The Contractor is to insure 115% of the full replacement value of the works tocover reinstatement as well as professional fees, demolition etc and will also insure the replacement value of his own equipment.The insurance is to be in the joint names of the Contractor and the Employer andis to cover all risks other than Employe r's risks (a) - (d) from the start of work onsite until taking-over of the works. It must also cover the Contractor's operationsin the Defects Liability Period and when searching.The Contractor and the Employer will bear losses in relation to their own risks tothe extent that their losses are not paid for by the insurer.This clause has been fundamentally reorganised for the 4th Edition including atsub-clause 21.4 a wholly unnecessary repetition of items (a) to (d) of clause 20.4(Employer's Risks).
Page 100 of 264
2 1 . 1 " ( a ) . . . f u l l r e p l a c e m e n t c o s t " . T h i s m a y n o t b e n e c e s s a r y w h e r e t h e s i t e i s spread out making total destruction very unlikely. In these circumstances, the c l a u s e s h o u l d b e a m e n d e d t o r e q u i r e i n s u r a n c e t o b e o b t a i n e d f o r a l e s s e r amount."(c) the Contractor's Equipment...". This equipment is not referred to in clause 20but clause 54.2 (Employer not liable for damage) makes it clear that
damagec a u s e d o t h e r t h a n b y E m p l o y e r ' s o r S p e c i a l r i s k s i s t h e C o n t r a c t o r ' s responsibility.P a r t I I p r o v i d e s o p t i o n a l a d d i t i o n a l w o r d i n g f o r s u b - c l a u s e 2 1 . 1 i f i n s u r a n c e payments are to be in a certain currency or if the Employer wishes to specify aceiling upon the deductible limits or excess provided for by the policy.T h e r e i s a s y e t n o r e c o g n i t i o n i n F I D I C o f t h e
i n c r e a s e d u s e o f d e c e n n i a l insurance. Decennial liability is imposed by many civil law countries and
rendersa r c h i t e c t s , e n g i n e e r s a n d c o n t r a c t o r s l i a b l e f o r t h e s a f e t y a n d s t a b i l i t y o f structures. Any defect threatening the safety or stability of the structure or itsfitness for its purpose appearing within 10 years would render the designers andbuilders liable to the Employer
without proof of fault. Insurance of this liability is n o w c o m p u l s o r y i n F r a n c e f o l l o w i n g t h e S p i n e t t a L a w o f 1 9 7 8 a n d t h e r e a r e signs, certainly in the UK, that it will become more widespread.CLAUSE 21.1 (Insurance of Works)Sub-clause 21.1 (Insurance of Works and Contractor's Equipment)" T h e C o n t r a c t o r s h a l l , w i t h o u t l i m i t i n g h i s o r t h e E m p l o y e r ' s
o b l i g a t i o n s a n d responsibilities under clause 20, ensure that:-( a ) T h e W o r k s t o g e t h e r w i t h m a t e r i a l s a n d P l a n t f o r
i n c o r p o r a t i o n t h e r e i n , t h e full replacement cost (the term "cost" in this context shall include profit), ..."The additional words are needed because the definition at clause 1.1(g)(i) statesthat""cost" means all expenditure properly incurred or to be incurred, whether on or off the Site, including overhead and other charges properly allocable thereto, butdoes not include any allowance for profit."I f p r o f i t w a s e x c l u d e d f r o m t h e a m o u n t i n s u r e d , t h e
E m p l o y e r c o u l d n o t b e confident that there would be sufficient cover in the event of the total loss of theproject. Even with an additional sum of 15% which might well be absorbed withdemolition costs and professional fees, the obligation upon a Contr actor to re -build with no profit recovery could be
sufficient to drive a Contractor at least to aconsideration of abandoning the project if not into financial difficulties. It
wouldc e r t a i n l y b e d i f f i c u l t t o a t t r a c t a n a l t e r n a t i v e c o n t r a c t o r t o u n d e r t a k e t h e r e - building.
