Client Engagement Information

Contractual issues- DFID

Risk Management Document

Document status Date Author(s) Security level

[DRAFT] 06 04 2009 R. Sanjeevi/ Thomas John [Internal Use Only]

2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Contractual issues- DFID Risk Management Document

Table of contents
Contractual issues- DFID......................................................................................1 Table of contents.................................................................................................2 Introduction........................................................................................................3 Guidance.............................................................................................................3 Proposed Risk Mitigation Matrix...........................................................................4 Terminologies Explained......................................................................................9

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Introduction
This document identifies contractual as well as business issues that have been raised by the Advisory Legal Team while carrying out DFID assignments and presents a risk mitigation framework. Engagement teams must be aware that the contract includes a number of clauses which are more favourable to funding agencies. Each engagement must be considered on a case by case basis (i.e. each terms of reference issued by DFID) and careful consideration must be given to the risks involved when using the Contract. The aim of the guidance document is to highlight the possible contractual and business risks involved while engaging with DFID and the mitigation steps to be undertaken during the RFP stages as well as during engagements with the client. This guidance covers majority of the issues and does not list all the practical obligations which PwC must comply with. Jurisdiction and Law still remain as issues since the DFID contracts are governed by the Laws of England and Wales and the place of arbitration is London.

Guidance
This matrix should be filled in for every DFID assignment, attached to the documents sent to the Risk Management Coordinator of the particular SBU for approval and then added to the projects map file. By filling up this document, we follow the global practice and at the same time reduce the legal comments.

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Proposed Risk Mitigation Matrix

Contractual risk Risk mitigation proposed by Advisory Risk Management Risk mitigation steps taken specific to the assignment

1 - Limitation of liability: Clause 28.1-Except where there has been misconduct, gross negligence, dishonesty or fraud on behalf of the Consultant or the Consultant's Personnel the Consultant's liability under this Contract shall be limited to the amount of the Financial Limit.
Whilst our liability is generally limited to whatever Financial Limit that is set out in the Contract, PwC would have unlimited liability for misconduct, gross negligence, dishonesty, and fraud. We cannot by law limit our liability for fraud. However, we would usually seek to limit our liability for the other categories. The position is further confused by the fact that gross negligence is not an English civil law concept and we cannot therefore predict how this would be interpreted. It is possible that liability for any negligence could be unlimited. There is also no exclusion of indirect or consequential loss. The firms usual practice is to ensure that all of its liability under a contract is limited and so this is a significant departure from the normal position. The engagement team must ensure that the Financial Limit proposed by DFID is acceptable in the context of our fees and that the nature of the engagement is such that the possible occurrence of one or more of the unlimited areas of risk set out above is minimal. Every team working on a proposed DFID work must ensure that every engagement has to be approved by risk management (via the bid review process) who will assist in assessing whether the level of risk is acceptable.

2 Indemnities Clause 15.1- Except where arising from the negligence of DFID or DFID's employees, the Consultant shall indemnify DFID in respect of any costs or damages howsoever arising out of or related to breach of warranty or representation, contract or statutory duty, or tortious acts or omissions by the Consultant or the Consultant's Personnel or any claims made against DFID by third parties in respect thereof.
We have liability by way of indemnity, i.e. DFID has a contractual right to damages against us it does not have to sue us. The firm does not The only way to prevent the indemnities from taking effect is to ensure that we do not breach the contract, are not negligent and to minimise the risk of third

2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Contractual issues- DFID Risk Management Document

Contractual risk

Risk mitigation proposed by Advisory Risk Management parties taking action against DFID (see also no.3 below).

Risk mitigation steps taken specific to the assignment

usually accept indemnities. The indemnity arises if we are in breach of contract or are negligent or if action is taken against DFID by third parties.

3 - Third party liability

The Contract does not include any restrictions on DFIDs use of our deliverables and it can therefore disclose our work to anyone it chooses. This raises the possibility of third parties relying on our work and claiming against us if they suffer a loss. As stated above, we are also required to indemnify DFID against claims by third parties. Such claims would be unlimited. Careful consideration must be given as to the likelihood of third parties having access to and being able to rely on our deliverables. The use of robust disclaimers on deliverables is essential. Disclaimers will not provide complete protection but are of some assistance. Engagement teams must be satisfied that deliverables will not infringe the rights of third parties.

