Imagine your surprise when you jump from the plane and open your parachute only to find that the moths have eaten holes in it and it doesn’t do what you expected it to do. While the chances of this happening to you personally might be remote, many contractors who have entered into service contracts without first having had the contract reviewed by a specialist tender lawyer could very well experience that same sinking feeling.

It’s a given that your business will hold various types of liability insurance cover, which will include public (and probably products) liability, workers compensation, professional indemnity (if you are providing professional services) and probably some form of comprehensive vehicle insurance. The purpose of these insurance policies is to cover any potential liabilities that your business might incur to employees, customers or third parties in the course of providing goods and/or services.

Each time you win a tender you are asked to sign a contract. More often than not the proposed contract will contain a variety of clauses that could potentially trigger exclusions in your liability insurance policies, leaving you exposed like a shag on a rock to potentially expensive claims. These clauses can often be negotiated out of the contract before you sign it, or at the very least watered down. However, if you’ve signed a contract that wasn’t reviewed and negotiated by a specialist tender lawyer prior to signing, you probably won’t realise that the contract contains these nasty surprises until you’re hit with a claim and you pass the claim on to your insurer. At that point your insurer is likely to tell you politely that your insurance policy doesn’t cover the claim. At which point you will most probably experience the same feeling of sudden dread as the person dangling beneath the moth-eaten parachute.

One of the most common exclusion clauses in a public, products or professional liability insurance policy relates to contractually assumed liabilities, or in the words of CGU’s Professional Indemnity and Broadform Liability Insurance Policy, for example, “a liability under a contractual warranty, guarantee or undertaking (unless such liability would have existed regardless of the contractual warranty, guarantee or undertaking”. This is usually followed by a further exclusion for where “a right of contribution or indemnity has been given up by the Insured” (but only to the extent of the prejudice suffered by the insurer). In simple terms, if the contract increases your liability exposure beyond the exposure you would have had outside the contract, that increased exposure will not be covered by your liability insurance policy.

So what kind of clauses should you look out for?

• Indemnities: These are often worded in such a broad way that you end up taking on responsibility for things that you wouldn’t otherwise have been responsible for at law.
• Warranties: over and above those implied by law: For example, while every contract for sale of goods has an implied warranty that the goods are fit for purpose, this is not the case in contracts for provision of services. In general terms, if you give a warranty that your services will be “fit for purpose”, you may be liable in circumstance where you would not otherwise have been liable at law.
• Duties of care: greater than your common law duty of care: Where the common law determines that a person has a duty of care, the standard of care is a “reasonable standard”. The Tender Lawyer recently reviewed a contract (drafted by one of Australia’s largest law firms) that required the contractor to “carry out the Services in a manner that is safe to both people and the environment, in accordance with Law and best industry standards for work of a nature similar to the Services”. “Best industry standards” is a far higher standard than “reasonable care”, so the contractor in this case could find itself liable in circumstances where it exercised reasonable care and would therefore not have been liable at common law. The same contract required the contractor to “use care, skill, judgment and diligence…of a standard consistent with the best industry standards for work of a nature similar to the Services”. This is a far higher standard than the usual standard for professional services, namely “to exercise due care and skill”. Phrases such as “highest duty of care” or “utmost skill and care” should also be avoided.
• Obligation to “take measures necessary to protect people and property” and “prevent nuisance”: This is a specific example of the “duties of care” category (above) and is commonly found in Australian Standards contract and other standard form contracts (e.g. AS 4000-1997). A duty “to protect” is requires active measures and is far broader than the relatively passive common law duty to exercise reasonable care to avoid causing injury or loss.
• Contracting out of proportionate liability legislation: Each State and Territory has enacted legislation that enables courts to apportion liability among multiple wrongdoers according to their relative share of blame. Some jurisdictions (i.e. NSW, TAS & WA) allow parties to “contract out” of this legislation, meaning that a contractor can be held 100% liable in cases where it would otherwise be liable for a smaller proportion of the loss. If you see any of the phrases “proportionate liability”, “Civil Liability Act”, “Wrongs Act”, “Civil Law (Wrongs) Act” or “Law Reform (Contributory Negligence and Apportionment of Liability) Act” in the contract, the alarm bells should start ringing.
• Waiver of Subrogation: unless you have a suitable endorsement for this under your insurance policy or have your insurer’s consent, a waiver of subrogation clause could compromise your insurer’s rights to recover the amount of the insurance payout from another liable party and could render your entire insurance policy null and void.

