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Why Contract Terms Matter

Why contract terms matter

Contract terms matter. Whether it’s insurance coverage and how your insurers will defend you, how your insurer will concede liability and make a third party payment, or if they’ll cover a matter at all, understanding what’s included in your contractual terms is essential to managing risk throughout the supply chain.

In an ideal world, you should seek independent legal advice from a solicitor before signing contracts. This might not be possible or economic though, and where you proceed without third party advice you need to do so with an appropriate degree of caution.

Remember when buying insurance that it is very important you meet your duty to make a Fair Presentation of Risk and give the insurer an opportunity to ask further questions where they’d normally do so. If you do not make a proper disclosure of risk, then the adverse consequence for you is that individual claims may not be paid. At worst, the entire policy could be voided whilst insurers can keep the premium you paid to them.

Regarding insurance for recruiters and those in the staffing supply chain, there is often reference to ‘standard and non-standard terms’; these are not always well understood. The distinction between the two is not exclusive to inside/outside IR35, nor are the definitions exclusive to who wrote the contract itself. The distinction is really to do with obligations the contract contains, and the defences allowed or excluded within the contract itself.

In very simple terms, a recruitment business should hold an insurance policy which reflects its true business activities and services – the business description in the policy schedule will read ‘Employment Agency Business’ or similar, effectively reflecting the true nature of operations.

So, when it comes to reviewing a contract put to you, it is important to check that definitions accurately reflect what you are insured to do. If the contractual obligations or services required from you don’t fall within the business description, you will need to amend your insurance (so that they are insured perhaps paying additional premium) or renegotiate the contract terms (so there are no uninsured exposures).

Check the definition of Services, Work and Agency Obligations all reflect general recruiter activities. Contracts that are considered higher-risk and less favourable to insure are ones that have wider obligations relating, whether that’s managing people and the associated health and safety risks for their welfare, safe working, a responsibility for the outcome of the work-product, or advice of the personnel supplied and managed.

Put simply, it is cheaper to insure an operation where the end-client retains responsibility and practical operations than having them transfer to you and your business insurer. To be clear, we are not getting at Recruitment Process Outsourcing in respect of HR functions here – what we are getting at is higher risk in a ‘turnkey’ type operation where you are delivering something other than a recruitment solution.

Some recruitment channels are starting to also see Statements of Work, especially in the IT channel. Where they arise, there should be a clear understanding of Services – as well as Deliverables – and whether they are on a time and materials or milestone basis.

The Recruitment and Employment Confederation model contract terms are favourable to a recruiter and its business insurer because the default position is stated that the end-client has most of the responsibility for welfare and work output, disclaiming the recruiter from matters outside their practical control in the process. There is no explicit financial undertaking or compensation route against the agency from the end-client and end-client’s insurers.

Of course, the commercial world has become a lot more sophisticated now and there are a variety of third-party agreements put to recruiters: neutral vendor agreements, managed service providers, and second tier supply agreements  to name a couple. These shouldn’t be problematic in themselves.

As time-consuming as it is to read through a contract, it is one of the wisest ways to invest in management of risk. It’s paramount to understand if you are you being asked to undertake recruitment services within your normal comfort zone, and to be able to explain why something within the terms causes you discomfort if outside your usual remit.

Do the Definitions – yes, capitalised terms mean what you expect them to mean within the context of the document.

Check more than the prescribed limits of indemnity are met by the insurance you bought or buy. Keep in mind the third party will likely specify the minimum required limits of indemnity and that they can almost certainly sue you in excess of them. Minimum prescribed limits of indemnity are not the same as maximum liability clauses.

There are other terms to look for which might indicate you have an onerous contract:

  • The law applicable, should be England and Wales in most instances. If the contract is subject to foreign court jurisdiction, including the United States of America or Canada, you are almost certainly going to have an uninsured contract requiring your insurer to assess it.
  • Punitive, Penal or Exemplary damages awards. These can be extremely costly and go beyond an insurance-indemnity. They require a payment for outrage to deter or reform a problematic behaviour which would be uninsured in most instances.
  • Strict-performance guarantees undertakings and warranties. These provide limited room to defend and avoid a liability even where something has happened which was beyond your control. You should always aim for contracts to reference the standard of work as ‘reasonable skill and care’ which allows more scope to successfully defend against an allegation.
  • Indemnity and hold-harmless clauses. These can be difficult to escape commercial terms but before agreeing to them have an appreciation as to the intended outcomes. Indemnity clauses set-out that reimbursement at a prescribed basis will happen as a result of an event.
  • Limitation periods. A simple contract has a liability period of 6 years from the date of the breach of the contract whereas a claim against you for breaching an obligation in a deed are double-that at 12 years. The limitation periods can be quite complex with a long-stop of 15 years for claims of negligence.
  • Waivers of subrogation. Waivers or exclusions of subrogation will put your business insurer in a disadvantageous position and quite likely breach insurance policy conditions.
  • General Liability or Umbrella Insurance or Worker Compensation Insurance, often specified in US Dollar – indicative of exposures to the USA which are not insured.
  • From your own commercial perspective (and not insurance related as such) what are the provisions for payment / credit or refunds.

Other manners in which a contract can be assessed include:

  • If supplying limited company contractors that they are stipulated as being independent contractors who have to buy insurance with limits of indemnity at least equal to that specified in the contract;
  • Liability-cap clauses which are fair and not going to breach Unfair Contract Terms Act 1977;
  • Net contribution clauses that create an equitable share of the loss by the parties whose negligence resulted in the loss being incurred in the first instance;
  • Unforeseen frustration of contact – force majeure – perhaps in the pre-COVID world this was thought of as hypothetical, but now we’ve been through an imposed lockdown with social distancing measures would a recurrence of such measures be recognised in the contractual obligations being put to you?

Remember, it might not be possible to insure every eventuality of a contract and there will often be parts of a contract not capable of being or affordable to insure. The objective is to understand and accept that the majority of the exposures are insured, and those which aren’t insured are understood for the risks they may pose to company balance sheet if accepted on the contract terms as offered.

Kingsbridge offer a consultative and pragmatic service where we aim to put the risks in plain English and avoid unnecessary legal terminology. Our customers can submit contracts to us to receive a pragmatic broker assessment against the policy we arrange where our comment is typically provided within 48 hours.

Written by Philip Horner

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