Liability

8.4 The RIBA Building Contracts allocate liability for insurable risks under clauses 6.1 and 6.2. (These are, of course, not the only risks that each party is liable for; risks are also allocated under, for example, cl. 9.3, which relate to delay.)

8.5 Clause 6.1 sets out the extent of the client’s liability as follows:

8.6 The contractor’s liability is set out in clause 6.2 as follows:

The contractor is therefore liable for the injury or death of any person engaged by it in relation to the works, and that of any third party that is caused by the works. It is also liable for loss or damage to the works, to ‘the property’ and to products or equipment, due to any cause.

8.7 Although this is generally clear, and similar to the allocation in other standard form contracts, it is worth noting some points. Under JCT contracts the employer is not made liable for the risks listed in clause 6.1.2 of the RIBA Building Contracts, i.e. for damage to neighbouring property not caused by the negligence of the contractor. A building owner may be liable to its neighbour under common law principles if work it carries out damages the neighbour’s property, but this liability is not automatic, and the owner would not normally accept it under the building contract.

8.8 The contractor’s liability under clause 6.2 is more widely defined than under the equivalent clauses in JCT contracts (e.g. IC16 cl. 6.1 or MW16 cl. 5.1). In JCT forms a contractor would only be liable for damage to property (other than the works) if it is negligent and if the damage arises out of the works; in clauses 6.2. these limitations do not apply. There is also some potential overlap between the allocation of liabilities (i.e. both parties being liable for the same losses). For example, the term ‘the property’ in clause 6.2.2 is not defined, and therefore could include the contractor’s property, third-party property, the works, and the client’s property, including the existing building (provided the damage is not caused by the client). However, under clause 6.1 the client accepts the risk of damage to existing structures and neighbouring property (if not caused by the contractor); what would therefore be the position if such damage occurs and neither party has caused it? It appears that both may be liable.

8.9 There is also potential overlap between clauses 6.2.3 and 6.1.1 (i.e. products and equipment that form part of existing fixtures) and between clauses 6.2.3 and 6.1.2 (i.e. products and equipment that constitute neighbouring property). It is probably intended that the ‘products and equipment’ are those belonging to the contractor and being used as part of the works, but the clause does not make this clear. In all these cases it is likely that, as the clause is clearly intended to distribute liability, a court would take a common sense approach and construe it in a way that would remove the overlaps. However, to avoid any arguments it might be sensible for the parties to introduce a clarification before entering into the contract.

Indemnity

8.10 It should be noted that there is no requirement for the contractor to indemnify the client against claims. So, if the client is sued by a party for losses caused by a matter that is the contractor’s liability, it may have to settle the claim and then pursue the contractor for compensation. This is in contrast to the typical provisions in JCT contracts (e.g. IC16 cl. 6.1 and 6.2 and MW16 cl. 5.1 and 5.2), which require indemnification of the client against claims for injury to or death of persons, or damage to neighbouring property that has been caused by the contractor’s negligence.

Insurance

8.11 The purpose of insurance is to ensure that those covered are compensated should the covered risks materialise. In the RIBA Building Contracts, as with most building contracts, the insurance provisions are linked to specific liabilities, and ideally the insurance policies should reflect precisely those liabilities. Even if the insurance is inadequate or non-existent, this would not affect or reduce a party’s liability under the contract, or under the law, but in practice it would frequently not have adequate funds to compensate the other party, or affected third parties, for the losses. Any mismatch or lack of clarity in insurance coverage may therefore give rise to arguments, at a time when delays and complications will only exacerbate an already difficult situation.

8.12 Insurance is a complex and specialist subject area. The guidance given here is a brief explanation only, covering some of the key concepts. Which policies will be needed will depend on the particular circumstances of the project; clients are recommended to take specialist advice, and to include any specific requirements in the tender documents.

8.13 The contracts state that ‘each Party is responsible for arranging insurance that is stated to be its responsibility in item J of the Contract Details for the amounts stated and for keeping it in place until Practical Completion’ (cl. 6.3). It is important to note that the parties are not required to arrange insurance to cover their liabilities under clauses 6.1 and 6.2. Unlike other forms, there is no link between the liability clauses and the insurance clauses.

