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Response to the Draft Liability Risk Assessment Guide

5 November 2009

ICA has been involved with the Commonwealth, along with other industry associations, in discussions about the generic nature of the contracts that the Commonwealth uses when outsourcing work to the private sector. This is relevant for many self-employed people because many undertake work for the Commonwealth directly, or are the ultimate service deliverer at the end of a chain of 'cascading contracts'. The type of contract the Commonwealth uses directly affects the nature of the work that many self-employed people undertake.

Consequently, for ICA, this is an integral part of our 'Integrity of Contract' campaign. Our desire is to see good quality commercial contracts operating throughout the community. This is not just for the benefit of self-employed people, but affects all commercial transactions in the Australian economy. Ultimately, better contracts mean better business which in turn means a better economy. The Commonwealth can demonstrate practical leadership in this respect.

On 27 October 2009, the Department of Innovation, Industry, Science and Research released for public comment a Draft Liability Risk Assessment Guide and requested comments by 6 November 2009. See here for the document.

The draft guide is written for Commonwealth procurement officers to assist them in their tendering and contract processes. It focuses on Commonwealth risk-management and what level of risk is appropriate to transfer to private-sector entities who may provide services to the Commonwealth under contract. The draft guide contains a suggested model contract clause (reproduced at the end of this response). The Commonwealth is making this guide a public document so that the private sector can understand the approach that the Commonwealth uses in contract management.

ICA's overall response
The draft guide is an excellent step in the right direction.
  • The model clause is simple, in plain English and does not require legal advice for a lay person to understand its intent.
  • The model clause strikes an appropriate balance between the parties on liability issues except for one query that we raise below.
  • The discussion and advice to procurement officers is also clear, and the practical examples work well and cover an appropriate range of likely contract scenarios.
What follows are suggestions and discussion which we hope will further assist the development of the Commonwealth's approach to contract management.

The model contract
We raise one potential problem with the model contract clauses.

Indemnity clauses (b) (iv) and (v) (see below) create liability for 'alleged' infringement of a third party's intellectual property and 'alleged' breaches of confidentiality.

Comment: It's hard to understand how a person can be held liable for an 'alleged' infringement of intellectual property rights or an 'alleged' breach of confidentiality. Surely liability indemnity to the Commonwealth can only reasonably be supplied in the event of 'actual' breaches. In acquiring the services of another party, the Commonwealth must accept that there is a risk of 'allegations' by a third party. This risk, one would think, is most reasonably a shared risk for 'allegations'. Where the infringement or breach is proven as 'actual', it is reasonable for the contracted party to indemnify the Commonwealth.

To cover 'allegations', the Commonwealth could required the contracted party to undertake to co-operate with and share the costs of investigating allegations with the Commonwealth. If the allegation were proven to be an actual infringement or breach, the contract could require the contracted party to reimburse the Commonwealth for its costs in relation to the investigation.

Cascading contracts
The discussion paper does not address the issue of instances where the Commonwealth contracts to a party for services and those services are (at least in part) contracted out to other parties as a normal process of achieving the required results. For example, IT specialists are commonly engaged through third-party entities in a series of one or more 'cascading' contracts. These mostly operate through labour hire-type arrangements. The Gershon Report into IT procurement indicated that the Commonwealth sources up to 20% of its IT work through contracting out. Presumably this is necessary because highly specialized IT professionals operate in a marketplace for their skills, and it is not possible to justify their full-time engagement by the Commonwealth.

Under such arrangements, it is probably inappropriate for the Commonwealth to concern itself with the nature of contracts between subsequent 'cascading' parties. Normally, that is a matter between the other parties themselves. However, given that the Commonwealth relies on the services of the subsequent party/s for the ultimate service delivery, the Commonwealth has a vested interest in the quality of the subsequent contracts. The discussion paper should at least address this issue and consider appropriate guidelines. We believe it is an important area for the Commonwealth to 'get right'.

