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Highways and outsourcing – planning ahead and avoiding the pitfalls

John Palmer offers guidance to local authorities on protecting their position when outsourcing key services.

The value of outsourcing contracts signed by UK local authorities in the first half of 2016 increased by 84% to £685m despite a dip in the value of overall public sector spend.

Highway inspections, maintenance and repair

Outsourcing can occur in a variety of services and is commonly used in the context of highway maintenance and repair, including winter maintenance activities.  It can involve the contracting out of systems for highway inspections, repairs and maintenance, or all of these.  Significant savings and improvements in efficiency can be made.  However, what may have seemed a sensible outsourcing of services can, when things go wrong, lead to strained relationships, protracted claims and expensive litigation. 

It must be remembered that in the context of highway issues, even with the most well drafted contractual arrangements in place, the local authority will usually be sued directly by an injured claimant due to the non-delegable duty placed on it under the Highways Act 1980. 

It is extremely important to ensure that appropriate and effective arrangements and agreements are in place, so that not only is it possible to deal with claims which arise in a timely manner, but also that appropriate claims for indemnity or contribution can be pursued. 

So how can a local authority ensure its position is protected when outsourcing arrangements may not go as planned? 

Contractual arrangements

Outsourcing may be put in place by a contract with an independent specialist contractor, but can also include the transfer of existing council staff to a new organisation who, largely, continue in the same roles.  It is essential that contractual documentation includes a well drafted indemnity clause to protect the local authority against the negligence of the contractor if damage arises.  The contract must also include detailed specifications which outline how the service is to operate on a practical level.  Standard terms and conditions exist and frequently, the NEC 3 Standard Conditions of Contract or the ICE Conditions are used.  However, these must be carefully reviewed before any agreement is finalised to ensure that adequate protection is provided. 

A claims handling agreement can be extremely useful when issues arise and this should be dealt with at the pre-contract stage.  Likewise, early input from an insurance/claims officer is important to ensure that provision is made to ensure that the Pre-action Protocols can be adhered to.   It can prove challenging to ensure that the right people are involved in the early stages of negotiations, particularly when parties are keen to reach agreement and put arrangements in place swiftly.   Lawyers are likely to be involved in drafting the contract, but are insurance and claims specialists also involved?  It is important that insurance officers are consulted at this early stage. 

Claims: a consistent approach

Outsourcing frequently occurs for significant periods; three or five years and sometimes longer, is common.  Even when claims arise, it will be necessary for the parties to continue working together in an ongoing commercial relationship, which can prove difficult if communications on a particular case become aggressive or frustrated.  It is important that claims are dealt with consistently as this can help relationships remain amicable.  A detailed claims handling agreement will ensure that each party knows from the outset what is required and the timescales involved. 

Sometimes, no matter how robust the documentation is, there remains a difference of opinion on a particular case.  Claims management meetings provide an opportunity for views to be exchanged which can prove helpful. If agreement cannot be reached, the local authority will still have to deal with the claim made. 

At this point, a difficult and complex tactical problem can arise:

  • Should the local authority, if it considers a claimant's claim to be a good one, settle the claim and then seek recovery from the contractor by way of separate recovery proceedings? 

  • Or, should the local authority defend the claimant's claim to trial, and if the claimant wins, then seek separate recovery proceedings (subject, of course, to the findings made by the trial judge - if the Court is critical of system or policy failings rather than operational failings, it is unlikely that a recovery will be possible).

  • Alternatively, the local authority may consider joining the contractor to any proceedings issued by the claimant if, as frequently occurs, the claimant fails to sue the contractor directly as a co-defendant.  In these circumstances, third party proceedings must be issued by the local authority, which will then involve complex multi-party litigation. 

The issues can be finely balanced.  Generally, it would not be appropriate to join a contractor to proceedings in a lower value claim.  If the sums involved are considerable, then third party proceedings may be appropriate and proportionate.  Cases are often fact sensitive and many factors must be taken into account before a decision can be made.

It is usually best to have all issues dealt with, if possible, at one hearing, when all relevant witnesses are available and can be questioned.  A consistent approach is the key.

Insurance

It is important that appointed contractors have appropriate insurance in place.  This will usually be provided for within the contract itself.  However, local authorities should obtain copies of the relevant insurance certificates from the contractor and ensure that they remain up to date. Local authorities will then be able to correspond with the insurers directly in appropriate circumstances should a claim arise.  The Third Parties (Rights Against Insurers) Act 2010 now makes proceeding directly against any insurer more straightforward if, as can happen, the contractor becomes insolvent, leaving the local authority liable for any judgment obtained by the injured claimant. 

Summary

  • When handled correctly and with careful planning and preparation, outsourcing can lead to significant savings.

  • Contractors should be given early notification of any potential claim and contractual documents must be robust.

  • Pre-contract involvement of insurance officers and specialist claims lawyers is essential. 

Contact

For further information please contact John Palmer on 020 7645 9576 or john.palmer@dwf.law

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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