6.3. Contingent liabilities and liability caps

Contingent liabilities are commitments that may give rise to a cost as a result of a future event. The PGPA Act section 60 applies to indemnities that create contingent liabilities. Typical liabilities are:

• An indemnity is a legally binding promise whereby the Commonwealth undertakes to accept the risk of loss or damage another party may suffer.

• A guarantee is a promise whereby the Commonwealth assumes responsibility for the debt, or performance obligations of, another party on default of its obligations.

• A warranty is a promise whereby the Commonwealth provides certain assurances to the other party to an arrangement.

Where an arrangement doesn't explicitly allocate liability, this may be determined at general law. To create certainty, a liability regime may be agreed and set out in a contract. This allocation of risk between parties on the occurrence of a future event creates contingent liabilities.

In some instances, your contract may include a liability cap. A liability cap does not necessarily create a contingent liability. A liability cap should be treated as an indemnity involving a contingent liability, if:

- it involves limiting a supplier's contingent liability to a third party so the Commonwealth is liable to the third party for any excess above that cap or

- limiting a supplier's exposure for damage the supplier has suffered itself, so the Commonwealth is liable to the supplier for any excess.

This is a complex area of law and you should always seek legal advice.