clear practical advice

Commercial Disputes – Have you got them covered?

Lockton & Watson Burton

Tuesday 2 July 2013

Richard Palmer & Bal Manak - Watson Burton LLPMichael Farrell & Anthony Place - Lockton Companies LLP

Getting Contract Terms Right

A Broker’s Perspective• Important part of a broker’s service, whether awarding or tendering for

contracts

• Times are tough so many businesses are passing off liabilities onto others and more onerous limits and requirements are becoming the norm

• Approach by clients ranges from full involvement, no involvement, involvement after contract won, involvement before tender submitted

• Ideally, before tender submitted or before tender published

• Don’t assume insurance programme is fit for purpose

• More than 30% of contracts vetted by Lockton result in the need for amendments to insurance programme – can become very expensive if insurers cannot / will not accommodate the amendments!

Contract Features To Look Out For

• Contracts with non-UK companies using different jargon and terminology

• PFI type contracts or drafted using similar language• Joint Names / Additional Insured• Cancellation / amendment clauses• Professional Indemnity ‘any one loss’• Subrogation clauses• Payment clauses (Loss Payee)• Primary Insurance clauses• Non-vitiation clauses• Brokers Letters of Undertaking

Information Required• What is the contract?• When is it starting, duration?• Contract Value?• Is this an existing, prospective or recently won contract?• Who are you in relation to the contract – supplier,

principal, contractor?• Have you forwarded all relevant sections?• Is agreement to the terms a ‘deal-breaker’ or is

negotiation possible?• What is your deadline?

A Lawyer’s Perspective

• Fitness for Purpose v Reasonable Skill and Care• Indemnities v Reasonably Foreseeable Losses• Net Contribution Clauses• Limits of Liability

Fitness for Purpose v Reasonable Skill and Care

• In English Law if there is no express or implied fitness for purpose obligation then a designer must exercise reasonable skill and care in its design

• This means the design must meet the standard expected of a competent designer– objective standard

• Contracts often include RSC as an express obligation• NB: Be wary of ‘diligence’

Reasonable skill and care

Fitness for purpose

Covered by Insurance

Policy

Unlikely to be covered under

Insurance Policy

Fitness for Purpose v Reasonable Skill and Care

Fitness for Purpose v Reasonable Skill and Care

• A fitness for purpose obligation is much stricter and tougher

• It means that the professional is guaranteeing the result of their work

• Professionals should never agree to a fitness for purpose obligation or expressly exclude any fitness for purpose guarantee

Fitness for Purpose v Reasonable Care and Skill

Reasonable Skill and Care Fitness for purpose

An employer must prove that the designer has been negligent, i.e. that the design failed to measure up to the standard of a competent professional designer

The contractor is guaranteeing that the design will meet the employer’s requirements

Indemnities v Reasonably Foreseeable Losses

Policies will exclude cover for:-

“Contractual Liability arising directly or indirectly from any breach or alleged breach of any contractual duty of care alleged to have been owed by Insured to any third party and which is more onerous to any duty which would otherwise be implied by common law or statute”.

Indemnities v Reasonably Foreseeable Losses

• Indemnities mean you must compensate the employer if due to any act, omission or negligence you cause the employer to suffer losses, expense or damage

• This is wider than reasonably foreseeable losses• For example, if you cause the employer to be in breach

of a third party agreement• No duty on Claimant to mitigate loss

Example of an Indemnity

• “The Architect agrees to indemnify the Client against each and every liability which the Client may incur to any person whatsoever and against any claims, demands, proceedings, damages, costs and/or expenses sustained, incurred or payable by the Client to the extent that the same arises by reason of any negligence, omission, or default, by the Architect in the performance of his obligations under and in connection with this Deed.”

Indemnities v Reasonably Foreseeable Losses

• Ideally indemnities should be avoided because it means it extends your liability beyond that which you would ordinarily have at law

• If they are insisted on one way to reduce your liability is to indemnify the employer for losses it suffers but only to the extent those losses are reasonably foreseeable and fully mitigated

• Check with your broker

Net Contribution Clauses

“Without prejudice to any other exclusion or limitation of liability, damages, loss, expense, or costs in this Agreement, the Consultant’s liability for any claim or claims under or in connection with this Agreement shall not exceed such sum as it would be just and equitable for the Consultant to pay having regard to the extent of the Consultant’s responsibility for the loss or damage giving rise to such claim or claims (‘the Loss and Damage’)….

Net Contribution Clauses

• At common law, a consultant might be 100% liable for damages whatever their share of the blame– E.g. even if fault is attributable to a engineer at 60% and an

contractor at 40%

• A net contribution clause restricts the employer to recovering only 60% from the engineer and 40% from the contractor

• Without a net contribution clause, the engineer could be 100% liable and could bear the risk of the contractor’s insolvency or inability to pay

Limits of Liability

• There are various clauses that can be inserted into your contracts to try and limit liability

• This includes– Limiting your liability to the Contract Sum/Fee/Price– Limiting your liability to an aggregate amount – Limiting your liability to the level of PI insurance

required– Net contribution clauses

Limits of Liability

– Excluding liability for terrorism, asbestos, mould, nuclear risk or radiation or other uninsured risks

– Excluding liability for consequential loss– Limiting the limitation period under the contract

• Deed – 12 years from completion of your services• Underhand – 6 years

– ‘No greater liability’ clause– ‘Reasonable Endeavours’ proviso

Understanding the key components of your cover

Policy Schedule

Certificate Number: XYZ 1234

Insured: Prism Architects

Period of Insurance: 01/01/2013 – 31/12/2013

Excess: £50,000 each and every claim, does not apply to Defence costs.

