In any commercial contracting environment, liability risk provisions often prove to be a source of friction and lengthy negotiation between parties.
Defence acquisition and sustainment contracts are no different. These contentious issues can be further complicated by the fact that the liability regime adopted in an initial procurement activity may have down-stream effects for the Capability Life Cycle (which may span decades), including the allocation of risk in subsequent sustainment contracts.
While industry may be keen pass risk early and minimise exposure (for example by capping liability or minimising at-risk amounts), Defence must ensure that risk is managed and passed appropriately. The proper allocation of risk in strategically important contracts is vital to protect the national interest.
Following a joint Defence and Industry Working Group, Defence devised an approach to standardise the allocation and management of liability risk for all new materiel acquisition and sustainment contracts. In addition to appropriately allocating risk, the intent of this approach is to assist both Defence and industry to negotiate and administer its high volume of contracts in a timely and cost effective manner.
Essentially, there are three major arms to this standardised liability risk management regime:
1. The development of the Principles;
2. Implementing the Principles in the ASDEFCON templates; and
3. Aligning the liability risk assessment (LRA) template with the Principles and ASDEFCON templates.
The Principles
The introduction of the Principles standardises Defence’s positions in respect of 19 separate categories of liability risk. The Principles provide a rationale for the allocation of risk in the ASDEFCON suite of templates. Accordingly, the Principles cover issues such as liquidated damages, indemnities, standards, defect rectification, warranties, liability caps and exclusions. The full list of Principles, and guidance on their application, is publicly available at Liability Risk Management | Business & Industry | Defence.
The Principles have been agreed with defence industry and reflect a commercially realistic allocation of risk which has been considered and endorsed by Defence at a corporate level.
The Principles are not structured by way of a hierarchy of importance, and each should be considered equally important. Critically, the Principles come as a package – no one principle can be traded at the expense of another as it may undermine the liability regime as a whole. Before departing from any of the Principles and the clauses which give them effect in the ASDEFCON suite, you should seek specialist legal and commercial advice.
The ASDEFCON templates
Defence continues to roll-out updated ASDEFCON templates that reflect the liability regime established under the Principles. For example, at the date of publication, the Principles are reflected in the templates used for higher complexity/value procurement (such as Complex Materiel Volume 2 and Support), but not some of the less complex templates (such as Shortform Services). Over time, this effort will effectively embed the Principles within the full suite of ASDEFCON documents.
The liability regime is given effect by many provisions across the Contract documents within the relevant ASDEFCON suite. In addition to the provisions referenced above, the relevant provisions include postponement/relief, securities for performance, insurance, termination, price and payment and the performance management framework. Accordingly, you should seek specialist advice before amending these provisions to prevent unintentional departure from the overall liability regime.
The LRA template
Defence has updated the ASDEFCON liability risk assessment template to reflect the Principles and provisions in the updated ASDEFCON suite templates. The updated LRA template is publicly available at Liability Risk Management | Business & Industry | Defence.
The LRA template sets out a standard process for Defence and industry to identify the source, impact and controls/treatments for liability risks and to assess the residual risk of liability being incurred. The template is specifically designed for the purpose of developing and negotiating contract documentation using the ASDEFCON suite, particularly the:
As discussed in our previous article, Commonwealth officials are now encouraged by the Commonwealth Procurement Rules to reflect risks in liability caps rather than insurance amounts.
Although the LRA template aids Defence personnel in assessing liability risk, conducting a rigorous LRA requires dedicated effort and a detailed understanding of the Principles and the specific project, as well as input from technical, financial, legal and commercial subject matter experts. Accordingly, the LRA should not be rushed or considered an after-thought. Further, the LRA should be updated at key points in the procurement process and maintained throughout the life of the resultant contract.
Finally, the LRA template does not cover all project or contract risks. Accordingly, those risks will need to be identified, assessed and documented in other procurement risk logs/registers.
If you have any questions, or would like to know how to navigate liability risk management frameworks in your procurement, please feel free to contact us.
Authors:
Rory Alexander, Director + Principal
Tristan Croft, Associate
