CONSTRUCTION RISK LECTURE NOTES

TIPS

1. Where multiple layers of insurance – should get agreement that first layer would take the lead on
any dispute so no in-fighting between insurers
2. Insurance bonds – risk allocation device. Look at wording of recourse provision. If it says bond
can be called where there is a ‘claim’ then risk lies with the party providing the bond.
3.

DAY 1

RISK MANAGEMENT

Risk in the Australian context

- ‘No dispute’ report – developed by a research group created by the construction industry in
order to try and reduce the number of disputes in the construction area.
o Terms of reference: examine each major risk inherent in contracts and recommends
who should carry the risk
o Report found that basic principles should reflect Abrahamsom principles – party who
can best manage the risk should adopt it (the correct allocation of risk will deliver a
better project); standard form contracts should be used (and preferably unamended)
o Are the no dispute findings still relevant today? Are they applied in our industry
today?

What is risk?

- Consider definition in AS/NSZ ISO 3100:2009

o RISK – effect of uncertainty on objectives
o NOTE 1: An effect is a deviation from the expected – positive and/or negative
o NOTE 2: Objectives can have different aspects (such as financial, health and safety,
and environmental goals) and can apply at different levels (such as strategic,
organisation-wide, project, produce and process)
o NOTE 3: Risk often characterised by reference to potential events and
consequences
o NOTE 4: Risk is often expressed in terms of a combination of the consequences of
an event (including changes in circumstances) and the associated likelihood of
occurrence.
o NOTE 5: Uncertainty is the state, even partial, of deficiency of information related to,
understanding or knowledge of an event, its consequence or likelihood.
- Risk ISO
o The way we should access risk is consider the likelihood of potential events and
consequences and assessing the associated likelihood of occurrence. BUT need to
consider that risks are not always known – risks arise from uncertainty based on
objectives
o When analysing risk – should consider the specific risks arising from potential events
(e.g., plan to manage delay vs plan to manage delay arising from weather risk)
o Note, reference to the risk management standard is not even mentioned in our AS
contracts – should it be required to be mentioned? I think not, the contract should be
the product of analysing the risk.
o Assessment of risk has to be a multi-disciplinary team process because risk
perception is informed by personal history/experiences

- Risks will change over time. Risks that are identified today may not be risks that will be a
problem in years to come. E.g., covid – who could have identified that covid would have
caused the disruptions that it did?
Risks in construction project

In smaller, less complex projects

- The risks include (per Abrahamsom, 1973) - the physical work, delay, supervision, damage
and injury, shortage of resources, government policy, conflict, industrial relations, payment,
inflation, disputes and Law
- In 2023:
o Escalation
o Pandemic
o Supply chain uncertainty
o Contractor, subcontractor insolvency
o Climate change
o ESG
o Modern slavery

All projects (per Greenham)

- Risk bounce back - By the ineffective management of a project or the ineffective

administration of the contract the risk treatment strategies can be undone and risk:
o is created
o is transferred
o bounces back
- Consider risk bounce back – by the ineffective management of a project or the ineffective
administration of the contract the risk treatment strategies can be undone, so risk is created,
transferred and then bounces back.
o Arises where parties ignore the contract until disputes arise, then cannot go back and
rely on the contract.
o Risk bounce bank also arises where risk is transferred to a party who cannot manage
the risk

PERCEPTION OF RISK
What constitutes risk in the first place and the reaction of a particular stakeholder to it will be informed
by:
- objectives
- personal and organisational value systems
- past experiences
- recent events
- custom and fashion
Key risks for principal:
- Contractor solvency
- Feasibility
- Within budget
- On time
- Satisfy end user requirements
- Fit for purpose
- Comply with approvals / law
Key risks for contractor
- Escalation
- Supply chain
- Certainty of payment
 - Paid for extras
- Achieve margin
- Contract fairly administered
- Site available
- Complete without interruption
- OH&S requirements
- No residual liability
Key areas of risk for financier
- Completion risk – the risk that development and construction of a project will not progress to
the achievement of required levels of actual or demonstrated capacity by a specified date at
costs sufficient to generate cash flow necessary to service debt and pay operating expenses'
- Drivers
o Commercial banks lend for a margin
o no upside
o significant down side
o assume only measured risks
o control over key project decisions
o take control of project ASAP in time of difficulty

RISK MANAGEMENT
- What causes disputes?
o An outcome resulting from an unacceptable risk allocation

- Refer to definition in ISO Risk Management – RM is the identification, assessment and

prioritisation of risks, followed by co-ordinated and economical application of resources to
minimise, monitor and control the probability and/or impact of unfortunate events.