Page 101 of 264
It should be recalled that the insurance of the works is in respect of all risks
other than those risks set out at clause 20.4 (Employer's risks) items (a) to (d). TheEmployer may try to insure those risks himself if such
insurance is available onthe market. Under clause 20.2 (Responsibility to rectify loss or damage), in theevent that there is loss or damage to the works, the Contractor is obliged, at hisown cost, to re -build. He is dependent upon the insurance to pa y him to do so.Whether the insurance policy will pay out any element of profit to the Contractor undertaking such remedial works, [ is to be doubted].If for any reason, the Contractor is not prepared to
undertake the remedial works,the Employer will be the claimant under the insurance policy whose claim wouldcomprise primarily the cost of obtaining an
alternative contractor to undertaken the re-building works. That cost
would include paying the alternative Contractor an amount in respect of profit.S u b - c l a u s e 2 1 . 1 i s n o t t h e o n l y p r o v i s i o n r e q u i r i n g a m e n d m e n t i n r e l a t i o n t o profit. The main source of the difficulty is that the bar on profit is not limited in thedefinition to profit recovery by the Contractor. In arriving at the global definition, ita p p e a r s t h a t t h e d r a f t s m e n d i d n o t c o n s i d e r e a c h a n d e v e r y u s e o f t h e t e r m "cost" to see whether the definition given was actually appropriate. Too muchreliance has been placed on the opening words of clause 1.1 which gives
wordsa n d e x p r e s s i o n s c e r t a i n m e a n i n g s " e x c e p t w h e r e t h e c o n t e x t o t h e r w i s e requires". One only has to look at clause 21.1(b) to see the term "costs" referringt o p r o f e s s i o n a l f e e s a n d d e m o l i t i o n . I t
c a n n o t h a v e b e e n t h e i n t e n t i o n o f t h e draftsman to exclude the professionals' profit element nor that of the demolitioncontractor. Nor is the exclusion of profit appropriate in the indemnity clauses some of which are listed in the commentary to clause 60.9 in the main work. For example, in clause 22.2 (Exceptions), a Contractor is not responsible for damageto persons and property arising from any act or neglect of the Employer "or inrespect of any claims, proceedings, damages, costs, charges and expenses
inrespect thereof". This context obviously requires the definition not to
apply.Perhaps the most striking exa mples of the inappropriateness of the definition
of " c o s t s " a r e i n c l a u s e s 3 9 . 2 ( D e f a u l t o f C o n t r a c t o r i n c o m p l i a n c e ) a n d 4 9 . 4 ( C o n t r a c t o r ' s f a i l u r e t o c a r r y o u t i n s t r u c t i o n s ) . I n b o t h c a s e s , f a i l u r e o f t h e Contractor to carry out certain instructions entitles the Employer to employ andpay another contractor to execute the works concerned. "All costs consequent thereon or incidential thereto" are recoverable from the Contractor. Clearly it
isi n t e n d e d t h a t t h e E m p l o y e r s h o u l d r e c o v e r t h e e l e m e n t o f p r o f i t w h i c h t h e alternative Contractor has charged. Again, in clause 46.1 (Rate of progress), it isthe Employer's additional supervision costs incurred as a result of the Contractor h a v i n g t o a c c e l e r a t e t h a t a r e t o b e d e d u c t e d f r o m s u m s o t h e r w i s e d u e t o t h e Contractor. W ithout doubt, it is not intended that the supervisor's profit should not be recoverable.The purpose of the definition is to resolve a recurrent problem, namely whether
aContractor entitled to loss and expense under the Contract is entitled to claim a loss of profit as part of that loss and expense claim. Arbitrators both in England (Page 102 of 264)
and internationally have differed on this point. Has it been resolved in the 4thEdition? It is submitted that a Contractor would find it almost impossible to arguethat a loss of profit on the turn-over If an attempt is made to reconcile the definition of cost and the clear intention of the draftsmen in clauses such as 39.2 (Default of Contractor in compliance) and49.4 (Contractor's failure to carry out instructions), a distinction must be drawnbetween profit in the hands of the Contractor or the Employer on the one hand and their professionals, alternative contractors and sub-contractors on the other.I f t h a t i s t h e c a s e , t h e n t h o s e e l e m e n t s o f t h e C o n t r a c t o r ' s l o s s a n d e x p e n s e claims which relate to subcontractors could probably include elements by way
