Are contingent liabilities causing you red tape?

With the January 2015 release of Resource Management Guide (‘RMG’) 414 on indemnities, guarantees and warranties, non-corporate Commonwealth entities (‘NCCEs’) should consider how they handle typical, recurring contingent liabilities in common supplier contracts.

Not acting now risks non-compliance. Also, without good systems, dealing with contingent liabilities even in otherwise straight forward and low value supplier contracts can divert significant resources in an already resource constrained environment.

What are the common issues for NCCEs?

NCCEs cannot grant indemnities, guarantees or warranties (‘contingent liabilities’) without PGPA section 60 delegate approval. If the relevant contingent event occurs, a NCCE must meet the liability from existing appropriations.

In some procurements, NCCEs will find it impracticable or impossible to persuade suppliers to use the NCCE’s own contract templates, e.g. conference venues and equipment hirers will want to use their standard terms and conditions. Supplier terms will typically require NCCEs to incur contingent liabilities such as broad uncapped indemnities.

Before 1 July 2014, FMA agencies could avoid the need for specific delegate approval of contingent liabilities that were considered low risk. That sped up agencies’ handling of supplier contracts, particularly ones that were otherwise low value and otherwise straight forward.

Since the commencement of the PGPA Act on 1 July 2014, NCCEs must now obtain section 60 delegate approval of all contingent liabilities (even ones that are low risk), in addition to general expenditure approval. This means more paperwork than would have been the case under the former FMA Regulation 10 – i.e. more demands on officials and delegates when staffing resources may already be thinly spread.

Without a systematic approach to assessing and approving contingent liabilities, NCCEs are exposed to:

  • avoidable ‘red tape’ for NCCE personnel;
  • delay, complication and frustration for both the NCCE and supplier;
  • not complying with PGPA Act obligations;
  • not achieving intended business outcomes; and
  • financial risk if the contingent event occurs.

What are the new rules?

Before approving a contingent liability, a NCCE’s section 60 delegate must:

  • Consider the principles (although not necessarily be satisfied) that risks should be borne by the party best placed to manage them, and the benefits to the Commonwealth should outweigh the risks; and
  • following reasonable inquiries, be satisfied that, under the arrangement, both:
  • the likelihood of the contingency event is remote (less than 5% chance); and
    the most probable expenditure (without considering potential insurance proceeds) would be less than $30 million.

A reasonable inquiry won’t necessarily require extensive investigation, and need only be proportionate to the complexity, risks and materiality of the proposed arrangement. Reminiscent of previous Financial Management Guidance, RMG 414 lists extensive factors which section 60 delegates should consider and must ensure before approving a contingent liability, e.g. an explicitly defined risk, a time limit and a maximum financial limit on the contingent liability. Delegate decisions should be recorded.

Ultimately, this means that officials will need to have a form of risk assessment for every contract containing a contingent liability when seeking delegate approval.

Do liability caps require section 60 approval?

Under RMG 414, some but not all liability caps may require section 60 delegate approval if they will leave a gap which exposes the Commonwealth to additional expenditure obligations. This probably won’t apply to ordinary liability caps which simply limit a supplier’s obligations to the Commonwealth.

When do I need to contact Comcover?

Before committing to a contingent liability, NCCEs should liaise with Comcover on a proposed contingent liability, to ensure that Comcover will insure the additional risk imposed by the contingent liability.[15] We recommend that NCCEs contact Comcover in advance to discuss Comcover’s timeframes and requirements for such requests.

How can agencies streamline their processes?

We suggest that NCCEs anticipate and plan how they will assess and process section 60 delegate approval requests (and requests to Comcover) for contingent liabilities that are likely to be common and recurring for that NCCE. NCCEs will be better able to quickly process contingent liabilities under the new PGPA requirements if they arrange up-front and comprehensive risk assessments and obtain legal advice addressing anticipated contingent liabilities, combined with clear and practical procedures which officials and delegates can later follow.

Meyer Vandenberg can help by:

  • working with your people to identify contingent liabilities that are likely to arise on a regular, recurring basis;
  • providing legal advice addressing the issues required by RMG 414;
  • providing a comprehensive risk assessment in accordance with RMG 414;
  • working with your people to develop systems for officials and delegates to quickly assess and approve these contingent liabilities; and
  • providing training to officials and delegates on how to deal with contingent liabilities based on these systems.

For more information contact the Government Team:

Alisa Taylor | Partner
(02) 6279 4444