- NOTE, risk management is not risk elimination

- Benefits of Risk Management (consider Kerin article)

o Strategic benefits
o Financial benefits
o Marketing benefits
o Tactical or management benefits

- Results of poor risk management for Principal

o Discourages tenderers
o Increases cost
o Claims

- Results of poor risk management for Contractor

o Injury and death
o Under-pricing and disputes
o Under pricing and losses/insolvency
o Proper risk management processes should deter and identify incompetent contractors
(e.g. underbidding), should not increase costs and should reduce claims.

Ways to manage risk

- Multidisciplinary approach
- Workshop
 - Basis for procurement
- Risk allocation

- Consider the risk management structure included in the ISO:

o If parties go through the exercise of risk management, then can id the specific event
and allocate it to the party most able to manage it.
o Contract negotiation should occur in the context of risk management rather then in a
vacuum – need to identify the risk, analyse the risk (likelihood of risk / cost associated
with risk) and then treat the risk (i.e., principal to accept risk / contractor to accept risk
/ procurement strategy)
- Risk management is not to be done at the beginning of the project, risk management should
be monitored and reviewed throughout the life of the project

RISK ALLOCATION AND TREATMENT

Abrahamson Principles

- A party to a construction contract should bear a risk or obligation where:

o The risk is within that party's control
o The party can transfer the risk by insurance (CW, PI, PPL insurance)
 This raises the question about who should take out the insurance? Inter-
relationship between insurance policies.
o The preponderant economic benefit of running the particular risk accrues to him
 E.g., Latent condition clause in AS contract – it is the owner/principle who
owns the site, elects to build on the site and has the opportunity to conduct
Geotech investigations on the site, therefore the risk with latent conditions
should sit with the principal.
  However, to the extent that the Kr should have reasonably anticipated
adverse Geotech conditions based on the materials given by the Principal,
then the risk should sit with the Kr.
o To place the risk on him is in the interests of efficiency, which includes planning,
incentive and innovation and the long term health of the construction industry on
which that depends
 E.g., level crossing removal projects – the same contractor is being used to
deliver all the level crossing removal projects which creates efficiencies in the
delivery of the projects
o If the risk eventuates, the loss falls upon a party in the first instance and it is not
practicable nor is there any reason under the above 4 principles to cause expense
and uncertainty, and possibly make mistakes, in trying to transfer the loss to another

- The No Dispute working group adopted the Abrahamson principals for allocating obligations
and/or risks for all projects
o Principal should not ask a Contractor to price an unquantifiable risk that is within the
control of the Principal
o 'balanced contracts' where risk allocation follows Abrahamson principles work better
and are less prone to claims/disputes
o The limitations of the No Dispute – Risk Allocation Model are:
 Some risks impossible to respond to in this way
 Why give equal weight to each Abrahamson principle – Principle 1 is clearly
paramount
 Some result contrary to common sense.

Alternative to Abrahamson principles – Brunni principles

- Principles, consciously or unconsciously, used by arbitrators or judges to allocate risks when

the contract is silent or not clean cut
- Says FIDIC Gold Book for Design, Build and Operate contract is based on these principles
- Not of equal importance and in priority
- The principles are:
o Which party can best control the risk and/or its associated consequences?
o Which party can best foresee the risk?
o Which party can best bear the risk?
o Which party ultimately most benefits or suffers when the risk eventuates?

Criticisms of Abrahamson principles

- Davenport
o Not capable of practical application
o Risks not capable of clear definition and ambiguity results
o Involves introduction into contract law of principles of economic theory and equity
o Each risk is more complex than Abrahamson theory pretends eg. latent conditions
 Latent condition risk not capable of being allocated to one party
o Abrahamson principles assume that a 'preponderant economic benefit' can be
determined in each instance
o Davenport proposes a risk table
 In absence of agreement, following events do not entitle contractor to relief
 Weather
 IR
 Shortages of labour/materials
 Escalation
 Latent conditions
  Common for Contractor to be provided in contract with some relief for some
of these events
 Relief is usually one or more of: EOTs; Reimbursement of extra costs; off site
overheads and profit

Application of Abrahamson principles

- Not require risk management – Pascoe

- Notwithstanding clauses to contrary, are not based on any coherent policy or set of principles
- Are promulgated on behalf of a particular interest group with a sympathetic risk allocation
- Or are consensus forms framed to accommodate disparate interests

