Avoid signing up to problems

Ana Paula Nacif explores how commercial brokers can help SMEs avoid becoming entangled in common contractual difficulties with their clients

While many large companies have dedicated legal teams that ensure contracts are tightly drafted and revised as necessary during projects, small and medium enterprises (SMEs) often fall foul of common contractual pitfalls, which can result in more claims being made against them.
To help tackle this issue, Hiscox has partnered with law firm DLA Piper to produce a risk management toolkit addressing the most frequent contractual traps. Although Hiscox cannot provide specific legal advice, the toolkit will put SMEs in a much better position – giving them greater knowledge of problem areas they may not have previously considered – when negotiating contracts and running projects with their clients.  
According to Alan Thomas, Hiscox’s UK Head of Technology, Media and Telecoms, at least 49% of all professional indemnity claims paid to IT firms in the past five years involved some sort of breach of contract brought by the insured’s client. He explains: “A common problem when SMEs are carrying out work for larger clients is that the client insists that the SME agrees to their standard, and potentially unfavourable, terms and conditions.”
Brokers should be aware of these common issues and point out potential problems to their SME clients. “Brokers should avoid giving actual legal advice on contracts unless they are qualified to do so,” Alan emphasises, “but they should be able to spot a contract that puts the insured in a potentially worse position than would have been the case in the absence of the contract.”

Every last detail
Alan explains that many claims arise when the contract is not specific enough, giving the SME’s customers room to challenge. “For example, the client may insist on broad indemnities that allow them unlimited rights of recovery in the event of a breach of contract,” he says. “To benefit fully from their professional indemnity cover, the insured needs to be careful not to extend their liability beyond that which the policy allows.”
Ian Birdsey, Technology and Media Claims Manager at Hiscox, adds: “In a typical IT claim, for example, the supplier will be working to deliver a project when the client unreasonably demands additional scope – outside the original specification of the contract – in the name of performance bugs or defects. Rather than flag this, IT suppliers commonly try to placate difficult customers by agreeing to deliver more for less, but without extending key delivery dates.
“If the contract has a ‘time is of the essence’ clause,” Ian continues, “the customer could make a claim against the SME for late delivery or non-performance, even if it was due to the extra work and scope. That’s why the contract should be clear about what is being delivered, making the client stick to the agreed specifications.”