Risk management process for limiting a contractor's liability

The risk management process for limiting a contractor's liability is the method federal contracting officials use to decide whether a contract should limit what a contractor can be held responsible for, and if so, how. The term comes from the Public Services and Procurement Canada (PSPC) Supply Manual, where it sits under the heading "Risk management" in section 3.195.5.1 of Chapter 3.

The Supply Manual defines limitation of liability as establishing, by contract, a predetermined financial cap that limits the contractor's responsibility. The process is how a department reaches that decision: it identifies the risks, weighs the techniques available to manage them, applies the ones it selects, and checks the results. The Supply Manual is now marked as archived, but the same approach appears in current CanadaBuys buyer guidance.

The five steps in the Supply Manual process

The Supply Manual describes the process as a sequence of five activities:

• risk identification and analysis;
• examination of risk-management techniques;
• selection of the appropriate technique or techniques;
• implementation of the selected techniques; and
• monitoring of the results.

The CanadaBuys liability and risk management guidance describes risk management in the same terms: identify and analyse risks, examine and select techniques, implement them, and monitor outcomes.

Limitation of liability, indemnification and risk transference

Several related concepts sit around this process, and each has a distinct meaning in federal guidance.

• Limitation of liability is a predetermined contractual financial cap on the contractor's responsibility.
• Indemnification is a contractual requirement for the contractor to compensate Canada for specified losses.
• Risk transference means allocating the risk of loss, or the obligation to control loss, to the contractor through contract conditions. CanadaBuys identifies indemnification as a notable form of transference.
• First-party liability covers losses suffered by Canada, while third-party liability covers losses suffered by anyone other than Canada.

The Supply Manual also points users to section 4.70.90 for additional guidance on limitation of liability.

The Treasury Board Directive behind the process

The process is tied to the Treasury Board Directive on the Management of Procurement, which sets requirements and mandatory procedures for limiting contractor liability and indemnification. The Directive requires contracting authorities and business owners to use risk-based decision-making when they decide how liability should be allocated.

It also calls for standard legal language stating that each party is responsible for the risks under its control and accepts responsibility for risks it can manage or mitigate. The Directive provides for predetermined clauses, risk assessments and financial caps in applicable commodity groupings. Shared Services Canada is named as a department that may use approved commodity groupings, predetermined clauses, risk assessments and financial caps without separate Treasury Board approval, as long as the approved terms are not changed.

Where the process shows up in federal contracts

The risk assessment behind these decisions is used to identify risks and mitigation strategies and to determine the Government of Canada's exposure when it enters contracts, as described in a PSPC internal audit report.

The resulting clauses are visible in standard supply documents. PSPC's ProServices supply arrangement includes provisions on the contractor's liability for losses and damages, total contractor liability, first-party liability, and liability connected with damage to government records or data.

Contracts with a limitation of expenditure are another example. CanadaBuys guidance on choosing a method of supply states that clauses may be needed to limit Canada's total liability under the contract, and that the contract's total estimated cost must correspond to the stipulated limitation of expenditure.

What it means for a supplier bidding on Canadian public contracts

The decisions and approvals in this process belong to the contracting authority, the business owner and the approval authorities, not to the supplier. The outcome, however, lands in your solicitation and contract. Before bidding, read the liability, indemnification, risk-control, reporting and financial-cap provisions closely, and understand any cap, exclusions, indemnities and liability categories.

If the contract allocates a risk to you, you accept responsibility for it. That means performing the work in a way that avoids losses the contract makes you answerable for, and managing, monitoring and reporting losses where the contract requires it. The exact obligations depend on the clauses selected through the government's risk assessment for that solicitation.