Risk Allocation in Major Construction Projects

• United Kingdom

• Construction and engineering - Articles

31-10-2014

Indemnities are an important contractual tool for ensuring the appropriate allocation of risk between the parties to a major construction contract.

In standard EPC contracts, key risks as to programme, price, quality and design generally sit with the EPC contractor. 

Whilst allocating risk in this way has its advantages, there are also disadvantages, such as high prices for owners/employers, and the need for contractors to accept risks whose extent is unknown and over which they may have no control.

The parties may therefore seek to manage these risks, either by imposing caps on liability, and/or by adopting different risk allocation models such as the use of ‘knock for knock’ indemnities which are particularly prevalent in the offshore and oil & gas sectors (see in particular the London Bridge case).

This article explores those ways of managing risk and looks at how indemnity clauses operate, including fault-based approaches and 'mutual hold harmless' approaches.

We look at drafting points as to the obligations imposed by indemnities and the parties and claims covered by indemnities. We look at how parties tend to deal with consequential/indirect losses and loss of profit; whether and when negligence has to be expressly excluded (see Greenwich Millennium Village Ltd v Essex Services Group plc); and questions of gross negligence and wilful misconduct (Tradigrain SA v Intertek Trading Systems).  

Please click here to download a pdf version of the full article