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RISK MANAGEMENT

LEGAL

One benefit of standard contracts is that a body of case law builds up on the interpretation of particular forms, with the result that the industry knows how they work, writes Sue Lindsey. The Court of Appeal has recently ironed out a wrinkle in Clause 6.3b of the 1993 revision of the JCT Minor Works form (TFW Printers Ltd v Interserve Project Services Ltd, 27 June 2006).

The clause sets out the optional insurance provision of the employer taking out joint names insurance. The question concerned how long the employer was obliged to maintain the insurance - the clause is silent on the subject.

Shortly after the practical completion of works carried out by Interserve, the building was ooded, and TFW blamed Interserve. Interserve argued that the employer should have maintained the joint names insurance until defects had been made good, and that Clause 6.3b barred TFW's claim.

TFW argued that it was only obliged to maintain joint names insurance up to practical completion, and thus the contractor did not have the benefit of any protection after that date.

The judge at first instance agreed with Interserve, but the Court of Appeal disagreed, finding that the employer's insurance obligation ceased at practical completion. Many reasons were found for interpreting the contract in that way.

The Clause 6.3b obligation relates to 'the Works', and to insuring unfixed materials and goods delivered to the Works.

The Court found that these references related to the work and materials required to bring the project to a finished state, and that it was therefore unlikely that the clause related to an obligation that continued after practical completion.

It was held that there is no contractual mechanism in Clause 6.3b enabling the employer to instruct reinstatement of loss and damage after practical completion. That is because the only mechanism in Clause 6.3b to order such things is a variation instruction. The employer cannot issue variation instructions after practical completion. It did not make sense for the insurance obligation to continue after practical completion but, for the employer, to have no power to give appropriate instructions ensured that losses arose.

Clause 6.3a is the optional provision for joint names insurance taken out by the contractor. The Court decided that obligation ceases upon practical completion, and that there is no good reason why the period of the insurance obligations under Clauses 6.3a and 6.3b should be different.

The judges also considered the commercial common sense behind the clause. The more sensible a particular interpretation, the more likely it will have been what the parties intended when they made the contract. The Court concluded that when possession passes to the employer at practical completion, it makes sense for the employer to bear the risk of damage to the building and its contents from then on. While the contractor may have to return to deal with defects, there may be none.

Thus the contractor's ongoing interest in the building after practical completion is likely to be minor and possibly non-existent. The other consideration in relation to defects is that the contractor is obliged to remedy them at its own cost. That does not square with the contractor having the benefit of insurance cover paid for by the employer during the defects period.

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