24.3.1 The Authority will want to ensure the Contract requires the Contractor to indemnify the Authority against certain costs and the Contractor will make provision for such contingent liability in its bid price.
24.3.2 The general principle in civil procurement is that there should be no limit on indemnities provided to the Authority. This principle can be overridden, however, if commercial necessities demand.
24.3.3 An analysis of the limits on liabilities under the Contract will be part of the assessment by the Authority of the strength of its counterparty. The existence and extent of any indemnity should be considered in conjunction with other obligations imposed on the Contractor and Sub-Contractor (e.g. under collateral warranties). In this context Section 24.6 (Damages Claims) is relevant. The levels of insurance in respect of any likely claim are also relevant and the Contractor should always set these at a level sufficient to compensate it for foreseeable loss.
24.3.4 Broadly, there are four heads of liability that the Authority will be concerned to be indemnified against if the liability arises as a result of the Contractor's operations. These are:
• death and personal injury;
• property damage;
• breach of statutory duty; and
• third party claims.
Liability for death and personal injury cannot, at law, be capped, and an Authority should only allow caps or restrictions411 on other heads of claim if they believe this offers clear value for money benefits412. Authorities should not offer such caps as a matter of course.
As regards personal claims a Contractor enjoys no cap on the actions, claims, etc., made directly against it by third parties, and should set its insurance at whatever level it feels necessary to protect itself. It may not therefore provide any additional value for money to allow a Contractor to cap the identical liability which it may suffer indirectly through the Authority, in circumstances where the claimant makes its claim against the Authority and the Authority seeks to recoup its loss from the Contractor. In any event, if any cap is allowed (on a value for money basis), any such cap must not be used as a device to undermine the agreed insurance risk allocation position (e.g. by transferring responsibility for any deductible which would otherwise lie with the Contractor) or to backstop the credit of insurers. The indemnities should not be used to subvert core risk allocation principles.
24.3.5 The Authority should not generally use the indemnity provisions in the Contract as an additional layer of protection for specific remedies set out in the Contract. For example, if the deductions being made to the Unitary Charge under the performance mechanism are a genuine reflection of the losses that the Authority will incur as a result of the Contractor's non-performance, the Authority should not generally seek to rely on the indemnity as an additional or alternative means of claiming against the Contractor in respect of that loss.
24.3.6 Given the project specific nature of many of the employment issues that arise on projects no guidance can be given on either employment indemnities or issues arising out of the Transfer of Undertakings (Protection of Employment) Regulations 2006 SI 246, save that they are appropriate in some cases.
24.3.7 The Authority may be faced with a request for a reciprocal indemnity from the Contractor. A general indemnity from the Authority should not be offered in response to such a request. If the request relates to possible breach of the Authority's obligations under the Contract, this should be dealt with under Compensation Events (see Section 5.2.1.4); and if the request relates to acts of the Authority during a step-In this is dealt with separately as part of any step-in arrangements where there is no default (see Section 29.5.1). Exceptionally an Authority may be faced with project specific issues which require it to offer a reciprocal indemnity, in which case the Authority should ensure that the indemnity is limited to the specific issue.
24.3.8 Appropriate drafting for a general form of indemnity from the Contractor is as follows:
24.3 Indemnity
(a) The Contractor shall, subject to paragraph (b), be responsible for, and shall release and indemnify the Authority, its employees, agents and contractors on demand from and against, all liability413 for:
(i) death or personal injury;
(ii) loss of or damage to property (including property belonging to the Authority or for which it is responsible "Authority Property");
(iii) breach of statutory duty; and
(iv) actions, claims, demands, costs, charges and expenses (including legal expenses on an indemnity basis),414
which may arise out of, or in consequence of, the design, construction, operation or maintenance of the assets or the performance415 or non-performance by the Contractor of its obligations under this Contract or the presence on the Authority's property of the Contractor, a sub-contractor of the Contractor, their employees or agents.
(b) The Contractor shall not be responsible or be obliged to indemnify the Authority for:
(i) any of the matters referred to in paragraphs (a)(i) to (iv) above which arises as a direct result of the Contractor acting on the instruction of the Authority;
(ii) any injury, loss, damage, cost and expense caused by the negligence or wilful misconduct of the Authority, its employees, agents or contractors or by the breach by the Authority of its obligations under this Contract; [or
(iii) any claims made under Clause 24.3(a)[(iii)] in excess of [ ].]416
(c) An indemnity by either party under any provision of this Contract shall be without limitation to any indemnity by that party under any other provision of this Contract.417
24.3.9 This Clause will also need to deal with:
• giving notice of claims (stating in reasonable detail the nature of the matter and the amount claimed). This will enable the proceedings to be contested before any judgment in respect of such proceedings is given;
• taking any action insurers may request to dispute the matter or enforce rights against any person;
• the exclusive conduct of the proceedings by the party giving the indemnity although it may be that certain politically sensitive issues would require the Authority to control proceedings which will require specific agreement; and
• there being be no admission of liability or settlement of the matter without the consent of the indemnifying party.
_________________________________________________________________
411 The Authority should consider whether or not it is appropriate to exclude consequential loss from the scope of the indemnity provisions. This approach has been adopted in the NHS sector, although in other sectors (e.g. transport) the potential for claims from third parties in relation to consequential loss may be greater.
412 For example, liabilities relating to environmental risk or breach of statutory duty are sometimes capped for value for money reasons.
413 See footnote 410 above.
414 See Section 24.6.3.
415 The Contractor will perform its obligations under the Contract in accordance with the solution it offers as part of its bid and in putting together such solution should have regard to the indemnity provisions. Accordingly, the Contractor should take account of the potential liability under the indemnity provisions in developing its methodology and pricing its bid. Some Contractors may try to argue that the indemnity provisions should only be triggered if the relevant liability arises as a result of (a) the Contractor being in breach of or not performing its obligations under the Contract; or (b) the Contractor being negligent. Such requests are unacceptable as they bring the risk of the Contractor's delivery plan (to meet the output specification) back on to the Authority. The only exception to this will be if the Authority has specified input requirements or is providing a degree of design sign-off (see Section 3.4) in which case the indemnity may need to acknowledge this.
416 Please see Section 24.3.4 and footnote 411 as to whether to include this cap and as to what it could cover.
417 See Section 24.6 (Damages Claims).