4 - Intellectual property rights (IPR)/ownership: Clauses 7.1- 7.3 All intellectual property rights in all material (including but not limited to reports, data, designs whether or not electronically stored) produced by the Consultant or the Consultant's Personnel pursuant to the performance of the Services ("the Material") shall be the property of the Consultant. The Consultant hereby grants to DFID a world-wide, non-exclusive, irrevocable, royalty-free licence use all the Material. For the purpose of Clause 7.2, "use" shall mean, without limitation, the reproduction, publication and sub-licence of all the Material and the intellectual property rights therein, including the reproduction and sale of the Material and products incorporating the same for use by any person or for sale or other dealing anywhere in the world.
Whilst we own the work product, DFID has an unlimited, irrevocable licence to use it. This would include a licence to our working papers, drafts, records and any other items we produce. The licence also covers any third party rights and our pre-existing IPR that may be included in the work product. This licence allows DFID to reproduce, publish and sub-licence (without restriction) all these items and also, confusingly, to sell them (even though they don't own them!). Further, the firm is liable for any draft deliverables and oral advice given to DFID and DFID may rely on the content of any of these. If we intend to use important preexisting IPR in a particular engagement, it would be worth seeking additional protection for this. Likewise, for some engagements it may be appropriate to clarify that our working papers and internal documentation would not be licensed to DFID. Such provisions could be set out in the Special Conditions section to the Contract. There is of course no guarantee that DFID would agree to such deviations. To mitigate this risk, the engagement team should: Consider whether it is appropriate to issue draft deliverables and, if so, ensure that drafts are reviewed as though they were final opinions; and Prepare a contemporaneous file note of any oral advice

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Contractual risk

Risk mitigation proposed by Advisory Risk Management provided.

Risk mitigation steps taken specific to the assignment

5 - Confidential information
There is no protection for PwCs confidential information and the usual carve-outs in respect of DFIDs confidential information have not been included. Accordingly, we must treat DFIDs confidential information as confidential even if we had received such information from a third party or if the information was in the public domain. In addition, we have no contractual right to disclose information required by our regulators and it is questionable whether we have the right to disclose information if required to do so by law. The engagement team should take care to ensure that any confidential information obtained during or arising from the Contract is kept confidential. In addition, the engagement team should be aware that the UK Official Secrets Acts 1911 to 1989 apply to them when carrying out work for DFID. Should any request be received from a competent authority to disclose any DFID information, immediate consultation with Risk Management is required.

6 - Access and audit: Clauses 9.1- 9.3 The Consultant shall keep accurate and systematic accounts, files and records ("the Records"). The Records shall clearly identify, among other things, the basis upon which invoices have been calculated and the Consultant shall keep the Records throughout the duration of this Contract and for six years following its termination. The Consultant shall upon request provide DFID or its representatives including the National Audit Office, unrestricted access to the Records in order that the Records may be inspected and copied. The Consultant shall co-operate fully in providing to DFID or its representatives answers to such enquiries as may be made about the Records. Where it is found by DFID that any overpayment has been made to the Consultant the Consultant shall reimburse DFID such amount within 28 days of the date of DFID's written demand.
The Contract permits DFID and its representatives worldwide rights of access to our files and records. The engagement team must ensure that it keeps accurate and systematic accounts, files and records. These records must identify the basis on which invoices have been calculated and must be retained for six years post termination of the Contract.

7 - Sub-contractors: Clauses 5.1, 5.2 The Consultant shall not sub-contract any of its obligations under this Contract without the prior written consent of DFID. If, having obtained DFID's consent, the Consultant sub-contracts any of its obligations, the subcontract shall:(a) provide that payments due to the sub-contractor shall be made not more than 30 days after provision to the Consultant of a valid invoice; and (b) include rights for the Consultant and obligations on the sub-contractor to ensure that DFID's rights to require replacement of personnel (as set out in Clause 4.3) and DFID's rights and the Consultant's obligations as set out in Clauses 6 to 11 (inclusive) can be enforced against the sub-contractor.
Engagement teams must ensure while working with any subThe engagement team should engage with sub-contractors as

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Contractual risk

Risk mitigation proposed by Advisory Risk Management early on in the process as possible to ensure that they are prepared to accept a flow down of the DFID terms. Any sub-contract must ensure that payments to sub-contractors are made within 30 days after provision to us by the subcontractor of a valid invoice, subject only to our being satisfied that the services we contracted for have been delivered on time and to the required quality.

