If any contractor or subcontractor ever needed a lesson in the importance of managing legal risk in the tender process, the Opal Tower debacle provides that lesson in spades. Let me be upfront – I have no information other than what’s publicly available about the contracts involved in the design, construction and certification of the Opal Tower, but there’s one thing I can guarantee: there will a lot more people paying much closer attention to those contracts now than there were at the tender stage. Which is ironic, because now it’s a case of the horse having bolted. Frankly, it’s a bit late!

The Opal Tower residents voted in January to launch a class action seeking compensation for the defects in the building. It’s impossible to say at this stage what will come of that, but one thing is certain – the finger-pointing blame game has already started and will continue until the dust settles (i.e. until a Court orders one or more parties to pay a substantial amount of money to one or more other parties). The real question here is which parties should bear responsibility for the defects and to what extent. Is it the fault of the developer, the architect, the engineer, the builder, one or more subcontractors or the certifier?  All parties involved will now be asking their legal advisers, “Are we exposed to liability and if so, to what extent?”. The answer to this question could largely depend on how the risk of defects was allocated in the multiple contracts between each of the parties.

Having established primary legal liability, the liable parties will naturally look to their insurers to cover their liability, which raises further questions? Do they have, at least on the face of it, appropriate types and extents of insurance cover? Among the many parties now poring over the fine print in the various contracts between the relevant parties will be their insurers. While I also have no idea what insurance arrangements each party has, there is another thing I can guarantee – that each of those insurers will be looking to see if they can rely on any exclusion clauses in the insurance policies. The reason they will be poring over the contracts that their insured has signed will be to see if their insured has assumed any greater liability under the contract than they would otherwise have had at common law. If so, there’s a good chance this will trigger an exclusion clause in the relevant insurance policy, giving the insurer a “get out of jail free” card (I refer you in this regard to the article I posted in November 2018 titled “Why the next contract you sign could make your liability insurance seem like a moth-eaten parachute”).

There are many lessons that will be learnt the hard way by many people involved in this debacle. Hopefully other contractors and subcontractors can learn “free” lessons from this as well, including the following:

1. For goodness sakes (and I keep harping on about this) always read the contract before you submit your tender, so you know what you are getting yourself in for;
2. Ask an experienced contract lawyer to review the tender package and draft appropriate contract departures for you to submit as part of your tender;
3. Apply a disciplined risk management process to every tender – try to imagine the worst-case scenarios. Don’t forget that tendering risk is not just about the the cost of unsuccessful tenders – it’s as much about the additional legal and financial risks you will take on if you win the tender;
4. The legal risk in a contract is not always commensurate with the value of the contract in terms of revenue or profit. Don’t determine which contracts should be the subject of a legal review based simply on the potential “value” of the contract;
5. Make sure that you only agree to take on the type and extent of risks that are within your ability to control (e.g. don’t sign a “Design and Construct” contract if you don’t have full control over the design process). The basic principle for contract risk allocation is that risk should be allocated to the party best able to manage it;
6. As far as possible, try to limit taking on any liability for damage to people or property that exceeds the liability you would have at common law in the absence of the contract (i.e. beware broad indemnity clauses);
7. As far as possible, don’t agree to be held to a standard of care that is higher than the standard of care you would have at common law or under statute (this is particularly important for professional contractors such as engineers and architects who might need to rely on a professional indemnity insurance policy);
8. Try not to give warranties about the goods and/or services you will supply under the contract that go beyond the warranties that are implied into the contract by law;
9. As far as possible, resist any clause that contracts-out of the proportionate liability legislation, otherwise you could (a) end up being liable for a larger proportion of the loss than you actually caused and (b) find that you have just handed your insurer one of those “get out of jail free” cards, leaving you to foot the bill;
10. Make sure your insurance policies (a) are of an appropriate type to cover the nature of the risks you will be assuming if you win the contract, (b) have an adequate level of cover so as to meet a “worst case” scenario; and (c) have appropriate extensions to cover commonly assumed risks under contract indemnities (e.g. an principal’s indemnity extension);
11. As a contractor, make sure you pass on an appropriate amount of risk to your subcontractors, so that you can require them to cover you for whatever part of your liability they contribute to.

Stephen King
The Tender Lawyer
11 February 2019

(Oh, and for those who know the Opal Tower, yes you’re right – the picture featured here is obviously NOT a picture of the Opal Tower.)