- Look at the AUS standard form contracts (For a comparison of AS2124-1992, AS4000-1997,
MW1-2003 and PC1-1998 see 'Understand Australian Construction Contracts' by Bailey and
Bell)
- NEC3 contracts –
o Pascoe re NEC3:
 Jointly consider risks on a regular basis
 Statement of over-arching principles
 Early warning requirement
 Risk reduction meeting
 Updating of risk register

The Lender’s Perspective

- What is the financier’s role?

o Financiers will finance the construction and project costs
- Deal must be bankable in order to secure finance. Bankability is the banks assessment of the
risk of the project. Key elements include:
o Predictability and robust project feasibility
o Total risk analysis – looking at construction risk but other risk too
o Certainty of project delivery, cost and timing
 Experience and capability of principal
 Experience and capability of contractor
 Risk identification, mitigation and allocation
 Sanctity of cost-to-complete (financier wants to have enough money in the
bank to pay the builder to finish the project)
o Adequacy of return for risk – for everyone
o Relationship between the developer and the financier – the better the relationship, the
more likely you will get finance

DAY 2

ALLOCATING, TRANSFERRING AND MANAGING RISK

Retaining the risk

- Why?
o No other party will take it
o Divesting the risk does not represent value for money
o High risk of bounce back
 Therefore pay but no divestment
 Therefore no value for money
- Inadvertent retaining of risk
o Existence of risk not appreciated
o Risk appreciated, but incorrectly assessed
 o Risk appreciated but absence of divestment mechanism
o Ineffective divestment mechanism
- Reclaimed risk
o Intervention (finger in the pie)
o RFIs (Request for Information)
o Commercial indulgence
o Inattention
o Non (or delayed) responsiveness
o Waiver
o Critical contract administration risk

Pricing risk

- Principal
o Risks that arise: inaccurate estimates or budget and value engineering exercises
o Principal may think have priced risk in by asking Kr to accept it and paying a premium
but if they accept lowest bid / incompetent tenderer, then really have retained the risk.
- Contractor
o Pricing methodology is different to contracting methodology.
o Careful build up of price, claim by claim, item by item.
o Experience is as important than tools
o Process
 Brainstorming by estimating team (with reference to past papers)
 Tender prepared in a standard format and contingencies are included
o Integrated approach – risk identification and pricing
o Micro
 Estimate prepared on a trade by trade basis with contingency for each trade
or major cost element
o Micro + Macro
 Each cost centre review past projects
o Construction Period
 Review proposed programme and allow contingency for delay and to cover
LDs

Choosing a procurement methodology

[refer to Cooper and Begaud – The Procurement Decision]

- Different procurement methods – risk can be managed through consideration of procurement

methodologies
o Construct only
o Document and construct
o Design and construct
o ECI – Early Contractor Involvement
o Integrated Project Delivery (IPD)
o Construction Management
o Managing Contractor
o Relationship Contracting - Alliances
- HOWEVER, the traditional descriptions (refer above) imply something about risk allocation
and can be dangerously misleading about actual risk allocation. The traditional methodologies
have lost a lot of utility by reason of hybridisation and evolution.
- We should be focusing on the key characteristics, not the name of the method.
- Key characteristics:
o Core obligation (build, supply, etc)
o Cost
  Lump sum
 Cost plus
 Plus what?
 Lok at the hidden constraints
 Measurement Contracts
 Bill of Quantities
o Risk control (project definition)
o But beware of bounce back
 Schedule of Rates
o Risk control (set a variable)
o But beware of false sense of flexibility (rebalancing
quantities)

o Time
 Complete by X date
 Masquerading as a reliable date
 Risk leakage mechanics
 Extension of time
 Prevention principle
 Programs
o Quality/Performance
 Prescriptive v performance
 Specification v output
 Methodology
 ‘Finger in the pie’
 Design and construct
o Other risks
o accountability

Particular methodologies

- PPP
o State engages with SPV. SPV usually has both equity and debt support. Construction
is funded by equity and debt and debt is repaid once the asset is operational. It is
paid for the provision of the service during a concession term and the asset returns to
the State once the concession period has finished. The SPV is not paid on
completion of the asset, rather then SPV is paid during the concession term. There
are KPIS with respect to quality which are measured during the concession term and
to the extent that the KPIs are not met, the service fee is reduced.
o Fail safe risk allocation for the construction as SPV adopts all risk during the
construction period.
- Alliance
o What is the promise? To try very hard
o Other end of the spectrum is an alliance. There is a no dispute mechanism in the
alliance (in the absence of wilful misconduct or fraud)
o Payment is by reimbursement with painshare / gainshare allocation based on
margin/profit
o Difference is in the accountability and risk – accountability is shared and no liability
between the Ps
o Usual characteristics of alliancing:
 Risks cannot be adequately defined
 Cost of transferring risks is prohibitive
 Urgent start required (before risks are fully identified)
 Owner has a capacity to influence delivery
 Collective risk management will produce a better outcome
 - What about a hybrid between PPP and alliancing?
o Consider Marko Misko’s proactive risk and issue settlement model (PRISM)