What can be done to avoid these pitfalls?

1. Identify the problem clauses. The best way to do this is to make sure that all of your tenders are reviewed by a specialist tender lawyer before you submit your tender.
2. Address the appropriate clauses by drafting relevant contract departures for inclusion in your tender. Once again, a specialist tender lawyer is the ideal person to do this. In this regard, the simplest and best solution is to ask for the problematic clauses to be removed from the contract. Realistically however, depending on the nature of the clause and the context of the tender, this may be “pushing the friendship” and the best you will be able to negotiate is a change of wording to minimise the scope of the uninsured liabilities that might be triggered by these clauses. A specialist tender lawyer will be able to help you decide how far to push in terms of having clauses deleted or amended. For example, in the Tender Lawyer’s experience you will rarely succeed in having an indemnity clause removed, but you will usually succeed in having its wording changed and you should always aim to insure that the indemnity reflects, as closely as possible, your common law liability. In the case of warranties and duties of care you have a good chance of having the clauses either removed or amended. Finally, you should always push back against any requirement to contract out of the proportionate liability legislation. In your contract departures you should always give sound reasons for wanting to delete or amend the contract. The reason should always be that clauses such as these could expose your business to uninsured liabilities. After all, it is always in the best interests of both the contractor and the principal that the contract risks borne by both parties be covered as far as possible by insurance. Also, it’s important to remember that few contracts are drafted specifically for the tender in question and many principals are unaware of what’s in their own contracts. In the Tender Lawyer’s experience, if you are able to give a fair reason as to why you think the relevant clause should be changed, as well as a reasonable suggestion for addressing the issue, you will have a good chance of getting what you want.
3. Consult your insurer or insurance broker. It’s possible that your insurer (usually for an additional premium) might agree to “designate” or “note” the contract on your insurance policy, thereby extending your insurance cover to liabilities that arise under the contract (e.g. for damage to persons or property or professional liability). This option should always be used in conjunction with well-written departures that try to minimise the impact of the problem clauses. Both your insurer and your tender lawyers should be an integral part of your tender team. Another common option to negotiate with your insurer, if you don’t already have it, is to add a “principal’s indemnity” extension or endorsement to your policy. This is a common extension to Broadform liability policies and will typically cover a principal for any vicarious liability that the principal incurs as a result of your provisions of services under the contract. At the same time, you should also ask for endorsements or extensions covering waiver of subrogation and cross liability clauses in the contract as these are typical insurance requirements in many larger contracts.
4. Investigate the possibility of taking out contract liability insurance. Historically, this has been a difficult form of insurance to obtain, as not many insurers have been willing to provide it. A few (mainly smaller) insurers are now offering it, primarily to SMEs. If you are able to find an insurer that’s willing to offer you such insurance, make sure you read the fine print – it’s bound to contain numerous exclusions.
5. If you are unable to remove or reduce the risk of uninsured liabilities from the contract, do your best to price that risk into your tender price.
6. Finally, and this is a general comment in relation to insurance requirements under the contract, beware of insurance clauses requiring the supplier to insure all ‘indemnified losses and liabilities’ under the indemnity clause. Some indemnified losses cannot be insured, e.g. intentional fraud and liability for fines and penalties. For this reason, ensure that any insurance clause in the contract is a stand-alone requirement that only requires the supplier hold commercially available classes of insurance and is not specifically linked to the indemnities. This is important, especially where compliance with the obligation to insure is a pre-condition to payment of money owing under the contract.

The above discussion represents one example of many common risk factors that appear in most tender contracts. The Tender Lawyer refers to these as “Tender Monsters” (in this case, see Tender Monster #24 – “Shag on a Rock”). For a list of other such risks that might be lurking in that contract you’re about to sign, visit www.thetenderlawyer.com.au and download a free copy of “Tender Monsters – An illustrated guide to some of the classic ‘monsters’ that lurk in tender documents, often invisible to the untrained eye” from the home page.

Stephen King
The Tender Lawyer
16 November 2018