Bulletin

Contractual Liability – Risk Management

The Statement of Cover (SoC) has no restriction or exclusions to Contractual Liability Cover. So therefore,
Agencies have a responsibility to mitigate their risk exposures, in the context of contractual liability.

Understanding Liability Risks

Understanding and managing your contractual liability risks is imperative. The objective is to ensure that
indemnity clauses within a contract are enforceable and the Agency can rely upon them. If not, liability can
flow straight through to your Agency, resulting in claims made against the TMF. This ultimately could have
an impact on your liability contributions.

There are several risks and emerging risk issues which can be better managed with well written contracts.
It is noticeable that an increase in claims is occurring due to contracts which are not fit for purpose and
expose some Agencies to risk consequences, particularly in matters requiring a termination of contract.
An emerging and serious risk are cyber exposures. It is important that contracts which have direct risk
exposure to public information and secure data include a consideration of cyber risk.

Understanding Liability Obligations

Consider that contractual liability obligations imposed on a government agency, or a supplier, should
theoretically be well known to contract stakeholders. So, it makes sense that no contract is signed without
fully understanding the scope of any imposed risk transfer of responsibilities and obligations. This is
important for all parties involved in the contract. Stakeholders, including those who may not be signatories
to the contract, should also be provided with copies for a full review.

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When contemplating dealing with a contract, there are

general actions which are necessary to reduce the risk of nasty
surprises. These include:
1. Read and understand the contract
Each section must be understood. That means the contract must be written in a manner which can be
comprehended by a reasonable person.

• Is the contract fit for purpose?

• Do you agree to everything written in the contract?

• Do you understand your obligations and rights under the contract?

2. Articulate what is being agreed to

Verbally discuss the contract details and confirm the contract is reflecting the agreement with all parties.

• Do all parties comprehend the contractual obligations in the same way?

3. Completeness
Does the contract have any ambiguity? All scenarios, or “what ifs” should be covered within the contract.
Also, terms and conditions should be understood by all parties to the contract.

4. Clarify
Make sure there are no assumptions being made, make sure you explain how your understanding of the
contract is the same as intended. There are no stupid questions, get clarification of what might appear to
be common sense, or an assumption that in some way appears obvious, yet there is ambiguity.

5. Definitions
Are all terms and references defined? Ensure the words being used in the contract are explained in clear
context and there is no doubt what is meant by each definition.

6. Identification
All parties to the agreement should be clearly identified in the contact. That means, businesses, people,
agencies are all referred to in the correct legal entity for any possible future legal recourse.

7. Indemnity
Is there a “Hold Harmless” clause or other fair and reasonable clauses to protect parties’ responsibilities to
deliver on obligations agreed? The question is, what does this mean for your Agency? Is this acceptable
for the purpose intended?

A fair allocation of indemnity is to assign indemnity to the party that has caused the loss.

Avoid accepting hold harmless clauses and accepting liability beyond common law where possible. If
assuming additional liability, ensure your Agency is adequately financially compensated.

NSW Procurement suggests:

• You should avoid providing indemnities to suppliers.

• You should always cap any supplier indemnities at a reasonable amount. We do not consider it
reasonable to require a supplier to provide an uncapped liability in favour of the State. You can work
out this cap based on the goods or services being supplied.
The default indemnity is a multiple of the annual contract value, such as 5 times.

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8. Insurance
Agencies need to determine an appropriate level of insurance based on:

• the type of procurement

• contract value

• risk profile

• category and market profile, and

• any other relevant factors.

Standard insurances:

• Broadform liability insurance – a minimum of $20m for public liability is reasonable, or more depending
on the above assessment.

• Workers compensation

• Property insurance

• Cyber insurance – particularly for data management services or IT related services.

◦ Policies should include 3rd party loss; this cover tends to be narrower in cover and sub-limited
compared to the 1st party cover provided to the service provider.