- ECI
o Hybrid
 Phase 1 – Quasi alliance (cost-reimbursable)
 Phase 2 – Design and construct
 The risk allocation in this model switches
- D&C
o Need to consider whether novation required (for design)

- Management
o Construction management
o Project management
o EPCM (Engineering, Procure and Construction Management)
o Managing Contractor

o Key obligation is to manage other subcontractors in the chain.

o Significant dilution of risk transfer however this isn’t always the case – in reality the
Construction Contractor manages the trade contractors and the contracts remain
between the principal and the trade contractor.

How the organisation sees management How legal sees management

Contractual mechanisms to allocate, transfer and manage risk

- Risk transfer may be achieved contractually by:

o Scope definition
o Schedule definition
o Warranties
 o Indemnities
o Limitations and exclusions
o Time bars
o Liquidated damages
- NOTE: The document that gives most rise to debate when there is a dispute is the scope
documents. – these are the documents which are the most contentious. Because scope
documents are not drafted to be contractual documents – there is often inconsistencies
between them and it is this which gives rise to the dispute
- All provisions of the contract should operate together – limitation of liability; warranties;
exclusion clauses; indemnities

- Scope definition
o Detailed documentation
 Drawings
 Preliminaries
 Specification
o OR Performance bases (PPR)
o Need to consider risk bounce back – inconsistency between documents (particularly
where team has relied on precedence)

- Schedule definition
o Date for PC / Date of PC
o EOT regime
o Contract programme and updates
o Unilateral power to extend
o Definition of PC

- Liquidated damages
o Often time related
o Could be other criteria
 Production capacity
 Running costs
 Downtime
 Power output / noise
o Benefit to Principle: ability to levy the LDs as soon as the breach occurs and also
saves the Principle time/cost in proving breach and establishing loss
o Benefit to Kr: provides certainty and caps loss
o Common law constraints on LDs (cannot impose LDs if they are penal in nature):
 Dunlop Pneumatic Tyre Co v New Garage and Motor Co Ltd [1915] AC 79
 Paciocco v ANZ (2016) 333 ALR 569
 In Paciocco the court made it much harder to establish whether a
rate is penal – need to compare the rate, the estimated damages and
the other legitimate commercial interests the counterparty has in
performance (these commercial interests are not defined, e.g.
reputation loss etc.) Therefore much harder to establish penal
because can say that the higher rate takes into account commercial
interests

- Warranties
o Historical significance
 Warranty v condition – type of relief
 Condition – termination
  Warranty - damages
 Is this still relevant today?
o Best approach – use more flexible language (as opposed to X warrants Y)
 X promises Y
 X will ensure that Y occurs
 If Y occurs then X will…
o Don’t forget about implied warranties
 Good and workmanlike
 Due Diligence
 Reasonable time
 Fit for purpose? This is often contentious for design consultants because PI
will not respond to warranties which extent the designer’s obligations beyond
what is required at CL (e.g., work performed with due care and skill).
o Statutory devices
 Statutory implied warranties
 Goods Act
 Domestic Building Contracts Act
 Australian Consumer Law
 Most common misleading or deceptive conduct – gets you around ‘no
reliance’ clauses on pre contractual docs etc and also LOL does not apply
 Usually non excludable

