Parties to construction contracts always look at risk when negotiating them, including the risks of incorrect design, mistakes or damage and the consequences of those risks if things do not go according to plan. But do they give enough thought to the full significance of what they are promising to do if they give indemnities?
Scott McKinnell considers this important question.
A famous Corsican general come Emperor once said that the best way to keep a promise was not to make it in the first place.
An indemnity at its most basic level is a promise - a form of protection or security against damage or loss sustained where one party promises to cover another party's losses if a triggering event occurs.
Indemnities are widespread in the construction industry, occur in many of the standard forms that are used, crop up in many of the amendments to them and are often given without the parties to a contract necessarily appreciating what they are promising or letting themselves in for should anything go wrong, particularly when a party may be pushing out all the stops to win work and make its prices and tender as competitive as possible.
An indemnity is a promise to pay. Let's take Alain (A) and Bertrand (B) as examples.
So long as the wording allows, if B agrees to indemnify A against a certain event then A's claim against B will be a debt claim as opposed to a breach of contract. Practically what this means is that A's recovery for losses caused by any future works may not be limited by the rules of remoteness of damage and mitigation of loss as a normal claim for breach of contract would be. A may be entitled to all losses arising from the damage caused and not just those that were reasonably foreseeable.
B's liability under an indemnity may also be open-ended. Unless expressly limited A can make a claim under the indemnity whenever the future damage occurs, be it 5, 10 or 50 years after the indemnity was signed. This is because the cause of action under an indemnity arises when the loss to be indemnified against is established or incurred. It is from this point that the normal rules concerning limitation of actions starts to run. As such, A will have 6 years within which to bring its claim for the damage covered under the indemnity if executed as a simple contract or 12 years if executed as a deed.
Whilst the case law is mostly very old and there is some debate as to when exactly limitation for the cause of action starts to run (is it from the date of the damage to be indemnified against or from the date of the loss to A) what is clear is that this could be a lot later than after the expiry of the ordinary limitation period for breach of contract. Depending on the drafting, A could recover its future losses from B whenever they have occurred.
B may also discover that he is not insured for all of the losses arising out of the indemnity that he has given because his insurance policies may not cover such wide ranging or long lasting categories of loss.
B will therefore need to think carefully about his potential ongoing liabilities and consider limiting the extent to which the indemnity he gives applies in terms of duration, extent and cost – or alternatively do what the Corsican gentleman recommended and not make the promise in the first place.
Hopefully that will mean that B avoids meeting his Waterloo!
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