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Beware of relying on indemnity in plant hire standard terms

05 March 2010

A recent Court of Appeal case serves as a reminder of the importance of explicit language if a contractual indemnity is intended to apply even in cases where the indemnified party was negligent or otherwise at fault.

It also highlights the potential risk for companies of simply relying on trade or industry association standard terms and conditions without taking legal advice on their scope and effect.

Although the case is specifically relevant to those involved in plant hire in the construction industry, it is also of wider interest to contract managers and commercial lawyers generally.

Background

There is a long-standing principle of contract interpretation, known as the Alderslade principle, that for an exclusion of liability clause to apply in the event of a party’s negligence, the wording of the clause must be sufficiently clear to cover negligence.

If the words are not clear, and there is doubt as to whether the words used are wide enough to cover negligence, the court must hold that the exclusion does not cover negligence.   

The principle was developed further in the Canada Steamship case, which produced a three-stage test to determine whether an exclusion of liability or an indemnity clause should apply in situations of negligence:

Facts

Jose v MacSalvors Plant Hire Ltd centred on a crane driver’s claim for damages against the owner of the crane, in which the driver alleged that negligence and breach of statutory duty by the owner had led to the accident which caused the driver’s injuries.

The driver had been provided by the owner to a hirer of the crane as part of a crane hire agreement, which was subject to the Construction Plant Hire Association’s Model Conditions for Plant Hire 2001, with Crane Supplementary Conditions.

The owner settled the claim with the driver and then brought a claim against the hirer to indemnify the owner under the CPA Model Conditions, relying on clauses 8 and 13. Clause 8 states that a hirer ‘shall be responsible for all claims arising in connection with the operation of the plant by the said drivers/operators/persons’, while clause 13 provides for a hirer to ‘fully and completely indemnify the owner in respect of all claims by any person whatsoever for injury to person or property caused by or in connection with or arising out of the...use of the plant’.

The decision

The Court of Appeal, agreeing with the judge at first instance, held that the hirer was not liable to indemnify the owner for damages paid to the driver. This was on the basis that clauses 8 and 13 of the CPA Model Conditions did not apply where the damage was caused by the owner’s own negligent acts.

Concerning clause 8 of the CPA Model Conditions, it was held that the clause was only intended to transfer risk to the hirer where third parties brought claims as a result of the crane operator’s negligence, and was not intended to make the Hirer responsible for the owner’s negligence.

The owner’s reliance on clause 13 was also rejected. As the wording of the indemnity (‘all claims…whatsoever’) did not expressly include negligence, the owner was unable to rely on it to claim an indemnity in respect of its own negligence. The clause failed to satisfy the Canada Steamship test.

The owner had also argued that its default had not been negligence, but breach of statutory duty (namely, a failure to comply with health and safety regulations), and that therefore the Alderslade principle did not apply.

This argument was also rejected, as the owner’s breach of the regulations inevitably implied a degree of negligence, and in the circumstances it did not make commercial sense to distinguish between the two concepts.

What does this mean?

The specific lesson of this case for companies that hire out their equipment under the CPA Model Conditions is that, if damage or injury is suffered by a third party during a hire contract resulting from the equipment owner’s negligence or breach of regulations, it cannot rely on the provisions of the CPA Model Conditions to recover from the hirer any compensation paid out to the third party. 

Although the wording of clauses 8 and 13 might seem wide enough to make the hirer liable for all losses arising during the hire contract, more explicit wording would be required for the indemnity to apply where the equipment owner is at fault.

This case also has wider application to liability and indemnity clauses generally. It suggests that the courts may be returning to a stricter application of the Alderslade principle, following Brown v Drake (2004), in which the Court of Appeal held that the words ‘howsoever caused’ in an indemnity were clear enough to cover the negligent acts of the indemnified party.

However, rather than guess at the form of general words that may work to cover negligence, the safest course of action is to make the scope of the indemnity absolutely clear.

What should you do?

This case acts as a reminder to be as clear as possible when drafting contracts.

Particular care should be taken with indemnities or limitations or exclusions of liability where, if the clause is unclear, there will often be a bias against the party seeking to rely on it. 

Also, where a limitation or exclusion of liability appears in standard terms and conditions (ie not negotiated), it may need to satisfy a test of reasonableness under the Unfair Contract Terms Act.

Equipment owners using the CPA Model Conditions for hiring equipment should consider whether the (possibly unexpected) allocation of risk highlighted by this case causes any exposure for the business, for example, due to gaps in insurance cover.

More generally, those that rely on trade or industry association standard terms should consider whether all of the terms achieve the effect that the express words would suggest.

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Jon Bartley

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