of profit. This may indeed be the intention of the draftsman. If so, the definition should be clarified.Sub-clause 21.4 (Exclusions)The first category of causes of loss or damage for which the Contractor has no obligation to ensure is now :-
" w a r , h o s t i l i t i e s ( w h e t h e r w a r b e d e c l a r e d o r n o t ) , i n v a s i o n , a c t o f f o r e i g n enemies..."T h e p r e v i o u s w o r d i n g " ( w h e r e w a r b e d e c l a r e d o r n o t ) " w a s p r e s u m a b l y a typographical error. Recen t events have demonstrated the importance of
thesew o r d s a n d t h e e x t e n t t o w h i c h h o s t i l i t i e s c a n e s c a l a t e w i t h o u t a f o r m a l declaration of war. The words in
parentheses could usefully qualify all four of theitems and not just hostilities.2 1 . 2 T h e r e i s a m i s -
m a t c h b e t w e e n t h e r e q u i r e m e n t i n c l a u s e 2 1 . 2 f o r t h e insurance to run from "the start of work at the site" and the date from which the C o n t r a c t o r t a k e s f u l l r e s p o n s i b i l i t y f o r t h e w o r k s u n d e r c l a u s e 2 0 . 1 ( C a r e o f W o r k s ) w h i c h i s f r o m t h e
C o m m e n c e m e n t D a t e . T h e r e m a y b e a p e r i o d o f several months between the date upon which the Employer gives notice under clause 41.1 (Commencement of Works) and the date that the Contractor actuallymobilises and commences. The Contractor's obligation is to commence "as soonas it is reasonably possible" after the notice to commence. There may be a
veryconsiderable procurement and mobilisation period. It may be preferable to havet h e i n s u r a n c e r u n " f r o m t h e C o m m e n c e m e n t D a t e o r a s s o o n t h e r e a f t e r a s i s practicable". A simple obligatio n to insure from the Commencement Date mightnot be practicable as the Contractor could receive the Engineer's notice
under c l a u s e 4 1 . 1 ( C o m m e n c e m e n t o f W o r k s ) a t a n y t i m e a f t e r t h e L e t t e r o f Acceptance, within the period
specified.The Contractor would normally be present on site after taking-over for one of four reasons:-i . i n p u r s u a n c e o f h i s u n d e r t a k i n g t o f i n i s h o u t s t a n d i n g w o r k p u r s u a n t t o c l a u s e 4 8 . 1 ( T a k i n g - o v e r c e r t i f i c a t e ) , c l a u s e 4 8 . 4 ( S u r f a c e s r e q u i r i n g Page 103 of 264
reinstatement) and clause 49.2 (Completion of outstanding work and remedyingdefects);i i . r e m e d y i n g d e f e c t s d u r i n g t h e D e f e c t s L i a b i l i t y P e r i o d u n d e r c l a u s e 4 9 (Defects Liability);i i i . s e a r c h i n g f o r t h e c a u s e o f d e f e c t s p u r s u a n t t o c l a u s e 5 0 ( C o n t r a c t o r t o search); or i v . d e m o b i l i s i n g a n d c o m p l y i n g w i t h c l a u s e 3 3 ( C l e a r a n c e o f s i t e o n completion).The insurance obligation covers (i) to (iii) but not (iv).T h e b e n e f i t s t o t h e
E m p l o y e r o f r e q u i r i n g t h e i n s u r a n c e t o b e i n j o i n t
n a m e s i n c l u d e a g r e a t e r c o n t r o l o v e r t h e m a i n t e n a n c e o f t h e i n s u r a n c e i n r e l a t i o n t o clause 25 (Evidence and terms of
insurances), control over the claims process and, importantly, a right to be paid directly by the insurance company in respectof the Employer's losses. If the insurance was in the name of the Contractor alone, the Contractor's insurers could pursue the Employer in relation to loss anddamage for example resulting from the Engineer's design.2 1 . 3 I t i s i n t h e i n t e r e s t s o f b o t h p a r t i e s t o t h e c o n t r a c t t o m a k e s u r e t h a t t h e r e is adequate insurance in place. It is little comfort to an Employer to know that aContractor takes
responsibility for a risk if, should that risk occur, the Contractor would be driven out of business by the cost of rectifying the consequent loss. T h e p r i o r i t y f o r b o t h p a r t i e s i s t o e n s u r e t h a t i n t h e e v e n t t h a t t h e w o r k s a r e d a m a g e d o r d e s t r o y e d , f u n d s w i l l b e a v a i l a b l e t o e n a b l e t h e p r o j e c t t o b e completed. As such risks will