Indemnity Limit: GBP £2.5 million in any one claim.

The Insuring Clause

“If during the period of insurance and as a result of your business activity within the geographical limits for clients, any party brings a claim against you for any civil liability, we will indemnify you against the sums you have to pay as compensation.”

•“Claims made” basis

Defective Workmanship

“We will not make a payment for any claim or cost directly or indirectly due to:

(a) Your or your sub-contractor’s defective workmanship, or any defective materials you, your subcontractor or a third party supplied, or your or your subcontractors’ failure to supervise or inspect the work you or your sub-contractor have carried out.”

Obligations

• Condition Precedent– Compliance so important that breach = automatic right to avoid

– Avoidance = as if policy never existed

• Simple Condition– Insurers must show prejudice

– Quantify and set off against indemnity provided

Notifying Claims – The Principles

• Key obligation under insurance contract• Allows insurers control• Notify what?• Notify who?• Claim / Circumstances

Claim / Notice of Claim

“The Insured shall inform underwriters as soon as possible and in any event within 10 working days of the receipt, awareness or discovery of;

(a) Any claim made against them;(b) Any notice of intention to make a claim against them;(c) Any circumstance• “Claim” often defined in Policy• Could include PAP Letter of Claim• No claim? Not the end of the story…..

Circumstances

“We will not make any payment under this policy unless you give us prompt notice of anything which is likely to give rise to a claim under this policy…”•Not a claim•“Likely” to lead to a claim – more than 50% likely•“May” lead to a claim – wide scope•“Prompt notice” – late notification?•Example of Condition Precedent (could be either)

Adjudication

“The Insured undertakes to immediately notify the Insurers within 48 hours of any notice of intention to adjudicate or of the service by the Insured of any notice of intention to adjudicate in circumstances which will lead or are likely to lead to a claim against the Insured being dealt with as part of the adjudication”

Continuing Duties – Co-operation

“We will not make any payment under this Policy unless you:

• Example of Condition Precedent (could be either).• Give us, at your expense, any information which we

may reasonably require and co-operate fully in the investigation of any claim under this Policy.

Continuing Duties - Mitigation

“We will not make any payment under this Policy unless you:

• Make every reasonable effort to minimise any loss, damage or liability and take appropriate emergency measures immediately if they are required to reduce any claim.

• Condition Precedent

Admissions / Settlement

“In the event of a claim, or the discovery of information which may give rise to a claim, the Insured shall not admit liability for or settle any claim, incur any costs or expenses in connection therewith, without the written consent of Underwriters.”

Continuing Duties – Change of Circumstances

• You must tell us as soon as reasonably possible of any change in circumstances during the period of insurance which may materially affect this policy. (A material fact or circumstance is one which might affect our decision to provide insurance or the conditions of that insurance.) We may then change the terms and conditions of this policy.

Key Components of PL Policies

• More similarities than differences in relation to terms and conditions

• Injury or damage to third parties and/or their property• Claims Occurring• Any one loss

What to Do When Something Goes Wrong

Insurer / Broker Perspective

• Inform your broker / insurer as soon as possible – notification of circumstances which don’t lead to claims won’t affect insurance premiums!

• Don’t admit liability• Don’t try to sort it out on your own• Don’t offer to make any form of payment• Major Losses – crisis management plan

Legal Perspective – The Information Required

• Factual Summary• Assessment of Liability / Quantum• Continuing co-operation• Share the good and bad!• Preserve the evidence• Advice in writing?• Sub-contractors / Sub-consultants

Best Practice for Buying Insurance

Best Practice Guide for Buying Insurance

• Technical purchase first and foremost, then price• The experience and capability of your advisors• The financial security and credentials of your insurers• Form a relationship with your broker & insurers• Agree lawyers and loss adjusters in advance and spend

time with them so they understand your business• Have an open culture within your organisation in relation to

claims or problem contracts

Best Practice Guide for Buying Insurance

• Read the policy / understand the key elements– Conditions precedent– Claims reporting– Onerous clauses

• Act on the terms and ensure these are shared with relevant people within your organisation

• If in doubt, be cautious and engage with your broker / legal advisers

• Ideally place your Public/Products Liability and Professional Indemnity Insurance with the same insurer.

Tips for Businesses

• Get your contract terms right• Beware onerous clauses• Record your advice in writing• Read your policy and share its terms• Involve your broker early• Small matters turn big• If in doubt, be cautious

clear practical advice

Commercial Disputes – Have you got them covered?

Lockton & Watson Burton

Tuesday 2 July 2013

Richard Palmer & Bal Manak - Watson Burton LLPMichael Farrell & Anthony Place - Lockton Companies LLP