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Indemnities and Liabilities

An Indemnity is a security given by one party to another to make good the loss suffered by the party being damaged, should a defined risk occur. Indemnities are often given in situations where the parties feel that the legal position is not desirable. It follows therefore that they need not be given in cases where Client is prepared to rely on the provisions of the applicable law governing the Contract.

Sad yet interesting lessons learnt from the Piper Alpha Platform disaster in 1988 operated by Occidental Petroleum, subsequent to which Indemnities, Liabilities and Insurances have become sacrosanct and firmly institutionalized into the general terms and conditions of Contracts the world over.

In the performance of a Contract, Client seeks various Indemnities from a Contractor against potential default due to deficient performance, infringement of patents, copyrights, tax matters, confidentiality, injury, illness, death of personnel, loss or damage to property, etc.

We shall however restrict ourselves in this instance to the risks from the point of view of insurance requirements.

Indemnity, liability and insurance provisions go hand in hand and thus have to be read and construed in conjunction with one another.

The principle behind inclusion of these provisions is obviously to protect one party from the unnecessary liabilities arising out of the actions of another party in the performance of a Contract, directly or indirectly.

Indemnity provisions are generally based on a Knock-for-knock principle (unless stated to the contrary) where the Contractor indemnifies the Client for the consequences of the actions (or the lack of it) of, its employees and assigns, arising during the performance of its Works/Services. Similarly, the Client also confirms a similar indemnity to the Contractor and each assume liabilities accordingly. Necessary insurances have to be in place in support of the indemnities / liabilities provided by each party to the other. Where no specific insurances are stated, they should at least be provided upto the minimums prescribed under the law.

What do these indemnities cover?

  • They cover causes without limitation: fault, negligence, breach of statutory provisions, contractual obligations, and others in respect of death, illness, injury damage or loss of property including those of third parties in connection with the performance of the Contract. In most cases liability towards injury, illness or death to personnel is prescribed by law and hence indemnity cannot be excluded.
  • The indemnity is set out against any claims, demands, liabilities, losses, damages, suits, judgments, penalties, fines, costs, legal expenses, etc.
  • Indemnities do not cover consequential losses and damages that are excluded due to their very nature.

Indemnity is specifically obtained towards:

  • General lack of performance of the Contract, defects in design and Work/Services;

The Contractor should be fully responsible for the unlimited re-performance of any defective service (e.g. design errors) and for the consequences of any defective services (e.g. additional and/or replacement fabrication work or materials supply) subject to a limit.

The limit should be set high enough to encourage good engineering but not so punitive as to require the Contractor to provide Contract specific professional indemnity insurance or such additional contingency as, this could unlikely be cost effective.

  • Non fulfilment of insurance obligations;
  • Breach / violation of applicable law;
  • Default on payments to statutory bodies;
  • Environmental damage/pollution claims;
  • Misrepresentation and corrupt practices;
  • Other such related issues.

Indemnities should always exclude “Gross Negligence” and “Wilful Misconduct” of the Parties.

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