As many in the defence sector will now be aware, the Ministry of Defence has recently made some very significant changes to its commercial policy on limitation of liability for contractors.
The changes set out in the new policy, which was released in February, are intended to align MOD Commercial Policy more fully with the relevant central Government policy, as reflected in the Cabinet Office’s Outsourcing Playbook and Model Services Contract. Fundamental to this is the principle that risk should be allocated to whichever party is best placed to manage it.
The key changes that commercial teams should be aware of are:
- Contractor liability must now be capped in ALL circumstances, other than where unlimited liability is required as a consequence of legislation (such as personal injury caused by negligence) or cross government policy (such as IPR and TUPE indemnities). This is now the default position, and any contract which does not comply will be subject to senior MOD approvals. This is effectively a reversal of the previous policy which allowed contractors to limit liability only on a case by case basis, placing the onus on the Contractor to demonstrate that including a cap was reasonable and provided value for money.
- Under the previous policy, liability caps had to be linked to specific risks and MOD commercial officers were instructed to reject any request to provide a general 'catch-all' limit; however, suppliers will be pleased to see that whilst the new policy retains the requirement to cap specific risks (for example in relation to damage to MOD property under DEFCON 76), it also requires the inclusion of a catch-all cap for residual risks.
- The policy no longer contains a default position of unlimited liability for negligence, with liability for negligence instead being subject to any general or specific caps that may be agreed (unless it is uncapped for the reasons described above).
- There is a new set of standard conditions which contractors can expect to see in tender documents going forward - this wording is pre-approved, reflecting the new policy position and providing some additional detail relating to which losses will, and will not, be recoverable.
Some aspects of the policy have not significantly changed. For example, whilst there is additional emphasis on the use of risk assessments (and early market engagement) to appropriately allocate risk, the essential requirement to assess risks in order to understand the liabilities that would be allocated to MOD as a result of any liability caps is not new. MOD is also still required to obtain approval before agreeing to any liability caps that create a contingent liability (i.e. where the cap is less than the estimated value of MOD’s exposure). Equally, the policy on the use of MOD indemnities to limit contactors’ exposure is substantially unchanged.
So what will this mean for commercial teams in practice?
Although the policy is not legally binding, our expectation is that it will be followed closely given the need for MOD commercial teams to justify any deviations as part of their due diligence and approvals processes. As with any new policy, there is likely to be a bedding-in period as commercial teams become more familiar with the new approach but, once it is established, the more commercially pragmatic nature of the new policy is expected to improve the ease and efficiency of negotiations, which can only be a positive thing for the customer/supplier relationship and the sector as a whole.
That having been said, whilst the policy sets out the overarching principles and a process for setting cap levels, what it of course cannot do is actually set those levels. These will be determined on a case by case basis, and there will be particular challenges when trying to accurately assess (and reach mutual agreement on) the risks associated with the more general liability caps envisaged by the policy. Ensuring the numbers reflect an appropriate risk allocation in any given case will be key to the policy achieving its ambitions of greater value for money for the taxpayer and a more robust, dynamic market.