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Contingent Liability

Volume 637: debated on Tuesday 6 March 2018

I am pleased to inform the House that I am today laying a departmental minute to advise that the Ministry of Defence (MOD) has received approval in principle from Her Majesty’s Treasury (HMT) to recognise new contingent liabilities associated with the Astute boat 7 “whole boat” contract. Negotiations are ongoing and the contingent liabilities will come into force on signature of the contract.

The departmental minute describes the contingent liability that the MOD will hold as a result of placing the Astute boat 7 “whole boat” contract, which will provide for the production and testing of the vessel. The maximum contingent liability against the MOD is unquantifiable and will remain until the out of service date of the submarine.

It is usual to allow a period of 14 sitting days prior to accepting a contingent liability, to provide Members of Parliament an opportunity to raise any objections.

Within the boat 7 contract, BAE Systems Marine Ltd limit their exposure to product liability to £1 billion per incident and £300 million in any 12-month period. This limits the contractor’s exposure for claims by the MOD for losses associated with the product being defective or deficient, and creates an exposure for MOD to third party claims against the contractor for losses associated with the product being defective or deficient. It is the view of the Department that the likelihood of any claim is remote.

The boat 7 contract also includes a narrative Shipbuilders Risks Indemnity (SRI) condition rather than Defence Condition (DEFCON) 663 which would provide a standard form of SRI.