The discussion about insurance requirements is excellent. If the guidelines are implemented, it should result in the Commonwealth receiving more focused and cost-effective services. Naturally, this will entirely depend on individual assessments made by procurement offers, the quality of which should be expected to vary. However, at least the guidelines will make it clear to procurement officers that the Commonwealth relies on their judgment which they should exercise to achieve good commercial outcomes. For this to work, it is important for the Commonwealth to back procurement officers who exercise appropriate judgment. The Commonwealth seems to have in place plenty of documentation which outlines what 'appropriate' might mean for procurement purposes (eg; part 1.6 of the discussion paper).

Contract amendment
The discussion paper should make it clear that requests to amend draft contracts should be accepted as part of normal commercial processes. This serves the purposes of both the Commonwealth and the entities seeking to contract with the Commonwealth.

For example, it is quite normal for the Commonwealth to amend contracts post-tender stage and after it has awarded successful tenders. This happens because of changing circumstances and/or the tender process clarifying the Commonwealth's needs. Conversely, the same can occur for tenderers. Circumstances may change which create difficulty under the contract or which may create an opportunity for improved service delivery to the Commonwealth.

Many of the contracts the Commonwealth construct take a 'standard form'. These should not be entirely set in stone, but should be taken as a firm starting point. The desire of parties to undertake contract negotiation should be considered as a healthy process directed towards the better servicing of the Commonwealth. Contract negotiation should be accommodated (within reasonable limits) up to the point of contract signing. Once signed, services should be expected to be delivered as contracted.

Brainstorming and identifying the real contract need
Clause 22 of the draft guide makes the highly constructive recommendation that to assess risks, brainstorming of key stakeholders should occur. Consideration should be given to extending this to potential tenders. There are qualifications.

We are aware that Commonwealth tendering is conducted in such a way as to ensure that all tendering entities have equal opportunity and that no one has an 'inside run' on tender or contract knowledge. Further, the Commonwealth and its officers must not be placed in a compromised position because of possible accusations of favouritism. The tendering process is designed to keep everything and everyone at 'arm's length.' The downside of this probity requirement is that potential tenderers are most often the people with the very knowledge that the Commonwealth most needs to clarify any particular task or job. The necessary probity process locks the Commonwealth out of this knowledge base. It's a catch-22---however some thought should be given about how to overcome this.

One suggestion is that the Commonwealth could engage persons with knowledge in the industry area (including those from potential tenderers) to consult during the contract design stage. Any additional cost would be offset by better contracts and better contract management aligned to the capacities of potential tenderers and market realities. A probity safeguard could be considered where such persons engaged in contract design could be precluded from involvement in tendering on any contract in which they were involved as a consultant.

Assessing risk to the contractor
The draft guidelines focus on procurement officers assessing Commonwealth risk. There is another side to this issue, namely, the risk that the Commonwealth poses to the entities who undertake contracts. The draft guidelines assume only one risk---that is, that the Commonwealth fails to pay or pay on time. However there are many other potential risks.

For example, the Commonwealth:
  • Is late doing things or supplying information to the contractor that the contractor needs to be able to deliver on the contract.
  • Is unclear in some of its requirements or specifications.
  • Requires things under the contract that may prove impractical or constrain the optimum delivery of services under the contract.
  • Fails to respond to requests for clarification made by the contractor.
  • Changes contract requirements during the contract period.
  • Requires work to begin before the contract has been finalized, or signed, or before up-front payments have been made.
Each of these potential circumstances pose considerable risk and potential cost to contractors.

Asking the Commonwealth to assess the risk that it poses to the other party may seem counter-intuitive. After all, isn't the task of the Commonwealth to mitigate its own risk and let the other party manage its risk? Our answer is that in a strict legal sense this may be a purpose of contracts. However, in the broader commercial scheme, contracts are really about the clarification of work to be done to the mutual benefit of both parties. Commercial contracts serve the parties best when they assist the working relationship. If Commonwealth procurement officers 'put themselves in the other party's shoes' this helps to clarify issues and build relationships. It should aid good commercial practice and assist the Commonwealth to achieve improved outcomes.

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.

(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.

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