Contractual risk management in the spotlight at FIDIC webinar

19 Apr 2022

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The latest event in FIDIC’s ongoing webinar series on 19 April 2022 looked at the always-topical issue of “Essential requirements for managing contractual risk”. Speakers at the event, organised by the FIDIC Risk, Liability and Quality Committee, included leading risk contractual and insurance experts and gave a comprehensive overview of how to improve the management of contractual risk.

An excellent turnout of 448 industry professionals attended the webinar, which was chaired by FIDIC CEO Dr Nelson Ogunshakin. The speakers panel included Nora Fung, senior counsel, legal group at Arup (UK), Michael Earp, architects & engineers practice leader at Aon (USA), Nicole Geoghegan, ex-general counsel for High Speed Two (HS2) Limited (UK), Daduna Kokhreidze, FIDIC general counsel (Switzerland), Nicola Grayson, CEO of Consult Australia (Australia) and Chloe Halloran, associate at Slaughter and May (UK). The panel was joined by FIDIC president Tony Barry (Australia) and FIDIC vice president, Luis Villarroya Alonso (Spain).

Introducing the webinar, FIDIC president Tony Barry said that the development of bespoke contracts over time had created a number of challenges for consultancy firms in the engineering and construction sector and he was looking forward to the webinar informing FIDIC’s activities and advocacy efforts in the contracts and risk management sphere. The issues under discussion were crucial, he said, and an eminent panel of experts had been assembled to address them.

Collaboration needed to address key issues

Nora Fung, senior counsel, legal group at Arup, highlighted the importance of introducing good contractual governance, especially in the light of big changes in the professional indemnity insurance (PI) market. “How consultants exercise the management of contractual risk is crucial and care needs to be taken around the issue of indemnities,” said Fung. Referring to recent FIDIC briefing notes that had been published on the issues under discussion, she said that these were for the benefit of consultants as well as clients. Fung highlighted the use of financial caps on liability but also said that exclusions and limitations on caps were becoming increasingly commonplace and consultants needed to be aware of these developments in order not to expose themselves to uninsured risks. “The contractual framework remains challenging, but I sincerely hope that we can discuss the issues as an industry in a collaborative manner,” she said.

Michael Earp, architects & engineers practice leader at Aon, said that there had been a ‘soft’ insurance market for nearly a decade up until three years ago, but since then rates were going up in order to reflect the higher cost of insurance in a hardening market. “As a result, risks are being pushed down to architects and engineers (and contractors),” said Earp. This meant that professionals needed to be extra careful to ensure that their insurance cover reflected their exposure to avoid problems, he said. “Insurance applies differently in different countries so don’t assume that it will apply in the same way everywhere. Above all, speak to your insurance advisor,” Earp said.

Nicole Geoghegan, ex-general counsel for High Speed Two (HS2), said that this was all about effective and efficient risk management and these points were linked. “Context is everything and in the case of HS2 we had an insurance policy that covered all of the project and its supply chain,” she said. From a client perspective, Geoghegan said that HS2 were happy to have caps on consultants’ liability as it understood its responsibilities to the industry. “However, it was also the case that there were areas that would not be capped, such as insurance recovery, and it’s important for consultants to understand what these are,” she said. Geoghegan said that clients wanted to know that their project outcomes could be achieved and that consultants needed to be aware of the different parties that have influence on said outcomes and the contingent liabilities and risk that flow from that. “Know what you don’t know and go and get inputs from people who know about these issues – go into things with your eyes open” she said.

Fair and balanced risk crucial to better project outcomes

FIDIC general counsel Daduna Kokhreidze said that it was always important to look at how local governing laws and jurisdictions would influence how a contract is applied. FIDIC contracts provided a key benefit in this regard as they have been developed over many years by international experts to be used across different territories for the benefit of all parties to a contract. “It is important to set internationally acceptable standards across the industry and FIDIC contracts do just that and are widely used as a result,” said Kokhreidze. She also highlighted the need for fair and balanced risk allocation as this was crucial to the best outcomes on projects.

Nicola Grayson, CEO of Consult Australia, urged FIDIC member associations to use the FIDIC guides and to build on them as they are applied to individual jurisdictions. “I can provide these guides to members and say that they are backed by our international federation which is very useful as they can also help in our advocacy with client bodies as they give strength to our arguments and lobbying positions,” she said. As always, it was crucial to look at the content of the contract and be clear about its obligations, Grayson said, who also highlight what she saw as a growing trend for clients to misunderstand the precise role of consultants as opposed to contractors, which people needed to be aware of. Grayson also made the point that the FIDIC guidance notes in no way absolved consultants from being professional and clients could be confident that designers would “stand by their work” but they could not warrant the delivery of aspects where others were responsible. “We need to create a collaborative environment where risks are shared and a move away from a siloed approach that leads to claims and disputes,” Grayson said.

Educate clients and exercise vigilence

Chloe Halloran, associate at Slaughter and May, said that establishing the balance of risk had be “particularly tricky” over the last nine months as a result of Covid and other issues. Halloran helpfully detailed the varied approaches to risk adopted by different employers in the industry, which included established clients with a detailed knowledge of the industry, one-off clients who might be less experienced or who take a different view on risk and liability issues and lenders standing behind clients in a project finance scenario. “It’s really important to educate the client as much as you can, use your project team to do so and to get as much clarification as you can before you sign on the dotted line,” Halloran said.

Speaking at the end of the webinar, FIDIC vice president, Luis Villarroya Alonso, said that the discussion and questions had shown that FIDIC was right to highlight contractual risk management at the webinar. Recent events like the pandemic and the supply chain issues caused by the war in Ukraine have raised more contract and insurance challenges, he said, meaning that consultants needed to be even more vigilant going forward. He also praised FIDIC’s Risk, Liability and Quality Committee for the great work they were doing in producing guidance notes to assist the industry on a range of key issues.

Summing up the event, FIDIC president Tony Barry thanked all the panellists and said that FIDIC would continue to work hard on effective and efficient risk management issues, but this had to be fair and reasonable for all parties.

The next FIDIC webinar, which is organised by FIDIC’s Contracts Committee and entitled “Greening FIDIC's rainbow contract suite – let’s do it!” will look at integrating net zero clauses and embedding sustainable performance criteria in the FIDIC rainbow contract suites for works and services.

Click here for full details and to book a free place at this webinar.

Full webinar recording is available below.

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