Indemnity clauses case study no.1

This example relates to a claim brought by the owner of an industrial park against the park’s architect following the failure of fire protection measures during a fire. Our client was appointed as the architect for the development in 1998.

Griffiths & Armour
04 September 2014

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Case study

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The industrial park was designed to include four large warehouse style buildings, each of which was sub-divided into six smaller units. The smaller units were designed to be self-contained, and the architect’s design included provision for fire stops between each unit to prevent the spread of fire from one unit to the next.  

In June 2007 a fire was started deliberately at the rear of one of the industrial units and, due to failure of the fire protection within that and other units, it rapidly spread though the entire building, which was completely destroyed. The owner of the park incurred significant rebuild costs, loss of rent, and also had to indemnify a number of tenants in respect of the business interruption losses they incurred.

“The date of breach in the case of the indemnity clause was the date on which the loss was incurred and the architect was therefore found liable for the losses suffered almost 10 years after he had completed his design work. Had the appointment not included that clause, an action in contract would have been time barred.”

A claim was brought against the architect alleging negligence in the specification and design of fire protection systems which were also alleged to be non-compliant with Building Regulations.

The architect’s appointment was by a simple contract signed under hand, to which a 6 year liability period applies. The contract also contained the following broad indemnity clause: “The Consultant shall indemnify the Client against all losses, damages, claims and expenses arising as a result of any act, omission or default in the services provided by the Consultant.”

Had the appointment not included this clause, an action in contract would have been time barred given that the last date when the architect could have breached his design duty was the completion of the project in 1999. However, the date of breach in the case of the indemnity clause was the date on which the loss was incurred and the architect was therefore found liable for the losses suffered almost 10 years after he had completed his design work. 

Outcome

In this case, the inclusion of an indemnity clause deprived our client of what could have been a complete defence – where a limitation period has expired the claimant gets nothing at all, as opposed to a merely diminished award based on (e.g.) contributory negligence.

With the benefit of hindsight, the inclusion of the indemnity clause in the appointment should have been challenged, or at the very least the clause should have been adapted to mitigate its effects.

One way the effect of the indemnity could have been mitigated would have been to restrict its application to a defined period (a maximum of 6 years in this case) from completion of the services or practical completion of the project. This change would have effectively prevented the indemnity from being triggered in this case, meaning the claim would have been time barred.