The liability and payment problems that keep industry leaders awake at night

Is limiting the amount of exposure a company faces when a claim is made becoming more difficult to agree? How are third party requirements affecting such terms and what can be done to solve the industry-wide problem of late payments?

These are all questions that the latest Association of Consultancy and Engineering Liability and Payment Issues group attempted to answer during a recent roundtable event, hosted by law firm Beale & Co in their Aldgate East offices.

Chatham House rules were in place, so this report will only give a flavour of the topics put under the spotlight during the main debate but a full list of the participants who took part are posted at the bottom of the article. 

The roundtable started by acknowledging that a big part of the problem regarding liability is what limit do you set and what is agreeable. The common view around the table was that in contract negotiations it tends to be the last thing both parties sort out. It was reminded to everyone in the room that the ACE default position is ten times the fee and depending on what services a firm is offering then this didn’t seem to be unreasonable. 

“It’s very difficult for a client to set a limit of liability without having a conversation with the supply chain, one industry boss said. “But it seems to be from what we are experiencing that it’s not protocol for its inclusion in the contract so you have to spot its exclusion.”

Worryingly, in the public sector, it was noted that just two contracts in the last two years during the procurement process had allowed some form of negotiation, with the vast majority restricted and allowing for very limited room to negotiate terms. It was summarised by one participant who said the public sector are issuing contracts with unlimited liability on basically “a take or leave it basis”.

"Despite not knowing or reading about agreements in contracts there are times when we have had to sign up to them and take them on as if they are our own and this brings massive risk."
Roundtable participant.

Another of the attendees discussed how he sits on a contracts working group who are currently undertaking a review of liabilities and by next March will produce a risk matrix on how to set levels. “The starting point will be that there must be a limit, that’ll be the first step, a lot also below that but there will be a limit which is important,” the participant said.

It was also claimed that most bespoke contracts don’t have limited liability wording, with many trying to carve-out - a specific exception – and the favourite being intellectual property. Together with the fact that the intellectual property law (IPR) definition is so wide, it means knowing what a consultant is liable for is challenging, the roundtable heard.

“The problem lies squarely with the definition, if it was limited to the consultant’s design then that would be one thing but its not, its trademarks, logos, domain names, it’s such a wide scope,” it was said. “When we are specifying products, it’s really not for us to investigate whether the manufacturer of that product has the requisite patent in place.”

Another factor brought to the attention of the room was the management and implications of third party agreements contained within appointments and the “massive risk” involved. 

“Despite not knowing or reading about agreements in contracts there are times when we have had to sign up to them and take them on as if they are our own and this brings massive risk. It’s something we are really worried about it and tried really hard to bring them back under control. It’s a bit of a battle at the moment as not many people are prepared to listen.”

With nearly a quarter of UK businesses reporting that late payments are a threat to their survival, the focus of the discussion concentrated on what measures that can be implemented to stem late payments which have led to the decline and demise of many firms across the country.

The second part of the discussion was opened by a real-life client situation that emphasised the vital importance of having agreed upon limits that were adhered to.

Speaking to the room, a participant said: “We have a client that pays on 90 days, now this client gives us a programme of work and at day 90 rest assured it’s there so once you’ve going through the initial pain, you know it’s there. So, the commercial aspect is that it’s a good client and it’s an agreed upon time so you just have to get over the initial hump.”

But it was agreed by the room that the two issues at the crux of the issue were setting payment terms and then having the terms stuck to. It was noted within the discussion by one director that three or four contractors employed by his firm had been threatened with legal action due to repeated negligence of paying on time.

However, the threat of legal action or a suspension notice was highlighted as being potentially detrimental to companies, particularly smaller firms who know they can’t threaten the loss of work from a client moving forward or cannot afford the time/expenses associated with taking such action.

“Although there is a lot of us about, it’s a very small industry, extremely small, so it’s very rare we will go down that road,” one company’s boss told the roundtable.

The use of electronic payments across the field as a mandatory requirement was also mentioned. Major UK clients were spoken of that still refuse to pay via the method and insist on paying by cheque.

“There’s no reason why everything shouldn’t be electronic,” one director told the room. “Not only is it more traceable but it adds to delays. I had a letter from a major UK housebuilder last summer that said they are going fully electronic but it is still yet to happen. 

As the room continued to deliberate over solutions, one of the biggest differences discussed that could be implemented to curb late payments was the idea of automatic interest being charged, regardless if it was the mistake of one person in the chain.

One roundtable participant said: “For me, it comes down to how can we actually incentivise firms to pay on time? Whether it’s payment in five, 30, or 45 days, it doesn’t matter, it’s about sticking to the agreed upon contract.”

But it was argued that real action was needed as despite acknowledging the need for change, it was only the start of the year that saw the fall of the former construction giant.

“We have seen these things like prompt payment and other versions but fundamentally they have not changed much,” a member stated. 

“You are not going to change anything until you change the house contract,” one participant claimed. “Until collectively it becomes normal to charge interest and issue suspension notices. So actually you are not the exception, you are the rule so the paymasters out there can’t discriminate against you.”

Roundtable participants:

• Andrew Croft, senior associate, Beale & Co
• Kevin Crawford, vice president technical, Chartered Institute of Architectural Technologists
• Diane Dale, practice and technical director, Chartered Institute of Architectural Technologists
• Indu Ramaswamy, director at Allies and Morrison and is also a member of RIBA Insurance Agency Board
• Nick Hopcraft, chair Procurement and Delivery Panel, CIHT 
• Ian Wright, Network Rail 
• Rowan Crowley, MD CIBSE Services

ACE members: 

• Mark Hurst, GHD 
• Tim Findlay, Hoare Lea 
• Philip Glowinski, TGZ Partnership 
• Neil Sandberg, Sandberg