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Contingent Liability

Volume 624: debated on Thursday 20 April 2017

I have retrospectively laid before Parliament a Ministry of Defence (MOD) departmental minute describing the contingent liabilities within the Astute boat 5 and 6 whole boat contracts with BAE Systems Marine Ltd.

The departmental minute describes the contingent liability that the MOD will hold as a result of placing the Astute boats 5 and 6 whole boat contracts, which will provide production, test and commissioning of the fifth and sixth Astute class submarines, HMS Anson and HMS Agamemnon. The maximum contingent liability against the MOD is unquantifiable and will remain until the respective 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. I apologise, but on this occasion, it was not possible to do so.

For boat 6 the Department was faced with exceptional sequencing from the completion of difficult negotiations. The Department faced the prospect of losing the deal and its associated £110 million savings, due to new changes to single source contract regulations introduced on 1 April 2017. As such the Secretary of State for Defence decided to proceed with the agreement, following scrutiny of the contract by the Department’s investment approvals committee which confirmed that the contract offered best value for money for the taxpayer, and subsequent approval by HM Treasury.

As a result of detailed work in connection with the boat 6 contract it has been recognised that contingent liabilities arising from the boat 5 contract, which has hitherto been considered not to require notification to Parliament, are in fact the same as those for boat 6 and should therefore have been notified, notwithstanding the fact that that no credible scenario has been identified in which a claim could exceed contractual limits.

Within both the boat 5 and 6 contracts, BAE Systems Marine Ltd limited 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 the MOD for 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.