- Indemnities and exclusions

o What is the purpose of indemnities?
 To allocate risk of:
 Third party claims
 As between counter parties
 To provide a mechanism to overcome limitations on recovery for damages for
breach
o Creature of contract – need to look at the drafting
o Agreement to cover a loss
o The purpose of the indemnity is to play around with the CL requirements when suing
for breach at CL – fault based / causation / remoteness / mitigation
o Point in negotiation – we should say that to the extent that we are departing from the
CL, we should only do it for specific serious events (e.g. death/injury)

o The anatomy of an indemnity

 5 constituent parts of an indemnity clause:
 Who – is indemnified
 What – costs or liabilities are indemnified?
 Which – events or circumstance must the costs or liabilities be
connected with?
 The nexus – between What and the Which
 Any limitations or exceptions which apply to 2 and 3

o Different types of indemnities

 Bare indemnities
 A indemnifies B against all liabilities or losses incurred in connection
with given events or circumstances
 Not fault based
 Not limited by notions of causation / remoteness / mitigation
 Reverse or reflexive indemnities
 X will indemnify Y for Y’s stuff ups
 Proportionate or limited indemnities
  Third party indemnities
 Financing indemnities
 Guarantees
 Party/party indemnities
 Mutual indemnities

o Reasons for including contractual indemnities

 Recovery where there is no breach
 Proof of causation
 Overcoming test as to remoteness
 Overcoming obligation to mitigate
 Recovering ongoing losses
 Overcoming limitation periods
 NOTE indemnities should survive termination

o Common law proof of causation

 Multiple causes for the loss
 Break in chain of causation
 Indemnity: wide words are used to create the nexus between the losses and
the event or conduct which is the subject matter of the indemnity
 Arising out of, in connection with, in the course of the work under the contract
or the Project

o Common law remoteness

 The damages recoverable are those that (Hadley v Baxendale):
 Flow naturally from the breach ‘according to the usual course of
things’
 Are in contemplation of both parties at the time of the contract as the
probable result of a breach.
 Stuary v Condor Commercial Insulation (2008) 24 BCL 255
 S had contract with Sydney Airport and was awarded batches of 300
houses to build. If successful, would be awarded the next 300. Stuart
engaged commercial insulation installer, they did a dodgy job and
caused house fire. Stuart was not awarded subsequent batches.
Stuart sued contractor for damages arising from having to rebuild
burnt house (limb 1 H v B) and also for the loss of profit arising from
losing the future projects (limb 2 H v B). No indemnity in contact.
Contractor was not aware of future projects so loss not in
contemplation of both parties, so contractor not held liable for loss
under 2nd limb.

o Common law obligation to mitigate

 Pl is under an obligation to take all reasonable steps to mitigate the loss and
may not recover damages which are due to a failure to take such steps
 Compare with an indemnity for any cost, expense, loss or damage caused

o At common law, damages are assessed once and for all at the date of the breach
 Risk of predicting future loss with plaintiff
 Inflation not taken into account
 Indemnity may be expressed
 As continuing, applying to each loss or expense as incurred
 As continuing beyond termination of the contract or completion of the
project
 So that ongoing losses are recoverable
o Contractual indemnities overcome limitation periods
 Design life warranty
 eg.warranty that certain structures will be designed so as to be fit for
purpose for 50 years
 Breach
 Limitation period
o 6 years
o 12 years if a deed
o 10 years building action in Vic and NSW
 Keating on Building Contracts - 'where there is an obligation to indemnify
against loss, the cause of action does not arise until the loss has been
established, so the limitation period runs from the date when the liability or
loss indemnified against is established or incurred. This may be after the
expiry of the ordinary limitation period…'
 Indemnity will provide a cause of action which accrues from the date
 The loss is incurred
 The date the liability is pronounced
 Essential to be coupled with long design life warranties

o Beware of privity
 Indemnity is a contractual right
 Only the parties may receive and enforce the benefit
 Obligations to indemnify non parties not enforceable by non parties
 Look at who the indemnity is with – if it is a TP not enforceable under
contract
 If having a TP indemnity to overcome privity issues, use a deed poll
(e.g., this indemnity is a deed poll separate to the other clauses of
the contract) because deed poll is enforceable by parties who aren’t
a part to the contract

 Now see trusts created in some documents

 Beware
 Fiduciary obligations assumed by contracting party (trustee)

o Usual commercial response to inclusion of indemnity

 Increase in Contract price to compensate for perceived risk
 Request for reciprocal indemnity
 May result in a request for exclusions and limitations – how will the interact
with balance of contract?
 Additional indemnifies risk may not be insured so refusal to accept