invariably cause delay to the works, it is also
of i m p o r t a n c e t h a t t h e i n s u r a n c e w i l l c o v e r o n t h e o n e h a n d t h e C o n t r a c t o r ' s p r o l o n g a t i o n c o s t s a n d , o n t h e o t h e r , t h e E m p l o y e r ' s l o s s e s f l o w i n g f r o m t h e delay. Although clause 21.3 may state no more than is clear from the preceding clauses, it serves as a reminder to the parties to ensure that the insurance cover is adequate. As this clause is equally applicable to the insurances under clauses23 and 24, it could usefully have been placed in clause 25 (Evidence and terms of insurances) which applies to all the insurance provisions.T h e E m p l o y e r m a y o b t a i n s o m e m e a s u r e o f p r o t e c t i o n f r o m t h e C o n t r a c t o r ' s financial vulnerability to uninsured losses from a bond obtained under clause 10(Performance security). However, these rarely exceed 10% of the contract valueand it will be a question for interpretation of the wording of each bond whether the loss itself or the lack of relevant insurance cover amounts to a failure of dueperformance allowing the Employer to claim on the bond.Any lack of recovery from insurers could result from one of the following causes:-
(i) no obligation to insure;(ii) breach of obligation to insure or procure insurance; Page 104 of 264
(iii) non-disclosure or breach of term of insurance policy;(iv)
excess;(v) loss exceeds maximum cover; or (vi) reduced payment due to scaling- down
or negotiation.U n d e r i t e m ( i i i ) , b r e a c h i s c o v e r e d b y c l a u s e 2 5 . 4 ( C o m p l i a n c e w i t h p o l i c y conditions): whoever breaches the policy is liable for any non-recovery. Under E n g l i s h l a w , n o n -
d i s c l o s u r e o f a n y i n f o r m a t i o n r e l e v a n t t o t h e r i s k t o b e un dertaken by the insurer is treated as rendering the policy void and as if never e f f e c t e d . I n s o m e E u r o p e a n j u r i s d i c t i o n s , t h e s a m e i s t r u e i f t h e f a i l u r e o f disclosure was in bad faith. A difficult
question arises as to whether an avoided p o l i c y s h o u l d b e t r e a t e d a s a f a i l u r e t o i n s u r e u n d e r c l a u s e 2 5 . 3 ( R e m e d y o n Contractor's failure to insure) or a failure to comply under clause 25.4. In view of t h e
i n e f f e c t i v e n e s s o f t h e p r e s c r i b e d r e m e d y u n d e r c l a u s e 2 5 . 3 i n s i t u a t i o n s where a claim has arisen and the insurer has refused liability on the ground of non-disclosure, the practical solution must be to treat the case as one of breach.I f t h e u n i n s u r e d l o s s i s t h e r e s u l t o f a b r e a c h b y t h e C o n t r a c t o r o f t h e d u t y
t o i n s u r e , a n d f a l l s w i t h i n c l a u s e 2 0 . 4 ( E m p l o y e r ' s r i s k s ) i t e m s ( e ) t o ( g ) , t h e question arises whether this sub-clause means that the Employer must bear theloss or whether he can pursue the Contractor for the breach. It is submitted thatthe Employer's remedy for the failure of the Contractor is set out in clause 25.3 ( R e m e d y o n C o n t r a c t o r ' s f a i l u r e t o i n s u r e ) a n d t h a t i t i s i n t e n d e d t o b e t h e exclusive remedy. If it had been intended that the Employer could sue for the breach, the draftsman would, it is submitted, have so indicated in this sub-clauseor in clause 25.4
(Compliance with policy conditions).T h e 4 t h E d i t i o n f o r t h e f i r s t t i m e d i v i d e s t h e E m p l o y e r ' s r i s k s i n t o t h o s e t o b e insured and those which need not be insured. Employer's risks (a) to (d) cannotnormally be insured against and thus are excluded from the insurance obligationsupon the Contractor. If the Employer is able to obtain insurance for some or all of these risks, he is free to do so.Obligations in relation to insurance are also imposed by clause 23 (Third partyinsurance), clause 24.2 (Insurance against accidents to workmen) and clause 25(Evidence and terms of insurances).As with clause 23.1 (Third Party Insurance) and clause 25 (Evidence and termsof insurances), Part II provides for this clause alternative wording in the event that the Employer decides to insure the works and the third party risks himself.
