Sample amendments to the Indemnities and Limitation of liability provisions of the FIDIC Yellow Book 1999

Sub-Clause

Amended wording

Reason

17.1 Indemnities

Always subject to Sub-Clause 17.6 and to the extent attributable to any negligence, wilful act or breach of the Contract by the Contractor, the Contractor’s Personnel or any of their respective agents the Contractor shall indemnify and hold harmless the Employer, the Employer’s Personnel, and their respective agents, against and from all claims, damages, losses and expenses (including reasonable legal fees and expenses) in respect of:

(a) bodily injury, sickness, disease or death, of any person whatsoever arising out of or in the course of or by reason of the design, execution and completion of the Works and the remedying of any defects, unless attributable to any negligence, wilful act or breach of the Contract by the Employer, the Employer’s Personnel, or any of their respective agents, and



 

(b) damage to or loss of any tangible property, real or personal (other than the Works and the Employer’s Property at Site), to the extent that such damage or loss:

(i)  arises out of or in the course of or by reason of the design, execution and completion of the Works and the remedying of any defects, and

(ii)  is attributable to any negligence, wilful act or breach of the Contract by the Contractor, the Contractor’s Personnel, their respective agents, or anyone directly or indirectly employed by any of them.

Always subject to Sub-Clause 17.6 the Employer shall indemnify and hold harmless the Contractor, the Contractor’s Personnel, and their respective agents, against and from all claims, damages, losses and expenses (including reasonable legal fees and expenses) in respect of (1) bodily injury, sickness, disease or death, which is attributable to any negligence, wilful act or breach of the Contract by the Employer, the Employer’s Personnel, or any of their respective agents, and (2) the matters for which liability may be excluded from insurance cover, as described in sub-paragraphs (d)(i), (ii) and (iii) of Sub-Clause 18.3 [Insurance Against Injury to Persons and Damage to Property].

To the extent a Party is obliged to indemnify and hold harmless another Party, the indemnifying Party may (at the indemnifying Party’s cost) assume overall responsibility for negotiating the settlement of the claim, and/or any litigation or arbitration which may arise from it. The other Party shall, at the request and cost of the indemnifying Party, assist in contesting the claim. This other Party (and the Contractor’s Personnel or the Employer’s Personnel, as the case may be) shall not make any admission which might be prejudicial to the indemnifying Party, unless the indemnifying Party failed to promptly assume overall responsibility for the conduct of any negotiations, litigation or arbitration after being requested to do so by the other Party.

Discussions have been going on whether the limitation of liability of Sub-Clause 17.6 extends to the indemnities placed in different parts of the contract. Therefore, the FIDIC drafters in the 2017 Yellow Book changed the concept and put the limitation of liability in the front of the contract conditions (Sub-Clause 1.15).

The original wording only makes indemnity for property damage contingent on attributability but not personal injury. Under a greenfield, general contractor scheme, such risk allocation may be adequate as the general contractor is overall responsible for all works taking place at site and the Employer would not want to get directed to any of the Contractor’s sub-contractors. That allocation would lead to inadequate results in case several contractors work on the same project in parallel. Liability insurers will usually not cover personal injury damages without the insured having acted at least negligently.
 

As property damage includes damages to intangible property, eg, drop of good will, company value or share price, which from a contractor’s perspective is closely connected to the Employer’s business and as such is of a similar risk as loss of profit, loss of revenue or loss of contracts.

In a greenfield, general contractor scheme, the ‘Works’ cover everything that is going to be built, excluding the land and adjacent property, as well as Employer’s Equipment. In a project separated into lots, all works performed by another contractor, all existing structure on the project site fall outside the ‘Works’ and any damages to them would get carved-out from the limitation of liability.

The indemnities need to carry with them an entitlement and a duty of the indemnifying party to undertake defence activities.

17.5 Intellectual and Industrial Property Rights

In this Sub-Clause, ‘infringement’ means an infringement (or alleged infringement) of any patent, registered design, copyright, trade mark, trade name, trade secret or other intellectual or industrial property right relating to the Works; and “claim” means a claim (or proceedings pursuing a claim) alleging an infringement.