◦ Does their insurance policy provide direct access to a cyber incidence response firm to assist in
mitigating the loss? Any cyber loss, particularly if your Agency’s customer data is affected, will likely
have a reputational damage impact to your Agency.

• Professional indemnity - include when a supplier provides professional services. A minimum of $10m or
more depending on the type and scale of professional services rendered. This type of insurance should
include, where possible, one automatic reinstatement of the limit of indemnity.
Certificate of Currency

• It is important to obtain certificates of currency (CoC) which demonstrates insured parties and
insurance limits.

• A CoC should be obtained prior to entering a contract of agreement, for each of the insurances that a
contractor is required to procure.

• if the contract is longer than 12 months, please ensure to obtain update Certificates of Currency from
contractors to ensure their insurance level is adequate and current.
Naming of third parties insurance obligations

Your TMF cover is not an insurance policy, we are unable to name any third parties on your CoC.

Ensure that the insurance clause does not require your Agency to name the contracting party on your TMF
cover.

Conversely, it is good practice for the contracting party to name your Agency on their liability policy when
they are responsible for insurances.

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9. Best practices for Indemnity and Insurance clauses

Legally vetted - For your standard contracts, particularly where you are contracting with a service
provider that is providing a service on your behalf (for example, youth home
care services for DCJ), it is good practice to consider standard insurance and
indemnity clauses which have been legally vetted. These should ensure that the
contracting party indemnifies your Agency for the services they are providing
and that appropriate minimum insurance requirements for those services has
been considered, allowing flexibility to modify to higher insurance limits for larger
contract values.

Clear drafting - The drafting of such clauses is a subtle and exacting task to ensure they cover what
they are intended to cover and are upheld by a Court, if contested. Each contract
should reflect the nature of services and intent of the parties.
The words used must clearly and unequivocally cover what they are intended to
cover. Generally, the courts look for clear wording which unambiguously sets out
the intention of the parties regarding the allocation of risk between them. They will
also look to the other contractual terms agreed to ascertain the parties' intentions
regarding allocation of risks and liabilities.

Limiting liability - It is common to see clauses which accept liability for limited types of loss or damage,
but which attempt to exclude or restrict liability for "indirect", "consequential" and/or
"economic" loss. These all have the same meaning.
An alternative method is to accept liability for all losses, whether direct or indirect,
but subject to a sensible financial cap.

10. Waiver of subrogation

Avoid waiving rights of subrogation against contracting parties, this way icare/TMF can bring action to
recover losses.

11. Proportionate liability

Agencies need to be mindful of contractual terms that seek to alter or interfere with proportionate liability
legislation. Parties are permitted to contract out of the NSW proportionate liability regime.

Proportionate liability replaces the common law principle of joint and several liability. Under joint and
several liability, where more than one person by negligence causes another to suffer loss, each may be
liable for 100% of that loss, irrespective of their individual degree of fault.

Proportionate liability divides responsibility between the various ‘concurrent wrongdoers’ according to the
degree of responsibility of each for the loss. This means that a claimant will only be able to claim a portion
of its total loss from each wrongdoer. From a defendant’s perspective this is a more equitable outcome.

If parties elect to 'contract out' of proportionate liability, parties may be found to have contractually
assumed greater liability than they would have at law (that is, if the proportionate liability applied and a
third party was partially responsible for any loss or damage).

12. Termination clause

Are the conditions of termination of contract well defined? Don’t be worried or concerned about adding to
the contract to improve function.

Are the termination rights clear? Remember, if you choose to terminate a contract and not follow the
prescribed termination clause conditions, the contracting party can bring a claim against your Agency.

You should always agree to the terms of this compensation in advance. This mitigates contractual disputes
and litigation.

Procurement NSW Guidelines recommends:

• If you include a clause that lets you terminate the contract early for convenience, always make sure the
supplier will be compensated.