o Risk of poorly drafted or wide indemnities

 Indemnities reallocate responsibility otherwise imposed by the general law
 Judges do not like that
 Judges developed special rules of interpretation
 Usual rule
o Consideration of commercial purpose and object by
reference to surrounding circumstances
 Special rule
o But, any ambiguity will be construed strictly and in favour of
indemnifier
 Ambiguity is in the eye of the beholder
 NOTE - To extent there is ambiguity in drafting, the courts usually construe it
against the drafter
o Examples of courts interpretating ambiguity in indemnities against the indemnifee
  Andar Transport Pty Ltd v. Brambles Ltd (2004) 206 ALR 387
 'Andar shall, indemnify Brambles from and against all actions, claims,
demands, losses, damages, proceedings, compensation costs etc for
which Brambles shall or any be or become liable in respect of or
arising from:-
8.2.2 loss, damage, injury or accidental death from any cause to
property or person caused or contributed to by the conduct of
the Delivery Round by Andar;
8.2.3 loss, damage or injury or accidental death from any cause to
property or person occasioned or contributed to by any act,
omission, neglect or breach of or default via Andar.'
 Facts: Brambles provided laundry services to hospitals. Employee of
Andar was injured whilst moving one of Brambles trolleys due to
defects in the trolley. The employee sues Brambles for negligence.
Brambles issued a TPN seeking indemnity from Andar.
 Q for the court: Did Andar indemnify Brambles for liability arising from
Brambles own negligence? Was it a reflexive indemnity?
 Kirby: 'Indemnity clauses are provisions that purport to exempt one
party from civil liability which the law would otherwise impose upon it.
…Self evidently this is a serious thing to do… Where such
indemnities are said to arise our of contacts which are ambiguous or
unclear, it is not unreasonable that their provisions should be
construed so that any uncertainty is resolved favourably to the party
thereby burdened by legal obligations that would not otherwise
attach to it.'
 Take away - If you are trying to indemnify against your own
negligence, have to be very clear in drafting

- EXCLUSION CLAUSES
o CL interpretation rules
o Tension between history/practice and modern articulation of CL
o Need to add in everything to be excluded (explicit – negligence)
 This results in bulky clauses
o Modern view – perhaps does not need to be so rigid
 Consider - Darlington Futures v Delco – consider exclusion and limitation
clause as per other clauses – how would a reasonable business person
interpret this clause in the context of the contract as a whole?

o Varieties of exclusion clauses

 No claim clauses
 Exclusion clauses
 Release clauses
o Often thought to be necessary to be supported by an indemnity

o Completion or partial (limitation)

 $ amount (% of contract sum)
 Insurance recovery
 Types of damages
 Consequential – economic – Peerless decision (Recommendation is
don’t use words con loss in contracts because of uncertainty about
what con loss includes – rather list out the types of loss you don’t
want to be liable for)
o Hadley v Baxendale says con loss is loss that falls within 2nd
limb (i.e. loss that is specifically in the contemplation of Ps)
 o Peerless (Vic COA) changed def to normal loss v particular
circumstances loss - normal loss is loss that every Pl would
suffer in a like situation and particular circs loss is loss
beyond that. This case says con loss is particular
circumstances loss
o Peerless however was questioned in McMahon Mining
Services (case on slide 68) – McMahon said we should look
at what con loss in context of what a normal business person
understand it to mean
o However, in Vic – most likely Peerless to apply
o So b/c of ambiguity – we should identify what the loss is
rather then simply mentioning it as con loss
 Indirect and consequential loss – McGregor view (more complete
explanation)
o 'The normal loss is that loss which every claimant in a like
situation will suffer; the consequential loss is that loss which
is special to the circumstances of the
particular claimant'
- In summary
o Risk assessment should identify:
 Losses common law may not recover
 Losses seek to limit or exclude
 Do not use boiler plates
o Indemnity
 Drafting should reflect purpose
 Ask 'which types'
 Consider 5 anatomical parts
 Avoid bare and reflexive
o Exclusions of consequential loss
 Identify the 'normal measure'
 Identify shopping list from risk assessment
 Do not use the phrase undefined

DAY 3

- Security
o Reasons for provision
 security for performance
 off site materials – security released when off site materials are brought onto
site
 early expenditure on project may require an advance payment bond

o Types
 Cash
 Benefits for the principal – easily accessible
 Benefits for the builder – may be convenient / simple – no need to
negotiate with bank or TP
 Disadvantage for builder – affects cashflow and if principal goes
insolvent, builder may rank as unsecured creditor and lose money
 Retention
 Bank guarantees
 Insurance bonds
o Making a call
o Enjoining a call
Notes 8.9.23

Exam tips

1. Perform analysis, don’t regurgitate facts/statements of law. Come to a conclusion

2. Avoid lengthy introductions – just get on with it. In intro, quickly id what my pov is
3. Avoid lengthy tables in lieu of prose
4. Give all the options and then come to a conclusion with a preferred point of view (e.g. on the
one hand and on the other it is this)
5. Don’t fence sit – express a view on balance
6. Make it interesting for examiner to read
7. Use examples – apply principles from CL to examples
8. Simple direct language
9. Avoid passive voice – use an active voice
10. Referencing
11. Don’t overstate propositions – no absolute statements