Risk mitigation steps taken specific to the assignment

contractors that they agree to a flow down of the terms of the Contract.

8 - Time of the essence: Clause 5 of Form of Contract Time shall be of the essence as regards the performance by the Consultant of its obligations under this Contract.
The Contract provides that time shall be of the essence as regards the performance of our obligations. This means that DFID may terminate the Contract and seek damages if we are at all late in performing the services. It is important that realistic timescales are agreed in advance and the obligations of both PwC and DFID are clearly set out in the terms of reference and our response thereto (which we believe is contractually binding). It is unlikely that these provisions would apply to services provided by the firm but if this is a possibility please contact OGC. Care should be taken to ensure that expenses are agreed in advance and that, where applicable, our pricing proposal reflects these. The engagement team must ensure that invoices are submitted on a timely basis in order to avoid falling foul of the 90 day rule.

9 - Procurement of equipment: Clause 16 & 17

The Contract includes some unusual provisions relating to the procurement of equipment to be paid for by DFID. The Contract provides that where travel and living expenses for our personnel are incurred, they will be paid at a rate consistent with that payable to DFID staff in comparable situations. Expenses that arise in foreign currency will be reimbursed at the exchange rate stated in the FTs Guide to World Currencies on the Friday immediately preceding the date on which the purchase was made or services acquired. Note that DFID reserves the right not to pay any amount due in respect of an invoice which is received by DFID more than 90 days after the date on which we become entitled to invoice for the payment to which it relates. DFID has wide rights to suspend and terminate the Contract with or without cause including the

10 - Fees and expenses: Clauses 19 & 20

11 - Suspension/termination: Clause 24 & 25

Given that DFID may terminate the Contract for no reason, it is impossible to mitigate this.

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Contractual risk

Risk mitigation proposed by Advisory Risk Management However, if we are likely to incur costs as a result of early termination, the team should consider including these in the pricing section of the proposal with a view to ensuring that DFID will agree to pay such costs if it did terminate the Contract without cause. If the team requires DFID to provide information or assistance, such obligations must be set out in the Terms of Reference or in the Special Conditions. The Form of Contract and the Conditions should not change for each contract (although please refer to OGC if you believe these documents have been amended in any way) but the latter three documents will vary for each engagement. If these documents appear to include any additional contractual terms (e.g. different payment provisions, changes to the liability provisions), they must be sent to OGC for review.

Risk mitigation steps taken specific to the assignment

right to terminate the Contract at any time on notice. We do not have a contractual right to remedy any defective services that we may provide. We have no contractual right to terminate the Contract.

12 - Obligations on DFID
The Contract does not include any obligations on DFID other than the obligation to pay us.

13 Miscellaneous
The Contract is to comprise a number of documents, namely the Form of Contract (a short document which is signed by both parties), the Conditions (referred to above), the terms of reference issued by DFID our response thereto, any Special Conditions and the Schedule of Prices.

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Terminologies Explained
We are trying to explain some of the legal terminologies which are frequently used in our contracts and the impact of the same as explained by our Legal team. What is an indemnity?
An indemnity is a form of contractual protection by which a party (indemnitor) promises to save another party (protected party) from losses arising, or caused, to the protected party due to certain pre-agreed circumstances in the contract. In a contract of indemnity, the protected party is entitled to recover, by demanding from the indemnitor, all damages and costs (including settlement amounts) arising out of such pre-agreed circumstances. An indemnity, therefore, provides a stronger and wider contractual protection to the protected party when compared to the default right of a party to claim damages by initiating legal proceedings. Therefore, PwC India would always seek to resist any indemnity exposures (including third party indemnities) in its contracts. Where PwC India has to finally agree to an indemnity exposure, then it is strongly recommended that such exposure be qualified in the manner as discussed below under the section on Limitation of Liability. Consultations with Risk Management and Law Team would be required in this regard.

How does a third party indemnity clause protect PwC?

