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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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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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