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Managing liability risk when doing business with the federal government

July 2010

Independent Contractors Australia is pleased to see that new guidelines have been issued by the federal government to its procurement officers about how liability is to be allocated when drawing up contracts.

This is important for anyone doing business with government agencies. The new guidelines and model liability clause should make a substantial difference by ensuring that the allocation of liability reflects the reality of each job. This should lead to improved efficiencies, resulting in lower costs for government and better profitability for those doing the work. Naturally, the big task from here is to ensure that government procurement officers follow the guidelines.

Below we have:
  • The new model clause
  • What this means for you and what to do if you contract with government
  • Background information
  • ICA commentary and ongoing campaigning
The key links are

What this means for you and what to do if you contract with government

Most contracts we've seen issued by government departments follow a standard form. They are written with little thought to tailoring them to the specific work being contracted. As a general rule, this has led to standard liability terms being applied that quite literally make the contracting party liable for everything and the government liable for nothing. This has made contracts highly unrealistic. It's also meant significant increases in costs because contracting parties have felt obliged to take out liability insurance for events over which they could not conceivably have control.

This new model clause and guide (released in June 2010) create the opportunity to change this. The key phase in the guide is:

    Where an agency is best placed to manage a particular risk it should not seek to inappropriately transfer that risk to a supplier and similarly, agencies should generally not accept financial liability for risk which another party is better placed to manage.

That is, departmental procurement officers are being asked to take a sensible, practical approach and assess liability in the light of the circumstances of each job being contracted. The guide provides case studies showing how this should apply. For example, the case study of Mr Stan (Stanley?) Kubrick, asked to review and sort film files, shows how, following appropriate risk assessment, 'standard' indemnity insurance would not be required.

The key to this new approach will be in its application. The guide is just that---a guide. It will (we presume) be up to departmental procurement officers to apply it.

However, if you are seeking to do work for the federal government, the guide does give you some power in the contract negotiation process. We suggest that:
  1. You familiarise yourself with the guide and the model clause.
  2. If any contract you are presented with does not comply with the guide and model clause, raise this with the procurement officer. This should also be done if tender documents do not comply with the new guide.
  3. Seek to negotiate the liability clauses in the contract around the principles of the guide. In most instances we believe procurement officers will be happy to do this.

Background information

As part of ICA's ongoing 'integrity of contract' campaign, we have been approaching government for some time about the unfairness and impracticality of the contracts that government routinely puts out. Many other business organizations have also complained to government about the same issue. The contractors most frequently affected have been in the information technology area, accounting, engineering, architecture and building, to name some.

During 2009, ICA was invited---along with others---to participate in discussions with the Department of Finance on the issue. The brief was limited to examining liability issues under the contracts. We would have preferred a broader brief which looked at the entire contract area, but the liability issue is an excellent starting point and a key issue of concern.

In October last year, the department released a discussion paper. We reported on it and responded to a number of issues.

Overall, our response was positive and welcoming. We raised some specific issues, however.
  • The model clause creates liability for alleged infringement of confidentiality and so on. We do not see how anyone can be held liable over an allegation. Surely, one can only be liable over a proven fact.
  • The government should be attuned to having the model clause applied in 'cascading contracts' when work is contracted out. This particularly applies to labour hire-type arrangements (which are very common in IT engagement).
We stand by these comments, as they do not seem to have been taken into account in the final guide. Other issues we raised related to the way procurement officers should apply the new guide in practice.

ICA commentary and ongoing campaigning

ICA welcomes this new liability model clause and guide. We hope (and assume) that
  • Government procurement officers will receive training in the new guide and apply it.
  • Government will find that application of the guide will lead to better focused contracts that deliver better outcomes at lower cost.
  • People contracting with government will study the guide and use it in their contract negotiations with procurement officers.
  • People contracting with government will find they are dealing with better contracts that more accurately reflect the reality of the work being undertaken. As a consequence, we trust that work can be done more efficiently, at lower cost to government and with enhanced profit for the service provider.
On the broader campaign of 'integrity of contract', ICA sees this development as an important positive step. We hope that government will become engaged in a broader review of contracts in their totality.

The new liability model clause (effective from May 2010)

[Source: Model Liability Clause]

Liability

Explanatory Statement
    (a) Where either party to this contract:
      (i) breaches the contract;
      (ii) is negligent; or
      (iii) breaches a statutory obligation
    it will be liable to compensate the other party to the contract, in accordance with the law, for any resulting expense suffered by that other party.

    (b) Where a party has expressly agreed in the contract to take responsibility for a particular event, that party will also be liable to the other party, in accordance with the contract, for the expense suffered as a result of the event occurring.

    (c) The term "expense" includes:
      (i) loss suffered by a party to the contract, such as the loss of property;
      (ii) liability incurred by a party to the contract to a third party; and
      (iii) expense incurred by a party to a contract, such as the expense incurred in repairing damaged property or in defending a claim made by a third party.
Indemnity
    (a) The Contractor indemnifies the Commonwealth against any expense caused by any negligent act or omission, breach of statute or breach of this contract by the Contractor, its officers, employees or subcontractors, except to the extent that any negligent act or omission, breach of statute or breach of this contract by the Commonwealth, its employees or agents contributed to the relevant expense.

    (b) Where the Contractor has agreed in the contract:
      (i) to provide intellectual property rights to the Commonwealth;
      (ii) to maintain the confidentiality of material provided to the Contractor; or
      (iii) to provide information to the Commonwealth
    the Contractor also indemnifies the Commonwealth against any expense caused by a claim against the Commonwealth by a third party in respect of:
      (iv) an actual or alleged infringement of intellectual property rights; or
      (v) an actual or alleged breach of confidentiality
    where the Commonwealth has acted in accordance with the contract.