The prime contractor and you

Matthew Crouch delves into the murky waters of contracting.

Story by Matt Crouch

Most participants in the meetings and events sector are service providers. If I was asked to describe the most important ways of managing risk in a service business – a kind of “risk management 101” - I’d respond:

1. Do good work. Ensure that the work you do is careful and complies with the expectations that you have generated with the client. See the December issue for help on how to describe your services - and to create expectations less likely to lead to an unhappy client.
2. Insurance, insurance, insurance. Get as much as you can afford. Understand the risks that the policy covers and does not cover. Make sure you comply with your duties to inform the insurer.
3. Minimise your liability for other people!

It is this last point that we’ll focus on this time. The meetings and events sector throws up numerous situations where an event manager or PCO – or any supplier for that matter - can be liable for other people. By “other people”, I mean people for whom you’d not normally be liable.

In past articles I have focussed on the need to avoid partnerships and agency wherever possible. As I have pointed out it is a good idea to not even use those terms in describing your business relationships as you can end up with an unintended partnership or an agency.

But this time I want to take a closer look at the position of the prime contractor.

Imagine you are a PCO, and that you agree to provide conference management services to an association client. The association client presents you with a contract. It states:

The PCO may engage subcontractors to perform the services but will remain liable in all respects to the Association for the provision of the services despite the engagement of subcontractors and will be liable for any loss caused by an act or omission of any subcontractor.”

This, and clauses like it, are common inclusions in service contracts prepared by the client. Even if yours is not a PCO or event management business, the odds are that if you have ever been presented with a contract by your client, you have seen this kind of clause before.

In essence, it means: “If you use subcontractors, that is your business, but you are primarily on the hook to ensure that the services are provided as agreed and you are liable if your subcontractor is negligent – ie you are a prime contractor”.
Why is this a problem?

First and foremost, unlike your employees, whom you control, you do not control your subcontractors. A PCO or event manager may have numerous subcontractors – AV suppliers, food and beverage suppliers, website designers, entertainers, etc, etc. Why should you be liable for them all?

Second (and some of the regular readers may already have guessed where this is going), such clauses operate, in fact, as indemnities (there is that dreaded word again!). You are really agreeing to indemnify the client for the actions of the subcontractors; ie to be liable for the loss they may cause the client.

Your insurance, of course, almost certainly doesn’t cover you for any liability you have under an indemnity – and of course it does not provide cover for loss caused by your contractors; your insurance only covers you and your employees.
You’d be entitled to ask: If they create such problems, why didn’t evolutionary pressures cause the extinction of such clauses? – Yet prime contract clauses are as common as ever for one good reason. Clients want a one-stop shop. Convenience rules. The client says, I know you will engage subbies but I want to deal only with one party, you!
So what can you do when faced with such a clause? Aside from simply rejecting the clause and hoping the client won’t walk away, the procedure is:

1. Limit your liability as best you can in the contract with the client and ensure that the limitation applies to the prime contractor clause and any indemnity you may be forced to give (kicking and screaming, of course!);
2. Enter into back-to-back contracts with the subbies. That is, ensure that the requirements you have under the head contract are matched by the obligations you impose on the subbies under the subcontracts.
3. Ensure that your subbies all have appropriate insurance.
4. Ensure that your subbies know that you will be liable to the client if they breach the subcontract.
5. Some would say “get an indemnity from the subby” – but that can cause problems of its own, especially if the subby isn’t insured for the indemnity, as is likely.

To one and all in the meetings and events sector – I hope you had a brilliant Christmas, that Santa was extra good to you, and that 2011 is exciting and prosperous!
 

For further details contact Matt Crouch on (02) 8281 7800 or email
mcrouch@bartier.com.au.