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A clause in a contract under which a contractor agrees to indemnify the
purchaser against some liability, or accepts a risk which would otherwise
fall upon the purchaser, is only as valuable as the contractor's ability
to meet a claim. Many purchasers overlook this. They include wide-ranging
indemnity clauses in their contracts without considering whether or not
the contractor has the financial muscle to support the indemnity.
Many contractors, especially those in the services sector or undertaking
minor construction works, have little or nothing in the way of capital
assets and their nominal share capital is low. If they were made liable
for a substantial claim the result would be insolvency. Unless the purchaser
insists that the contractor is adequately covered by insurance throughout
the period under which a claim is likely to occur, it has taken the risk
itself despite the fine wording in the contract.
The risks against which the purchaser may need the contractor to be insured
fall into four categories:
- loss or damage to the purchaser's goods while they are in the possession
of the contractor;
- loss or damage to the purchaser's goods while they are in transit;
- injury to persons or damage to property while the contractor is working
on the purchaser's premises;
- loss to the purchaser caused by the failure of a consultant to exercise
due skill and care.
Purchaser's goods in contractor's possession
The purchaser's goods may be in the contractor's possession because they
have been sent for repair or overhaul. It is essential for the purchaser
either to insure the goods while they are in the carrier or the contractor's
possession, or to require the contractor to do so and provide evidence
to this effect.
Alternatively the contractor may have manufactured the goods and their
ownership has passed to the purchaser prior to delivery. This happens
if the purchaser has been notified that they are ready for collection,
unless the contract specifically provides otherwise.
Contractors will usually have insurance cover for their own goods but
not necessarily those belonging to other people. Purchasers need to satisfy
themselves that contractors have the necessary insurance cover for goods
in their possession but which are the property of others.
Covering goods in transit from the contractor
It is usual for sellers to provide in their conditions of sale that delivery
of goods to an independent carrier for delivery to the purchaser is treated
as delivery of goods to the purchaser. This is the presumption under section
32 of the Sale of Goods Act 1979, provided that the seller has made a
reasonable contract of carriage which would include insuring the goods
in accordance with the custom of the trade. The effect will be, if either
the seller's conditions or the Sale of Goods Act applies, that the ownership
of the goods and risk of loss or damage will pass to the purchaser on
delivery to the carrier.
In either case the purchaser should ensure that the goods are properly
insured during transit and not rely on s32 (2) of the Sale of Goods Act
that the seller has made a reasonable contract of carriage. It may have
done so but, if the carrier defaults in its obligations, the buyer may
have to bear the loss.
Covering injury to persons or property damage
Once a contractor enters the purchaser's site to work, people may be injured
or property damaged. The contract should contain clauses under which the
contractor indemnifies the purchaser against these risks possibly subject
to a limit of liability with a small firm and which should be backed by
insurance. The contractor should also be liable for damage to any works
it is constructing caused by its default. This liability must also be
supported by insurance. Four points apply in relation to a contractor's
normal insurance policies:
- they basically end when the works are completed;
- they cover damage during the defects liability period caused by the
contractor on site to remedy a defect or due to a defect arising before
the start of that period;
- they only cover the damage caused by the defective work or materials
to other parts of the works and not to the repair of the defect itself;
- they usually exclude indirect or consequential losses.
Professional indemnity insurance
When engaging any engineering or management consultant, the purchaser
should consider whether to insist on professional indemnity insurance
against legal liabilities. It is expensive and policies are on an annual
basis. As a defect may not manifest itself for several years there can
be no guarantee that the policy will still be in force when it is needed.
Purchasers should use their discretion when asking for professional indemnity
insurance. It is sensible if a large firm of consultants is employed to
design a structure, where there are obvious risks, but may be unnecessary
if a small firm is being asked to conduct a training course.
Checking policies asked for in the contract
With all insurance requirements it is not sufficient to merely include
them in the contract. A check must be made to ensure they have been complied
with and the premiums paid. Probably the most effective way of doing this,
especially with firms that have blanket insurance policies, is to require
a certificate from their insurers or brokers that the firm does have a
policy in force which meets their contractual obligations.
SM
Peter Marsh and Frank Griffiths are associates at project strategy and
contract management consultancy FGA Ltd, tel: 0116 279 3383
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