NSW Govt vendors face uncapped liability

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NSW Govt vendors face uncapped liability

Hundreds of contracts struck without formal risk assessments.

NSW Government suppliers could be liable to pay unlimited damages should their projects go awry, under a commonly neglected section of the state’s previous standard procurement contract.

State Government IT contracts were required to comply with the Procure IT v2.1.3 framework until it was superseded by Procure IT v3 in July last year.

By default, Procure IT v2.1.3 required suppliers to accept unlimited liability for “each occurrence giving rise to any action”, so they could be forced to pay tens of millions of dollars should large projects go wrong.

Parties could agree to limit a contractor’s liability to a set amount by conducting a formal risk assessment plan, under section 8.5 of the framework’s terms and conditions.

But few State Government agencies took up that option in the past four years, according to NSW Department of Finance and Services’ principal solicitor Larry Noble.

“We assumed that everyone was doing what the contract was saying,” Noble told a Norton Rose seminar this week.

“I found that [the Department of Finance and Services] had not made one single risk assessment in three years. The result was that anyone who had signed version 2 that hadn’t done risk assessment was facing unlimited liability for claims.”

Noble urged State Government procurement panel members on the previous version of Procure IT to do a risk assessment for every new customer order to reduce their liability, until moving on to version 3.

He told iTnews that he had not audited the number of risk assessments performed by agencies besides those in the Finance and Services portfolio but speculated that there “could be hundreds” of NSW Government suppliers facing unlimited liability.

Potential costs for the suppliers depended on the size and scope of the project, he said.

“If you bring down the whole police force, that would be an absolute disaster. If that’s the fault of the vendor, they could end up having to wear the whole amount,” he said.

“In a major IT project – if you’re doing systems integration, for example – it could be a $40 [million] to $50 million project; that’s the potential risk.”

Changes in version three

Noble told seminar attendees that the State Government looked to address 12 issues raised by industry group AIIA in Procure IT v3, which came into effect on 1 July 2011.

Limitation of liability was an issue for industry as well as government organisations.

“We were asking you, the vendor, to assume all risk, totally uncapped and that was costing us in what we would pay for the products,” Noble explained.

“We did some research to try and find out how many claims were ever made in this area, and much to my surprise, we found that there were very few claims and the claims that were made were very small – generally under $500,000.

“It didn’t seem very sensible to continue with that regime of uncapped liability where it was costing government a lot of money, where in practice it didn’t eventuate.”

Procure IT v3 limits suppliers’ liability by default, without the need for the formal risk assessment process.

In a blog post last March, law firm Norton Rose described the move as “a first for a standard Government contract”.

“The ‘risk assessment’ approach under version 2.1.3, under which the parties had to assess risk once the contract was underway to put in place a liability cap, has been scrapped,” lawyers Nick Abrahams and Nick Martin wrote.

“Instead, there is a default supplier liability cap under a Customer Contract of the greater of $100,000 or two times fees for products or non-recurring services, or 12 months’ fees for recurring services.”

Abrahams told seminar attendees that Procure IT v3 was the result of a “very concerted effort within [the Department of Finance and Services] to try to bring Procure IT closer to something that the vendors might find more acceptable”.

Noble said the introduction of Procure IT v3 cut down on contract negotiations and better aligned the NSW Government with other jurisdictions, of which several have adopted the GITC framework.

He expected the new standard contract to reduce costs and improve clarity for the industry.

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