Professional risks

- Is it better to have a highly prescriptive consultant contract or rely on the duty of care owed in
CL to exercise due care, skill and diligence in performing the work?
o Better to rely on the duty – a highly prescriptive contract may actually limit the role of
the consultant.
- There is a tension in professional services where the contract requires a consultant to
promise a particular outcome – how can a consultant promise a particular outcome when they
don’t know what that outcome might be? What the consultant should do is promise to
exercise care, skill and diligence when completing the work. There is no prescriptive outcome,
rather the consultant just promises to perform services with due care, skill and diligence.

- If a client suffers loss and seeks compensation from a consultant, what are the two most
important contract terms in pursuing the claim?
o ‘known circumstances’ – look at slide 22 – very broad definition
o ‘assumed liability’ – look at slide 23 – insurance won’t apply to any contractually
assumed liability unless such liability would have attached to the insured at law (note,
this would include liability which is allocated by a judgement – if the professional is
awarded damages against them, insurance should respond).

Known circumstances

Will not insure against known cicrs at the time of placing the policy

Assumed liability

- NOTE, outcome promise may make it more difficult to recover from the insurers then loss
arising from a process promise.
o Outcome promise – The works will comply with the Principal’s specification
o Process promise – X will exercise due, care and skill in performing the works

- If there is an exclusion like 4.3 on page 23 (Day 3 notes) – and the professional entered into a
deed with a bank who was funding a project, the professional’s only liability to the bank would
arise by way of the deed (i.e, no duty of care is owed between professional and bank) so
exclusion clause would most likely operate

- What about professional’s liability for LD?

o LDs are the result of an outcome promise. The professional has promised to
complete by the date of PC however, could you argue that you failed to meet that
date because you did not work diligently and therefore, insurance will apply.
Slide 24

- Sets out the difference between contractors and professionals are covered under PI
- Contarctors insurance covers the product (i.e., all have to demonstrate is that product is
faulty, don’t have to identify fault and question of proof is easy – either the product works or it
doesn’t) whereas professionals insurance covers the process (i.e., have to prove that
professional was negligent – need to use experts to prove breach because they will establish
the baseline against which negligence to be measured)

Slide 27

- Look at the indemnity – the contractually assumed risks are highlighted

o Agents – would not, at law, have a duty of care to agents
o Claims, demands etc… - this is defence costs. No loss has to be incurred yet, all that
has to happen is a claim or demand has to be made. So professional will need to
fund defence of the claim
o Arising out of or in connection with services – no fault required.

Slide 28

- One form of strict liability which is covered by the insurance policy – misleading and deceptive
conduct will be covered by PI because it is liability arising under law

Consultant’s major commercial risks

- Uninsured liability – refer above. PI does not insure against outcome promises/contractually
assumed risk. This is very broad and most contracts include outcome promises.
o Agreed liability to others – liability assumed under a deed where no duty of care
exists at law
o Higher duties – where professional promises that they will act in accordance with best
standard or care as opposed to liable where negligent. Elevated duty of care (I
promise to provide services at the standard of world’s best practice) – If professional
sued for failing to comply with elevated duty of care but was no negligent, then will
not be insured. Very unlikely that this risk will ever eventuate.
o Preventing insurer’s recovery rights – if the insured takes away the insurers rights of
subrogation, then the insurance will not apply (this will occur where the insured enters
into a deed of release for e.g.)
 Subrogation = steps in the shoes of
 This will occur when releasing subconsultant as part of a settlement;
releasing client at the end of the project; releasing (original) client of deed of
novation
- Losing money
o Set off – where the consultant has a debt and wants to sue to recover the money and
the client then counterclaims for breach of duty (the suing of set off often triggers a
counterclaim which but for the set off claim would not have been raised)
o Never ending projects
o Unpaid variations – scope considerations
o Painful clients – termination for convenience can resolve this risk

- Disputes / litigation
o Vague and unclear clauses - especially re scope of services
o Unfair, oppressive contract terms

- Choice of client
Scope of PI insurance

- Liability to compensate TP for civil liability (but typically not covered for no fault contractual
assumed liability)

Standard of service

- ACL specifies the required standard of services (slide 50) – contract has to be under $100K /
domestic contract for this legislation to apply (to be deemed a consumer under the act)
o This doesn’t apply to architects and engineers because usually architects and
engineers are apply their services to TP not to their clients (??)
- What is the problem with FFP?
o FFP is an outcome promise (so an insurance risk)
o FFP is vague and may change (litigation risk)
o What is the purpose and when is the purpose ascertained? The purpose may change
over time so how can you assume risk for it.