8.14 It is therefore very important that the parties give careful consideration as to whether the proposed insurance arrangements will cover them for the above risks, and set out full information on what insurance is required. The insurance clauses do not set out any details, but helpful advice is given in the guidance notes included in the form. Item J of the Contract Details requires the ‘type’, and ‘amount’ of insurance to be inserted, and indicates that insurance for damage to the works and to existing structures should be all risks and in joint names. It is suggested that, in addition, full information about the type of losses to be covered, exclusions, subrogation, etc. should also be given.

8.15 The contractor’s liability for injury and death of employees (cl. 6.2.4) is met by its employers’ liability insurance. This insurance is compulsory under the Employers’ Liability (Compulsory Insurance) Act 1969. The legal minimum level of cover for most firms is £5 million, but many insurers will provide a £10 million policy as standard. Item J of the contract particulars indicates that the contractor is responsible for taking out this insurance, but an amount of cover must be inserted otherwise it is unclear what the extent of the obligation would be.

8.16 As noted in the contract guidance notes, the contractor’s liability in respect of third parties (death or personal injury and loss or damage to property including consequential loss, covered under cl. 6.2.5) is met by its public liability policy. Insurers advocate insuring for a minimum of £2 million for any one occurrence, and insurance companies typically offer £5 million as the standard level of insurance. As above, item J of the contract particulars indicates that the contractor is responsible for this insurance, but an amount of cover must be inserted.

8.17 A contractor’s public liability policy will not usually cover it for damage to neighbouring property, unless this was caused by its own negligence. Under the RIBA Building Contracts, this type of risk is accepted by the client, (cl. 6.1.2). The client will need to check if any existing building insurance it has will cover this risk; if it does not, the client needs to arrange for it to be extended, or take out a new policy. This insurance is usually expensive, and subject to a great many exclusions. The policy needs to be effective at the start of the site operations, when demolition, excavation, etc. are carried out. If the client would prefer the contractor to take out this insurance, the details will need to be given in the tender documents, and the clauses regarding liability and insurance amended accordingly, and an appropriate entry made in item J. (Under SBC16 this type of insurance is an optional provision, taken out by the contractor, and it is not included at all in MW16.)

8.18 With respect to the works, if the project is a new build, the contractor may be required take out a joint-names policy to cover any damage to the project (cl. 6.2.1, 6.2.3 and item J). With respect to existing buildings, the contractor is normally required to insure the works, and the client the existing structure (cl. 6.1.1, cl. 6.2.1 and cl. 6.2.3). This is similar to the approach in MW16 clause 5.4B. As noted above, full details would need to be inserted in item J, or the parties might find themselves liable for the losses under 6.1 and 6.2, but without adequate insurance cover. The arrangements should be discussed with both parties’ insurance companies to ensure there are no gaps or overlap. As noted above, if the existing structure is damaged due to a fire caused by the contractor’s negligence, is this to be part of the contractor’s liability under clause 6.2.2 and, if so, is it to be covered by its public liability insurance (unlikely), or is it intended that the client’s existing property insurance will cover such losses?

8.19 One issue that should be considered is that of subrogation, i.e. the right of an insurer to pursue a claim against a third party that caused a loss, in order to recover an amount paid to the insured for that loss. Any joint-names policy should make clear that, under the policy, the insurer does not have a right of subrogation to recover any of the monies from either of the named parties. In addition, the client should consider whether the policies should also include a waiver of any rights of subrogation against any subcontractors or required specialists (as they would in JCT contracts).

8.20 It is vitally important that all insurance matters are sorted out before the project starts on site. If there is a gap or an overlap (i.e. both parties insure against the same event or loss) this may cause serious difficulties. The last thing that is needed if a disaster such as a fire should occur is that the contractor or client is unable to honour its liabilities due to lack of funds, and the insurance companies become locked in a dispute and refuse to pay for the essential remedial work. The party responsible must provide evidence that adequate insurance has been taken out no later than 10 days before the start date (and any time after on request); if it is not provided the other party may take it out and the contract price is adjusted accordingly (cl. 6.4).