29 February 2016‘A Contract Journey’ the Legal & Insurance Perspective
‘A Contract Journey’ the Legal Perspective
As with any journey reaching the right destination demands advance preparation. However, where the contract journey is concerned, legal advice is often only sought when a problem arises, when getting the right professional advice at the outset, ensuring parties are clear about what is intended and taking simple actions such as checking the detail of the contract documentation are all proven ways of saving time and expense further down the contract road.
What constitutes ‘the Contract’?
A contract is formed when four basic principles are satisfied;
- There is an offer
- There is an acceptance of the offer
- There is an intention to create a legal relationship
- There is a consideration (payment or something else of value, given by both parties to persuade them to enter into an agreement)
Contract negotiations can range from ‘ping pong’ exchanges of documents to complex face-to-face discussions and whilst such negotiations can be lengthy they don’t necessarily produce a resolution. Matters are rarely simple and at each stage it’s important to distinguish between an acceptance – which accepts the offer in its entirety – and a counter-offer – which rejects and replaces the original offer.
The overarching objective should be to achieve both ‘certainty’ and ‘clarity’, to pay attention to detail and ask the right questions. For example, a tender response from a sub-contractor may appear to be quoting a very good price but it’s vital to look beyond the price to see what caveats might have been applied, such as a statement to the effect that the sub-contractor’s terms and conditions are to be used in place of your own. If a battle does ensue it’s important to monitor the situation and, if things aren't going your way – negotiate.
Who are the parties to the contract?
It may seem surprising but disputes can, and do, arise as to who the parties to a contract are.
It’s vital to ensure that the entity you intend to contract with is correctly identified in the contract before you sign it. Enter into a contract with the wrong party and you will have no right of redress as one company found out recently when it was unable to pursue its claim for £500,000 from a sub-contractor.
Beware of trading names, different companies with similar names, subsidiaries, parent or sister companies and be completely sure who you are contracting with. Don’t make assumptions, and having identified the right entity, check the company number and include it in the contract.
Always get it in writing
There’s no legal requirement for a contract to be in writing, a contract can be formed orally. However it is incredibly difficult to prove who said what, so don’t make life difficult for yourself.
‘A Contract Journey’ the Insurance Perspective
As with the negotiation of the contract itself, the approach which is taken to the creation of the insurance programme demands a high level of attention to detail, to ensure that the respective rights and responsibilities of the various parties to the project, are properly addressed.
Creating the right balance between risk transfer and cost throughout the contract chain is critical and the need extends beyond the employer, main contractor and/or construction manager, and the sub-contractors and/or trade contractors in any given tier. Funders, development managers and consultants (for their on-site activities) also need to be considered. The key to putting in place a programme that will be truly responsive in the event of a claim is to establish, at the outset, what the exposures are and then, by using insurance ‘responsibly’ within the business model and contractual framework, allocate the risks between the parties up and down the chain to meet the requirements of the contract whilst controlling programme costs.
Where employer’s and public liability is concerned there is a responsibility for adequate cover to be purchased and maintained. However, discharging that responsibility comes at a cost, and whether the cover needs to extend to include the sub contractors will depend on the attitude and approach of the main contractor to its sub-contractors and its willingness to incur insurance cost.
Given that the main contractor is responsible for site safety overall, the standard practice is to maintain cover ‘downstream’. There are plenty of examples of an employee working at height for ‘sub-contractor A’, dropping a brick on the head of an employee working for ‘sub-contractor B’. However, such exposures can be minimised by the maintenance of safe systems of working and site-routings.
The question therefore arises as to whether the principle should be maintained or such exposures ‘written out’ using a ‘Hold Harmless’ clause; by applying an ‘Indemnity to Principal Clause’ – in each case effectively leaving the respective sub-contractors in our example above to deal with claims – or whether the employee and public liability components should be in joint names. Obviously, the solution applied must satisfy the requirements of the Unfair Contract Terms Act, but a cost benefit analysis should be applied to optimise the allocation of the risks and the associated cost of insurance.
Period of insurance
The construction of the programme also needs to take account of the potential for losses at either end of the project process. Clearly, care needs to be taken within the process to ensure that terminal dates and phases are properly catered for but there also needs to be a focus on pre – and post-construction exposures such as Delay in Start up (DSU) and maintenance and defects periods.
Access to the insurance
It’s important to remember that you can only access a policy if it’s purchased for you. For this reason there is a need to be aware of the potential impacts on second tier partners such as sub-contractors, to ensure that their interests are maintained throughout the programme as appropriate. In order to do this it’s necessary to create a joint insured position where required and to define ‘whose claim it is’.
Under the JCT form, the responsibility of the employer to insure on behalf of others only extends to the main parties to the contract.
It’s also important to be fully aware of policy limits and to adopt a pro-active approach. Frequently policy limits can be quite arbitrary and bear no relation to what is actually required. A number of different parameters need to be assessed including the levels of excesses and deductibles. For example, balanced against the likelihood that a loss will occur and the financial resilience of the employer/contractor, it may be worth looking at the cost-benefit available by choosing a higher figure.
Always read the contract to ensure that you fully understand what liabilities you are taking on, and remember, just because you sign a contract agreeing to take on responsibilities doesn't necessarily mean that your insurance policy will cover you. If you are in any doubt, check before you sign!