The implications of dealing with Suppliers and other Third Parties without a written contract

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All organisations, large and small, are vulnerable to the mistakes, business practices, choices and non- compliance of the people with whom they contract.

You probably deal with a wide variety of suppliers, contractors, lessees or other third parties but how well do you understand the potential risks of not expressing your agreements in writing? One organisation we know, found out about this the hard way.

They hired a firm to supply and erect crowd control barriers, one of which was faulty. When someone leaned on it, it fell over and the person crashed to the ground, suffering a badly broken arm.

The barriers were hired over the 'phone and to make matters worse, it was not realised that the 'terms of hire' printed on the back of the supplier's invoice required the hirer to indemnify the supplier for injury and damage from any cause.

When the matter went to court, the Judge awarded damages to the injured person against the hirer and found that the supplier's terms of hire were valid ie, the hirer was unable to recover its costs from the supplier.

Formally documenting the terms of engagement provides you with the opportunity to specify:

• the circumstances under which your suppliers will indemnify you for their negligence,
• the nature and extent of insurance to be provided to back up the indemnities, and
• whether and how you want to be named in the policies ie as an Additional Insured or as an Interested Party (your solicitor can advise you on the most appropriate language to be used).

Whether a contractor has negligently set fire to your premises or you have just been named as a joint defendant in an injury case, your first step will generally be to report the incident to your own insurer.

On the other hand, the claim may be outside the scope of your policy or you could have a significant deductible. Either way, you or your insurer will clearly be keen to recover costs from someone - or better still, have the supplier's insurer take over the case on your behalf.

Where the supplier does not have effective insurance, you or your insurer will be looking to recover directly from him.

When the supplier is insured, his insurer will most likely take over his liabilities (provided his policy has not been breached or is ineffective in some other way) but in the event that a significant recovery is not possible, your own bottom line and your future premiums could be adversely affected.

Whether a supplier is insured or not, it is important to maximise the chances of recovery and minimise the cost of achieving this. The easier you can make it for yourself or your insurer to recover from the supplier the better. It is generally more effective to enforce an indemnity in a contract and call upon the other party (or his policy) to honour the indemnity, than to have to prove a breach of his Common Law duty of care.

Indemnities should be clear about whether contractors are required to indemnify you as Principal for simply the supplier's own negligence or for the actions of other parties as well; whether the supplier is required to indemnity for all losses or only damage and injury; whether the indemnity is enforceable on behalf of your employees and whether it will be enforceable after the work is finished or the contract has concluded. You also need to ensure that the insurance requirements are compatible with the indemnities and are realistic in terms of what is available in the marketplace.

Even if originally drawn up by a solicitor, if the indemnity and insurance clauses in your contracts have not been reviewed recently, they may not reflect developments in the law and insurance and may not provide the anticipated basis for recovery from negligent contractors.

In general terms however, you should never rely solely on another party's insurance as a substitute for your own insurance coverage.

This information in this bulletin is for general information only and is not to be construed as legal or financial advice.

Rating details were checked however we accept no responsibility for their accuracy.

You should seek your own advice before implementing any suggestions contained herein.