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13. Contract Breach

If contractually agreed obligations are not discharged, what are the implications and possible
consequences? Are these understood and considered when seeking to terminate a contract?

Who will cover costs of delays and remedies needed to restore the scope of work to expectations?

14. Mandatory Arbitration

Does the contract accommodate arbitration? Arbitration is normally a preferable dispute resolution
mechanism compared to legal action via the courts as the legal costs are higher and the process is also
more protracted.

15. Opinions
Who has read the contract? Are they in a position to fully relate to the workings of the contract for its
intentions and spirit of meaning and function? Consider getting a second, or third opinion.

Review - Legal advice is highly recommended

Firstly, ensure the risks assumed are within your Agency’s risk appetite. Secondly, ensure contracts
are reviewed by appropriately experienced and qualified persons. Internal and/or external legal review
is recommended. Make sure the brief to reviewers is accurate, ensuring contracts are functioning as
intended.

If you need to understand the insurance implications of the contract, before you finalise the contract,
please contact your Client Engagement Manager for guidance.

Conclusion
• In closing, entering into a contract should be well thought out and considered. Is there a start and
end date, what is the impact of any obligations, non-compliance consequences? Is there a mediation
process and an impact review to various stakeholders to the contract?

• Does the contract work appropriately, are the consequences of a failed contract acceptable? Is there
any requirement for insurances within the contract? Have the insurance requirements and implications
of the insurable contract components been considered? If so – are there any special conditions? On
what basis is acceptance provided? Is there sufficient risk transfer and insurable risk coverage to enter
into the contract with sufficient protection? Has the operation of the Proportionate Liability Legislation
been excluded?

• Has risk information been provided in sufficient detail that a reasonable person reviewing can
comprehend the critical risk factors?
There are so many moving parts to most contracts. We strongly recommend you make every effort to
understand each contract to avoid any disappointing surprises.

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 Bulletin

Summary of Actions Required in Checking your Contract:

Have you checked off the offer and acceptance, are all parties referred to correctly and included in the
contract, obligations are defined and written into the contract? Is the value proposition defined?

(1) Identify the proper parties to the contract and ensure the identities are legally correct and written
into the contract. Then the signatures of the authorised officers to formalise the contract, their
position clearly specified, and contract is dated.
(2) Ensure the purpose and delivery of obligations / expectations are clear for all parties.
(3) Include clear and unambiguous contract specifications and detailed scope of works.
(4) Terms and conditions, making sure timeframes, quality, assignment provisions, notice periods,
payment dates, materials, start and end dates, any penalty amounts (liquidated damages) with
reasons triggering conditions.
(5) Any disclaimers, content and reach of the scope for any disclaimers.
(6) Applicable jurisdiction of the contract. Preferable that this is Australian law or law of NSW.
(7) Arbitration, where there should be an appointed authority, of which all parties should agree and
abide by, including the location of the authority for notifications of referrals and the like.
(8) Dispute resolution by way of mediation (preferred) or legal process to be followed. Also, any
alternative Dispute Resolution pathway.
(9) Liability Limitations and Insured amounts, including naming your Agency (where applicable) defined
in the Certificate
of Currency.
(10) Who is responsible for indemnification (claims, injuries, legal demands, or other risk impact due to
oversight or negligence)?
(11) Include a severability clause to define what happens if any section of the contract is unenforceable.
(12) Statement of termination, this outlines the reasons and terms for termination (may include delays,
breach of satisfactory product quality, insolvency, prolonged force majeure).
(13) Provisioning for renewal of contract, ensuring this is in accordance with Agency procurement
guidelines.
(14) Criminal checks on all respective parties included in the contract.
(15) Allocation of responsibilities for all parties to the contract.
(16) Have you sought legal advice on this contract?

The checklist is not exhaustive but, provides considerations to each key component of risk prior to
entering any “Contractual Liability.”

If you have any further queries, please contact your dedicated Client Engagement Manager.

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IfNSW0081