliar clients
A larger issue is whether you really know which party you’re doing business with. There have been instances in which a firm negotiates an agreement with one entity only to find another organization named on the contract. For example, one architect negotiated with a local franchise and then discovered that the actual client was a corporation located across the country—an entity the architect had not worked with and did not know.
Single-purpose entities
Sometimes the client entity is brand new or set up just for a single project. If you don't do your due diligence and verify that this entity exists and has the financial means to pay you, you could end up with unpaid invoices and little legal recourse. What’s more, sole-purpose entities typically shut down after the project. If a third-party claim arises after project completion, and the client is long gone, the remaining defendants may have a harder time settling a lawsuit.
What you can do
First and most importantly, set up processes within your firm that require all contracts to be reviewed and officially approved before they are signed. Read every clause in your contract with a critical eye, starting with the preamble and ending with the signature page and attachments. Pay special attention to the following six points and be sure to seek the help of legal counsel:
- Confirm that the client entity legally exists and has the necessary funding.
- Make sure the individuals signing the contract for both parties have legal authorization. Some contracts include a clause stating that the individuals signing the agreement are legally authorized to do so.
- Review any definition of the client entity in the preamble, the “Definitions” section (if there is one), and elsewhere in the agreement. Delete any inappropriate party, such as the client’s agents, contractors, lenders, attorneys, other consultants, or anyone that is not directly part of the client entity. Note that when terms are defined in an agreement, the first letter is capitalized (Consultant) or the word is all uppercase (CONSULTANT).
- Confirm that the terms for the entities are used consistently throughout the document. For example, if the contract refers to you as “Consultant” in the preamble, only that word should be used throughout the document and not used interchangeably with other terms such as “Design Professional” or “Engineer.”
- Verify that the correct parties are identified in the contract and that their names, addresses, and other relevant information are accurate. Check that the entities in the preamble match those in the signature block. Look at your insurance policy to make sure the name on the policy is the same as in your contracts.
- Add a contract clause that expressly bars third parties from claiming rights under the contract between you and your client.
Contracts are the foundation of your business dealings, and their terms can dictate how easy or difficult it might be to extract yourself from a claim or dispute. They need to be precise, clear, and reflect everyone's understanding and agreement. Take the time to review each contract and make certain that the party you think you're dealing with is the one bound by the contract's terms.
