'No claims' clauses in alliancing contracts

Out-Law Analysis | 30 Jul 2019 | 10:54 am | 2 min. read

To enter into a truly collaborative 'alliancing' contract, parties have to be brave enough to take the leap of faith that they cannot generally sue each other if matters go wrong.

'No claims' clauses provide a contractual method of doing this, by limiting the parties' rights of action to being able to claim for the cost of actually carrying out the works and enforcing any incentivisation mechanism included in the contract. This can be strengthened by way of an indemnity requiring the innocent party to hold harmless the party it is considering suing, with the effect that anything recovered must be immediately handed back rendering proceedings neutral.

But how far can no claims clauses actually go, and can the parties really leave behind the typical mind set that a contract is largely there to determine the circumstances in which they can sue each other?

Blundell Nigel

Nigel Blundell

Partner

The effect of carving out liabilities is to dilute the collaboration and 'no blame' approach of an alliancing agreement to the extent that the contract comes to resemble a more typical, adversarial-style contract.

Typically, a no claims clause will include a number of carve-outs in order to allow certain claims such as:

  • claims for wilful default - which is sometimes broadly defined;
  • claims which cannot be excluded as a matter of law – for example, fraud;
  • rights to bring a claim under statutory requirements; and
  • non-payment by the client.

We have also seen further carve-outs agreed which could attract significant liabilities for the parties, including:

  • TUPE indemnities;
  • indemnities for infringement of intellectual property rights;
  • indemnities for failure to take out and maintain insurance;
  • clauses disapplying the no claims principle in relation to pre-construction work which does not proceed to the next stage in a two-stage contract.

The types of liabilities carved out of the no claims clause may be capped. However, even in these cases, there are then typically further carve-outs to these caps. The effect is to dilute the collaboration and 'no blame' approach of an alliancing agreement to the extent that the contract comes to resemble a more typical, adversarial-style contract.

The new NEC4 Alliance Contract attempts to work as a 'no claims' contract except in respect of what are set out as the parties' liabilities. Unusually, the client's obligation to pay is not included within the list of liabilities, although it would be very surprising if the contract is interpreted as removing the right to sue for non-payment.

It also appears that, under the NEC alliance contract, the client retains the right to bring a claim for latent defects – defects which, by their nature, cannot come to light until after completion – against the contractors. It is not clear if this is a general right, or if it has to be enabled by including it in the list of additional partners' liabilities in the contract data. Clearly, this is a serious concern for a contractor pricing the risks under an NEC alliance contract.

Helen Achilleos

Associate

If there is a no claims clause, and no ability to sue for a latent defect, the building owner should consider taking out a latent defect policy to cover against future risk if it wants to take advantage of the benefits of a fully collaborative approach.

Alliancing with no claims clauses has been used in infrastructure projects. The alliance has the obligation to put right defects until the final certificate has been issued. Once the final certificate is issued, claims cannot be brought.

This works well in infrastructure projects where a road or rail scheme is subject to fair wear and tear and will have an active and well-funded maintenance programme. As the construction of transportation projects is horizontal, a problem in one area is likely to be isolated and will not have a fundamental impact on the overall scheme unless repeated.

Contrast that with a vertically-built project, such as an office block or student accommodation. A significant defect on a lower level will have a major impact on the ability to use the building. If there is a no claims clause, and no ability to sue for a latent defect, the building owner should consider taking out a latent defect policy to cover against future risk if it wants to take advantage of the benefits of a fully collaborative approach.

Nigel Blundell and Helen Achilleos are construction law experts at Pinsent Masons, the law firm behind Out-Law.