Whenever a Party does not receives a claim but fails to give notice to the other Party of any claim within 28 days of receiving the claim, the first Party shall be deemed to have waived any right to indemnity under this Sub-Clause.

Always subject to Sub-Clause 17.6 the Employer shall indemnify and hold the Contractor harmless against and from any third-party claim alleging an infringement which is or was:

(a) an unavoidable result of the Contractor’s compliance with the Employer’s Requirements, or

(b) a result of any Works being used by the Employer:

(i)  for a purpose other than that indicated by, or reasonably to be inferred from, the Contract, or

(ii)  in conjunction with anything not supplied by the Contractor, unless such use was disclosed to the Contractor prior to the Base Date or is stated in the Contract.

Always subject to Sub-Clause 17.6 the Contractor shall indemnify and hold the Employer harmless against and from any other third-party claim which arises out of or in relation to (i) the Contractor’s design, manufacture, construction or execution of the Works, (ii) the use of Contractor’s Equipment, or (iii) the proper use of the Works.

If a Party is entitled to be indemnified under this Sub-Clause, the indemnifying Party may (at its cost) conduct negotiations for the settlement of the claim, and any litigation or arbitration which may arise from it. The other Party shall, at the request and cost of the indemnifying Party, assist in contesting the claim. This other Party (and its Personnel) shall not make any admission which might be prejudicial to the indemnifying Party, unless the indemnifying Party failed to take over the conduct of any negotiations, litigation or arbitration upon being requested to do so by such other Party.

Clarification

Discussions have been going on whether the limitation of liability of Sub-Clause 17.6 extends to the indemnities placed in different parts of the contract. Therefore, the FIDIC drafters in the 2017 Yellow Book changed the concept and put the limitation of liability in the front of the contract conditions (Sub-Clause 1.15).

As the IP indemnity cuts through both limitations of liability, it needs to be restricted to third-party claims an Employer is exposed to due to an infringement of the Contractor for the same reason for which the contract generally excludes ‘consequentials’.

17.6 Limitation of Liability

To the extent permitted by any applicable Law and irrespective of whether arising in contract, tort, delict, strict liability, negligence, statutory law, indemnity or otherwise, neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract, loss of production, loss of revenue or of any business opportunity, erasure and corruption of operational data or the link to such data, loss of interest (excluding the agreed or statutory interest for delayed payments) or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 16.4 [payment on Termination] and in respect of any liability relating to a third-party claim (or proceedings pursuing a third-party claim) under Sub-Clause 17.1 [Indemnities].

The total liability of the Contractor to the Employer, under or in connection with the Contract and irrespective of whether arising in contract, tort, delict, strict liability, negligence, statutory law, indemnity or otherwise, other than under Sub-Clause 4.19 [Electricity, Water and Gas], Sub-Clause 4.20 [Employer’s Equipment and Free-Issue Material], in respect of any liability relating to a third party claim (or proceedings pursuing a third-party claim) under Sub-Clause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights], shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount.

The Employer shall not be entitled to bring a claim against the Contractor under or in connection with this Contract or the Works for any loss or damage or any defect after […] years after the Works or in case taking over of a Section applies after the Section(s) have been taken over or are deemed to have been taken over.

This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party.

Carving out a Contractor’s indemnity obligation for third-party claims from the limitation of liability finds a certain justification in the fact that a Contractor cannot contractually limit its liability to a third party and therefore, it may not seem adequate that the Contractor can limit such liability in case the third-party does not directly claim from the Contractor but claims from the Employer and the Employer then seeks indemnification by the Contractor. However, loss of use, profit etc an Employer suffers due to the Contractor having caused third-party damages should not be carved back in, for example, loss of production of the Employer as it was unable to operate the Permanent Works by reason of a third-party restraining order. Usually, Contractors will not take a risk the sheer size of which predominantly depends on the Employer’s general business model. For that reason, loss of use and all the other ‘consequentials’ are excluded in the first place. Carving such risk back into the Contractor’s responsibility would make projects unreasonably expensive for every Contractor and sub-contractor would then need to calculate certain reserves for such tremendously higher (volume) risk.

Drafting to make enforcement of the limitation more likely.

Sunset clause when each and every Contractor’s liability in connection with the Contract or the Works expires.