The use of a third party indemnity clause, in favour of PwC, provides valuable protection for PwC against claims made by third parties. Typically, PwC would insist on a third party indemnity protection, in addition to liability capping as discussed below (which only protect PwC against claims made by the contracting client), especially in engagements where there is likely to be release of information or deliverables to third parties and/or or if there is no restriction on clients use of PwC information or deliverables and/or or if there is the possibility of third parties relying on our work and claiming against us if they suffer a loss. Risks which a standard third party indemnity clause protect PwC from include direct claims by third parties (costs of defending and any settlement costs or damage awards) and indirect damages/costs - when, for instance we incur costs in helping a client defend themselves in an action by a third party against the client. For this reason the standard third party indemnity seeks to protect us against a wide range of potential types of costs and damages. Any attempts by a client to qualify or remove such standard third party indemnity protection for PwC should be strongly resisted, and discussed with Risk Management and the Law Team.

What is a limitation of liability cap?

A limitation of liability cap is a contractual provision that can restrict the overall amount of damages/costs that a client can recover from PwC. Properly drafted, it is a valuable tool for allocating project risk. Indian contract law recognizes the validity of a liability cap by expressly allowing the parties to a contract to stipulate a pre-agreed sum as the maximum compensation which would be payable if there is a breach. Under PwC India Risk Management Policy, PwC India would typically limit its overall aggregate liability to one time the fees paid under a contract. Any attempt by Client to increase the liability cap should be discussed with Risk Management.

What happens if there are certain exclusions created to our limitation of liability cap?

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Contractual issues- DFID Risk Management Document

If exclusions are created to PwC Indias limitation of liability cap (say, for gross negligence or misconduct, as discussed below), then PwC India would no longer have the protection of the capped liability for such of those specified exclusions. In such an event, if there is a claim relating to the specified exclusion, and the claim is proven, then the court of law or an arbitral tribunal (as applicable) would apply general well contractual principles, which are now well established under a number of judicial pronouncements, for ascertaining the quantum of damages. Any attempt by Client to introduce exclusions to our liability cap, other than what is offered in our standard terms and conditions under PwC India Risk Management Policy, should be discussed with Risk Management and the Law Team. On the issue of damage quantification, it has been held that where a party to a contract is in breach, the damages which an aggrieved party is entitled to falls under two categories, namely, damages such as may fairly and reasonably be considered: i. to arise naturally (i.e. according to the usual course of things) from such a breach of contract (first category); or ii. fto be in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of contract (second category) Under Indian contract law, the default position on damages is they are not to be awarded for any remote or indirect loss or damage sustained by the breach. As regards how remoteness or indirect loss/damage would be interpreted, the test that is generally applied by courts is to see whether the damages claimed flow so naturally, or by express declaration, from the terms of the contract that they can be said to be the result of the breach. This generally resolves itself into the second bullet point above, namely whether the damages flowing from a breach of contract were such as must have been contemplated by the parties as the possible result of the breach. Given the above, it is extremely important to ensure that an exclusion of liability clause expressly excludes liability for indirect and consequential damages. Such exclusions assumes even greater significance in those contracts where PwC India has to finally agree to an indemnity exposure since, unlike damages, an indemnity clause would not, by default, be subject to indirect loss/damage exclusion. Hence, it becomes imperative to mitigate indemnity risk by insisting on an overriding express exclusion for indirect/consequential damages. To the extent possible, as a negotiating point, we should also try to further qualify our indemnity exposure by making them subject to final judicial determination in the contract. Assistance from the Law Team should be taken in drafting such qualifications.

Gross Negligence exclusion to the limitation of liability cap?

In general, gross negligence generally refers to any conduct that evinces a reckless breach of a duty of care and/or a blatant disregard or for the rights of others and/or smacks of intentional wrongdoing. Indian civil law jurisprudence is based on the British common law system, and the position on gross negligence in India is broadly similar to the UK position on this point. As in the UK, gross negligence does not exist as a distinct legal concept under the civil laws of India and is likely to be interpreted as ordinary negligence under the Indian legal system. Ordinary negligence is a relatively low proof hurdle; it cannot therefore be predicted how a gross negligence exclusion would be interpreted by a court of law or arbitral tribunal. Hence, PwC India would always seek to resist a gross negligence exclusion to the liability cap.

Misconduct exclusion to the limitation of liability cap?

PwC India would always seek to resist a misconduct exclusion since the term is generally susceptible to subjective and vague interpretations. Depending on the risk perception regarding the engagement and client, at times when clients insist on such exclusion, intentional misconduct may be considered, in consultation with Risk Management and the law team, in view of the higher standards of proof associated with establishing "intention. However, any such decision would require the prior approval of SBU Leadership.

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