Review your contract: indemnities

An indemnity is a promise to pay A’s losses if a trigger event occurs [read more]. But how do they pass risk on construction projects?

Managing risk

If someone else fails to spot your defective work, does it reduce the amount of your indemnity? No.

  • Greenwich Millennium v Essex Services – an indemnity allowed a sub-sub-contractor to claim all its losses from its supplier, who was in breach, even though the sub-sub-contractor was negligent in not inspecting its works or spotting the defect.

If the losses are not linked to carrying out the works, can A still claim? Yes, if the clause is wide enough to cover losses in connection with those works.

  • Campbell v Conoco – cross-indemnities provided that the contractor and its subcontractor would indemnify and hold harmless each other (although not in identical terms). An employee of the subcontractor was injured due to an event which was not “as a result of or arising out of or in connection with the performance or non-performance of the Contract regardless of the cause or reason therefor and regardless of the negligence or breach of statutory duty of the subcontractor and against all costs, charges, expenses, damages and proceedings incurred in connection with such claims or liabilities howsoever arising.

If the losses are caused by A’s negligence, can A still claim? Only if the indemnity includes clear words to that effect

  • Stent v Gleeson – the subcontractor’s crane was damaged by negligent operation of the contractor’s tower crane. The works indemnity said “The subcontractor shall be responsible for and indemnify the contractor against any claims in respect of plant or tools of the subcontractor or his workmen which may be lost or damaged by fire or any other cause“. The court held ‘any other cause’ was not clear enough to cover the contractor’s own negligence.

Clear drafting

In Stent v Gleeson HHJ Bowsher made it clear that he expected lawyers to draft indemnities clearly:

In all projects, the allocation of the risks of negligence and the duty to insure against those risks is a matter to be considered. Clear allocation of risk may reduce the likelihood of litigation or arbitration. The decisions of the courts, including this decision, should not be read as being opposed to such allocation of risk. All that is being decided in this case, as in others, is that the parties should be clear and explicit in their contracts so that parties start a project with clear knowledge as to where the risks lie rather than disputing the allocation of risk when the project goes awry. There is so much guidance in the decided cases on this topic that it would be easy for any lawyer for a contracting party to draft clear words excluding liability, if that is what his client wants, and the other party could then decide with informed consent whether he wants to accept that exclusion.

What should you do?

If you come across indemnities then as they are one of my showstopper clauses [read more], treat them with extreme caution. They can be the nuclear option!

Cases: Greenwich Millennium Village Ltd v Essex Services Group plc and Others [2014] EWCA CIV 960; Campbell v Conoco (UK) Ltd & Ors [2002] EWCA Civ 704; Stent Foundations Ltd v MJ Gleeson Group Plc [2000] EWHC TCC 66

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