CLAUSE 22 : Indemnity
The Contractor is to indemnify the Employer in respect of the death or injury of a n y p e r s o n o r d a m a g e t o t h e p r o p e r t y o f a n y t h i r d p a r t y r e s u l t i n g f r o m t h e execution of the project subject to certain
exceptions.The exceptions are listed in clause 22.2. Page 105 of 264
T h e E m p l o y e r s h a l l i n d e m n i f y t h e C o n t r a c t o r a g a i n s t c l a i m s i n r e s p e c t o f t h e exceptions.This edition is similar to the 3rd Edition although there have been changes to thevocabulary and the exceptions are now set out in a
separate sub-clause.2 2 . 1 T h e d r a f t i n g o f t h i s c l a u s e o b s c u r e s t h e m e a n i n g o f t h i s c l a u s e . W h y i t
i s n e c e s s a r y t o h a v e t w o l i s t s o f i t e m s a g a i n s t w h i c h t h e C o n t r a c t o r s h o u l d indemnify the Employer i.e., "losses and claims" as well as "claims, proceedingsetc" is a mystery and raises the suspicion that the exception qualifies only the second list and not the first. This, however, cannot be right." . . . e x c e p t i f a n d s o f a r a s t h e C o n t r a c t p r o v i d e s
o t h e r w i s e . . . " T h e p r i n c i p a l provision which the contract ma kes in relation to the indemnity is the insurance required by clause 23.1 (Third party insurance) which is in the joint names of theContractor and the Employer in respect of these risks. Thus, the Employer will recover directly from the insurer and neither the Employer nor the insurers will beentitled to seek to recover from the Contractor in respect of sums paid out under the insurance policy.Clause 65 (Special risks) provides further exceptions, protecting the
Contractor from liability for items (a) to (e) of clause 20.4 (Employer's risks), provided in thecase of item (b) that the rebellion etc occurs in the country where the Works aretaking place." ( b ) l o s s o f o r d a m a g e t o a n y p r o p e r t y ( o t h e r t h a t t h e W o r k s ) " . T h i s
c o v e r s p r o p e r t y o f t h e E m p l o y e r o t h e r t h a n t h e p r o j e c t i t s e l f . T h e c o r r e s p o n d i n g insurance obligation puts the matter beyond doubt as clause 23.1 (Third party insurance - including Employer's property) expressly covers such
property.A n e q u i v a l e n t v e r s i o n o f t h i s i n d e m n i t y w a s c o n s i d e r e d i n R i c h a r d s o n v Buckinghamshire County Council (1971) 1 Ll R 533; 6 BLR 58 when the Court of Appeal considered the ICE 4th Edition clause 22(1). There the Employer had incurred legal and other costs in successfully defending a personal injury action .He sought to recover those costs from the Contractor who had been joined intothe action as a co -defendant. The Court of Appeal decided that the Employer's costs did not fall within the terms of the indemnity.2 2 . 2 I t e m s ( a ) , ( b ) a n d ( c ) c o u l d a r i s e , f o r e x a m p l e , i n t h e c l a i m s t h a t m i g h t b e m a d e b y a n a d j o i n i n g o w n e r w h o c o n s i d e r e d t h e v a l u e o f h i s p r o p e r t y t o b e adversely affected by the construction activity and the presence of the completedproject close to his land or if there was a disputed boundary between his propertyand the site. In particular, an injunction or other order of court could be obtainedbringing all or part of the works to a halt.
Page 106 of 264
I t e m ( d ) i n j u r y o r d a m a g e c a u s e d o r c o n t r i b u t e d t o b y t h e E m p l o y e r o r
t h o s e e m p l o y e d b y h i m i s t h e m o s t i m p o r t a n t e x c e p t i o n . I t i s s u b m i t t e d t h a t t h e Engineer would be the servant or agent of the Employer for these purposes witht h e r e s u l t t h a t i n j u r y o r d a m a g e c a u s e d b y t h e E n g i n e e r ' s d e s i g n w o u l d b e covered. Compare the wording of clause 44.1 (Extension of time for completion)item (d) and the commentary
thereunder." . . . o t h e r c o n t r a c t o r s n o t b e i n g e m p l o y e d b y t h e C o n t r a c t o r . . . " c o u l d c r e a t e difficulties in relation to contractors employed
by subcontractors. The intention
isc l e a r h o w e v e r , e v e n w i t h o u t a n e x p r e s s r e f e r e n c e t o c l a u s e 3 1 ( O t h e r contractors).2 2 . 3 I t m a y b e w o r t h y o f n o t e t h a t w h e r e d a m a g e t o t h e w o r k s r e s u l t s
f r o m r i s k s w h i c h a r e t h e E m p l o y e r ' s r e s p o n s i b i l i t y , t h e
E n g i n e e r i s e m p o w e r e d t o ascertain the cost of rectification under clause 52 (Valuation of variations). Withrisks that may be termed "off -site", the
Engineer and the contractual paymentmachinery have no part to
play. Nevertheless, a dispute as to the contractor's entitlement to indemnity would have to be referred to the Engineer for a decisionand to an arbitrator pursuant to clause 67 (Settlement of disputes).