Liability

7.4 The RIBA Building Contracts allocate liability for insurable risks under clause 6. (These are, of course, not the only risks that each party is liable for; risks are also allocated under, for example, cl 9.1–9.4, which relate to delay.) The contractor’s liability is as follows:

• 6.1.1 loss of or damage to the Works
• 6.1.2 loss of or damage to products and equipment
• 6.1.3 death of or bodily harm to any person working for the Contractor arising in connection with the Works during the course of their employment
• 6.1.4 loss of or damage to property due to the negligence of the Contractor in carrying out the Works
• 6.1.5 death of or bodily harm to a third person [not an employee of the Contractor] caused by the Works.

7.5 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, products or equipment, due to any cause, and to property, due to the negligence of the contractor in carrying out the works.

7.6 Under clause 6.2, the client’s liability includes:

• 6.2.1 damage to existing structures and fixtures
• 6.2.2 damage to neighbouring property caused by the nature of the Works and not due to the negligence of the Contractor in carrying out the Works.

7.7 Although this is generally clear, there is some potential overlap between the allocation of liabilities (i.e. both parties being liable for the same losses). For example, the term ‘property’ in clause 6.1.4 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. However under clause 6.2.1 the client accepts the risk of damage to existing structures, and the clause appears to cover any damage, even if caused by the contractor’s negligence. There is therefore a possible overlap between clauses 6.1.4 and 6.2.1.

7.8 It is unlikely that a party would accept liability for damage caused by the other, and the RIBA has confirmed that this was not intended. However, this is the arrangement under many JCT contracts in situations where the employer takes out insurance for the existing structure (e.g. in relation to SBC11 cl 6·2 it has been confirmed by the courts that the contractor is not liable for losses insured by the employer under Option C and caused by a ‘Specified Peril’, even where the damage is caused by the contractor’s own negligence; Scottish Special Housing Association v Wimpey Construction, Kruger Tissue v Frank Galliers, Co-operative Retail v Taylor Young Partnerships, Scottish and Newcastle v G D Construction). MW11 cl 5·2 contains a similar exclusion of contractor liability for some types of losses caused by its negligence. The purpose of the exclusions is to eliminate a potential overlap, and avoid possible arguments about which insurance policy is meant to cover such losses should they occur. It may therefore be wise for parties to clarify whether the contractor is liable for the losses under 6.1.4 or the client is liable under 6.2.1. (The difficulties experienced in interpreting the less clear wording in earlier versions of MW11 can be seen in National Trust v Haden Young Ltd and London Borough of Barking & Dagenham v Stamford Asphalt.)

7.9 There is also potential overlap between clauses 6.1.2 and 6.2.1 (i.e. products and equipment that form part of existing fixtures) and between clauses 6.1.2 and 6.2.2 (i.e. products and equipment that constitute neighbouring property). Again, it is perhaps 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 construe it in a way that would remove the overlaps as suggested. However, to avoid any arguments it might be sensible for the parties to introduce a clarification before entering into the contract.

7.10 The contractor’s liability under clause 6.1 is more widely defined than under the equivalent clauses in JCT contracts (e.g. IC11 cl 6·1 or MW11 cl 5·1), as it does not have the important proviso ‘except to the extent that the same is due to any act or neglect of the Employer or of any person for whom the Employer is responsible’. This would mean that under the RIBA Building Contracts, the contractor will be liable even if the injury, etc., was caused by the client, for example by sending other operatives onto the site. Similarly, under JCT contracts the employer is not made liable for the risks in clause 6.2.2 of the RIBA 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.

Indemnity

7.11 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. IC11 cl 6·1 and 6·2 and MW11 cl 5·1 and 5·2), which require indemnification of the employer against claims for injury to or death of persons, or damage to neighbouring property that has been caused by the contractor’s negligence.

7.12 In one area, however, the client is given some form of protection. Under the optional contractor design provisions, the contractor is required to ‘compensate the Employer/Customer for all claims in respect of the Contractor’s designs’ (cl A2.6). Although not completely clear, the clause seems to be referring to claims by third parties (not only those by the client, which would go without saying), and therefore constitutes an indemnity. It is quite a widely drafted provision, and would appear to cover damage or losses resulting from the design, even where the contractor has not been negligent, and regardless of whether or not the ‘fit for purpose’ option has been selected in the Contract Details (see paras. 3.18–3.22).

Insurance

7.13 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.

7.14 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.

7.15 DBC requires that ‘the Parties shall maintain insurance policies in respect of their liabilities as set out in items L, M and N of the Contract Details’ (cl 6.3.1).

7.16 The wording in CBC is slightly different, i.e. ‘the Parties shall maintain insurance policies in respect of their liabilities at the values set out in items M and N of the Contract Details’ (cl 6.3.1). The difference is not significant, as the RIBA has confirmed that the intention behind both these clauses is that the parties are given full flexibility as to their insurance arrangements, and that if no details are set out, there would be no obligation to maintain insurance.

7.17 It is therefore very important that the parties set out full information. The contracts require that the policies taken out by the contractor are to be in joint names (cl 6.3.2), but otherwise no requirements are set out. It is suggested that not only the ‘type’, ‘amount’ and ‘duration’ should be inserted in the Contract Details as required, but that full information about the type of losses to be covered, exclusions, subrogation, etc. should also be given.

7.18 The contractor’s liability for injury and death of employees (cl 6.1.3) is met by its employer’s 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. It is not normal for this type of policy to be taken out in joint names (the JCT contracts do not require it), so the client should check with its advisers whether it is necessary to retain this requirement.

7.19 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 6.1.5 and 6.1.4) 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.

7.20 As with employer’s liability insurance, it is not common to have a public liability policy in joint names, so this should be checked. In addition, 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, which is also required to maintain an insurance policy to cover such losses (cl 6.2.2 and 6.3.1). 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 both liability and insurance amended accordingly. (Under SBC11 this type of insurance is an optional provision, taken out by the contractor, and it is not included at all in MW11.)

7.21 With respect to the works, if the project is a new build, the contractor is required take out a joint-names policy to cover any damage to the project (cl 6.1.1 and 6.3.1). With respect to existing buildings, the contractor is required to insure the works, and the client the existing structure (cl 6.1.1, cl 6.2.1 and cl 6.3.1). This is similar to the approach in MW11 clause 5·4B. 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 6.1.4, 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?

7.22 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).

7.23 It is vitality 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 contractor 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 client may take it out and deduct the costs from payments due (cl 6.4).