Mark Greenburgh: I am joined by Sarah Sasse, a Partner in the Public Sector team specialising in commercial contracts. Sarah, can you describe the difference for us in the approach towards indemnities and liabilities in public versus private sector contacts?
Sarah Sasse: Well, I think sometimes in public sector contracting there is a mind-set that equates the more risk you can put on to the private sector the better value for money. But there is also in public sector contracting that potential reputational risk and how does it sit with the public out there if you allow a defaulting provider to actually limit or exclude liability. And then just in the nature of public sector contracts they are often quite different, just think about the scale of projects, the way that they are structured and then the greater use of model contracts, framework agreements etc and the Public Contracts Regulations which now mean that you have to have drafted your contract including the indemnities and liabilities before you even go out to tender.
Mark: What are the main issues you see with indemnities in public sector contracts?
Sarah: For me it is all around the scope of the indemnities, it's one thing asking a supplier to give specific indemnities against risks like intellectual property infringement, TUPE and perhaps tax but it's quite another to actually put such a level of risk transfer on to the provider that they have to indemnify you against the performance of their obligations or general breach of contract indemnities when actually, you know, what's the likelihood of the public sector really claiming on those.
Mark: So what should public bodies and bidders consider?
Sarah: So from my perspective, public bodies should really limit the indemnities that they require the provider to give to those which cover specific risks in the context of the contract that is being let. Make sure that those are written in really clear language and also think about who might need to enforce those indemnities and how they might enforce them. And then from the bidders perspective, have a good think about whether you have priced for the indemnities that you are taking on. If it is an indemnity against breach of statutory duty, do you really understand what statutory duties the authority is subject to, for example?
Mark: Should supplies accept uncapped indemnities?
Sarah: I think that is a difficult one, it goes back to my earlier point about trying to find the right risk transfer. So I think as an authority if you are asking the supplier to accept a specific indemnity, that might be intellectual property right infringement, it might be TUPE, it might be against tax claims, so they are very specific indemnities against specific risks. I think it is reasonable for those risks to be uncapped but I think the broader in scope you go in terms of indemnities, so when it is starting to cover things like a general breach of contract claim perhaps third party claims, then I think the risks are potentially greater so I think it becomes more unreasonable to ask the provider to accept unlimited liability there.
Mark: Do you find that wilful default is a particular issue?
Sarah: Yes I think it is a difficult issue in a public sector context because of the reputational risk because if you don't carve out wilful default, from say the caps on liability, you are actually allowing the supplier to limit its liability for its deliberate wrong-doing and actually over the last few years we've seen numerous instances perhaps because of having tried to put too much risk on to the private sector where the service provider has actually walked away from the contract, has abandoned the contract. And is it really acceptable to limit liability in those instances? But it is difficult dealing with wilful default in a contract, not least because under English law we don't really have a clear definition on what we mean by it.
Mark: What issues do you see with excluding particular categories of loss?
Sarah: I think it is generally accepted now that whether you are dealing with private or public sector contracting, the supplier is allowed to exclude liability for indirect or consequential loss. The problem is how much more should they be able to exclude? In private sector contracting you have long arguments about exclusion of direct loss of profits, loss of revenue, damage to goodwill etc but I don't think they are really relevant actually from a public sector context so, do we really need to worry about, you know, whether the supplier can exclude those heads of loss or not? I think actually what you should be much more concerned about is exclusion of things like loss of anticipated savings particularly in this day and age when we are trying to drive out efficiencies through public sector commissioning.
Mark: So how do you decide on appropriate financial limits?
Sarah: That's difficult and it's definitely an art not a science and I think it is particularly difficult for the public body because you are having to put the contract out there at such an early stage nowadays. And there are a number of different options, so you can have an aggregate contract life cap on liability or you can have an annual cap. You can set it by reference to a set amount or you can set it by reference to a percentage of the annual charges for example, so that liability goes up the greater the value of the contract. But ultimately it is around setting that level of risk transfer, it's a balancing exercise really.
Mark: So is there a standard approach emerging?
Sarah: Yes I think there is and this is enshrined in some of the standard government contracts like the Model Services Agreement. So, that approach is to have a number of specific caps so for example, loss or damage to authority property, service credits, compensation for service failures - they have separate caps, and then there's a general sweeper cap on liability and that has two different limits. The first limit is set at around 150% of the contract value and that applies to any default. But the second limit is with the exception of, going back to my comments earlier around wilful default, so if the supplier has been guilty of wilful default, abandonment of the contract etc then the cap is actually increased to say 200% of the value of the contract.
Mark: In summary what are the key issues when considering indemnities and liabilities in public sector contracting?
Sarah: I think from the public body point of view really think about what level of risk transfer you want to put on the private sector, think about what that means in terms of the indemnities and liability provisions. Are you ever really going to claim against them? What is that going to add to the cost that you are going to end up paying? So really engage with the market perhaps through putting out an exposure draft as part of soft market testing and then from a bidder's perspective if you are given that opportunity use it, give your comments back on those provisions but conversely if you don't get that opportunity because it's just a procurement where you've just got to accept the contract, then have you priced in to your costs the potential liability that you are taking on and also have you discussed with your insurers what impact that might have because there is often, in my experience, a mismatch between the contractual provisions and what insurers will bear.
Mark: Sarah Sasse, thank you very much.
Sarah: Thank you.