Liability limitations

- The rules with limiting liability:

o Limitation must be clear – include $ amount rather than reference to the fee;
o The $ must be limited in the aggregate;
o Limitation of liability to survive termination / expiration of contract;
o If limitation of liability refers to the ‘amount available under PI insurance’ then PI
policy will be discoverable by the OP.

PROPORTIONATE LIABILITY

- NOTE proportionate liability does not apply to personal injury or fraud claims
- The solvency risk lies with the Pl under the proportionate liability legislation

- Characteristics of proportionate liability

o It is a defence that limits D’s liability – it is not a claim. The legislation is relied on by a
D to limit their liability to the Pl (i.e. D can join another D and court finds both parties
liable to Pl – then D1 will only be liable for their portion)

- Proportionate liability is not triggered when the claim does not arise out of a failure to exercise
duty or care of M&D conduct (i.e. it does not apply where claims are of strict liability)

- When does prop liability apply?

1. Is it an apportionable claims?
- Must be a damages claim (not a debt claim) for which a failure to take reasonable
care is an element
2. Are their concurrent wrongdoers? (Are there other parties liable to the Pl?)
- 1 or 2 or more persons whose acts/omissions caused and who are liable to the Pl
for the same harm
3. Exclusions
- – eg, vicarious liability, fraud, agency, partners, nominated statutes
- – contracting out (Qld)
CONSTRUCTION RISK: ALLOCATION AND INSURANCE

- Four basis risks which we insure against usually

(1) Damage to works
o Contract works policy
 Liability is a matter of chance – it is fortuitous
 More then one party is indemnified under the CW policy
 Need to look at when the policy expires – more likely then not, expires on PC
 The exclusions are what it is really about in CW insurance:
 Con loss (undefined) is excluded – this is a problem considering no
CL definition of con loss (look to governing law)
 Defect in design, plan, specification, materials, workmanship
excluded (however works which are damaged as a consequence
of defective design, plan, specification, materials, workmanship
are covered – slide 22)
(2) Claims by others
o Third party insurance here – insurance to pay out to persons who suffer personal
injury / property damage
o Again, look at exclusions – liability assumed by contract is not covered
(3) Workers compensation
(4) Professional liability
o Refer above but remember issues about contractually assumed liability

- When making a claim against the professional – what does the claimant need to know?
o Can the professional pay for this out of its own pocket?
o If not, is there PI insurance?
o Is this type of claim covered?
o What is the policy’s limit of cover?
o Is the policy eroded by defence costs?
o What is the policy excess?
o Can the professional pay the excess?
o Who is the insurers?
o What is the insurer’s approach likely to be?

- Duty of utmost good faith (slide 37)

o If insurer declines cover, the insurer has to provide written reasons about why they
have declined cover. Then can rephrase our claim / provide additional evidence /
address deficiencies of claim / decide not to pursue.

Important clauses under Insurance Contracts Act

- S 28(3) – if insured fails to disclose a relevant matter – this does not void the policy. Look at
28(3) which says that the insurer is entitled to reduce its liability to the position it would have
been id non-disclosure had not occurred (i.e., premium would most likely be increased so no
big difference for insured)
- S 41(3) – (use this where insurer sitting on the fence) If insured gives insurer a reasonable
time to make a decision to settle the claim, and the insurer doesn’t give the insured an
answer, the insured can settle and this will not void the insurance.
- S 45 – an other insurance exclusion clause is void unless the insurance contract identifies the
other insurance policy which they are excluding.
- S 54 – discussed above

Which policy to claim on?

- Occurrence based policies – claim can be made on the policy years after policy issued
because the policy which responds is the policy which was in place at the time of the
occurrence (contract works and PL insurance)
- Claim based policies – claim made trigger – claim made during the policy period (does not
matter when the occurrence occurred – reason for this is that it can be difficult to identify
when the cause of the loss occurred) – PI policies. NOTE obligation to notify of known
circumstances (so if have a concern that may be sued, best to notify policy - don’t forget
about s 40(3)) Also consider 54 which would apply when a claim is made against a
professional
o MUST notify of any potential claims – otherwise insurance will not cover liability