Express law No. 42

31 August 2006

Limited liability in ICT contracts: Finance Circular
2006/03

The Department of Finance and Administration has released
Finance Circular 2006/03 dealing with limiting liability
in information and communications technology (ICT) contracts.

The release of the circular coincided with the release
of the Department of Communications, Information Technology
and the Arts' A guide to limiting supplier liability
in ICT contracts with Australian Government agencies (the
DCITA Guide).

The Hon. Gary Nairn MP, Special Minister of State, referred
to this policy change in his keynote address to industry
representatives on 17
August
.

Changes to Australian Government policy regarding liability
capping in ICT contracts

The circular states that liability of ICT suppliers should
be capped at 'appropriate levels' in most cases. This policy
applies to agencies subject to the Financial Management
and Accountability Act 1997 (FMA Act) and only applies
to contracts for ICT supplies (whether or not the contractor
in question is an ICT supplier or not). The DCITA Guide
indicates that the ICT supplies subject to the policy are
those falling within Finance's Endorsed Supplier Arrangement,
but not those subject to the Whole of Government Telecommunications
Arrangement.

The exception to the policy is where there is a 'compelling
reason' to require unlimited liability. The circular indicates
that a 'compelling reason' would be where unlimited liability
represents an 'accurate reflection of the potential risks'
of a particular procurement.

The circular is stated to be policy for the purposes of
regulation 9 of the Financial Management and Accountability
Regulations 1997 (FMA Regulations) and for the purposes
of the Commonwealth Procurement Guidelines (CPGs).
Implicitly it has to be read that, in respect of ICT procurements,
the circular amends the statements of policy in the CPGs
and previous circulars regarding the policy preference
for agencies to seek unlimited liability.

The circular does not require agencies to modify either
their Chief Executive Instructions or other procedures
regarding risk assessment and procurement, but provides
a step-by-step approach that agencies can follow when applying
the general policy on capping liability for ICT suppliers.
The circular sets out the following steps for agencies:

  1. Determine the appropriate liability regime for the
    project (i.e. whether liability should be limited or
    unlimited).
  2. Determine the appropriate level for the initial estimate
    of the liability cap.
  3. Determine how the liability issues will be handled
    in the procurement process and the contract (i.e. which
    liabilities should be capped, and the level of the proposed
    cap).
  4. Establish agreement and complete the contract.

Which liabilities can be capped?

The circular states that it is particularly appropriate to
include caps for:

  • 'standard breach of contract'
  • supplier negligence, except to the extent the supplier's
    negligence relates to personal injury, property damage,
    breach of intellectual property rights, confidentiality,
    privacy and security obligations or unlawful conduct.

The circular proceeds to state that it is generally
appropriate to retain unlimited liability (unless
there is a compelling reason) for liabilities involving:

  • personal injury including sickness or death
  • unlawful or illegal acts
  • damage to tangible property
  • intellectual property obligations
  • confidentiality and privacy obligations
  • security obligations.

How do agencies set the amount for a cap?

Agencies will need to conduct a risk assessment prior
to issuing request documentation to set an appropriate
level for the cap. The circular does not require that the
cap represent a best or worst case scenario established
by the risk assessment – agencies therefore remain
free to state a dollar figure that represents a plausible
worst case scenario. The figure should represent a realistic
amount in the context of both the agency's risk assessment
and the prevailing market conditions.

Following selection of a preferred tenderer, agencies
will need to conduct a further risk assessment to reassess
the appropriate level for the cap (this level could be
expressed as a contract multiple equivalent to that assessed
level in the final negotiated contract).

Relevance of SourceIT model contracts

Finance has released draft SourceIT model contracts (available here
on Finance's website
). The circular does not
refer to these contracts, but the DCITA Guide refers
to them as an example of a limited liability regime that
will be consistent with the circular. We understand that
new drafts of the SourceIT model contracts are to be
released in next few weeks.

Application of the DCITA Guide

The DCITA Guide provides guidance to assist agencies in
implementing the policy in the circular. It provides valuable
information in respect to the potentially complex issues
that need to be considered to ensure that an agency achieves
value for money from limiting supplier liability as appropriate
in accordance with the policy.

The DCITA Guide provides a discussion of issues to be
considered by agencies in both setting caps and negotiating
liability caps with ICT suppliers. It also describes a
useful process for developing and implementing a risk assessment
and risk mitigation strategy for less complex ICT projects.

It is worth noting that the DCITA Guide does not represent
Australian Government policy for the purposes of regulation
9 of the FMA Regulations – it is stated to be a guide
that only provides examples of how agencies may choose
to implement the circular. Agencies may choose to adapt
and amend their existing Chief Executive Instructions or
other procedures regarding risk assessment and procurement
to reflect aspects of the DCITA Guide as they see fit.

Where can Finance Circular 2006/03 and DCITA Guide be
found?

The circular is available here
on Finance's website
.

The DCITA Guide and the Companion to the DCITA Guide are
available here
on DCITA's website
.

A more general discussion of risk management in the Commonwealth
context can be found in AGS's Legal
briefing
No.79:
Indemnities in Commonwealth Contracting
.

Next steps for agencies

Many agencies will need to revisit their template procurement
documentation and their procedures for developing requests
for tender in relation to ICT contracts to reflect the
requirements of the circular.

If you require further information or advice regarding
the application of the circular or the DCITA Guide to your
template procurement documentation or a particular procurement
process please contact:

National Tony
Beal
02 6253 7231
Canberra Stuart
Hilton
02 6253 7254
Sydney John
Berg
02 9581 7624
Melbourne/Hobart Kenneth
Eagle
03 9242 1290
Brisbane Robert
Claybourn
07 3360 5767
Perth Justin
Jones
08 9268 1125
Adelaide/Darwin Andrew
Schatz
08 8205 4201

Important: The material in Express law is provided
to clients as an early, interim view for general information
only, and further analysis on the matter may be prepared
by AGS. The material should not be relied upon for
the purpose of a particular matter. Please contact
AGS before any action or decision is taken on the basis
of any of the material in this message.