SAIA

South African Insurance Association

+27 11 726 5381

Contract Agreements/ Conditions of a Contract in Construction Projects

Construction Projects invariably involve several parties, as well as considerable sums of money. In order to protect the parties to the project, a Contract will be drawn up.

A Contract is a written or spoken agreement between two or more parties that is enforceable by Law. This is referred to as a bilateral agreement, where a proposal is made and an acceptance confirmed. The parties to such a contract must reach mutual assent. This process is often referred to as “a meeting of the minds”, and must take place for there to a valid contract.

Once a contract is signed, it becomes a legal and binding document. An important component of such Contracts are the Conditions of Contract, which set out the rights and obligations of the contracting parties, and simplifies the administration of the Contract. 

The Agreement sets out the Contractual rights and responsibilities of the contracting parties, from the design of the works, during the construction period until handover, as well as during the defects rectification/maintenance period.

However, of more importance to Insurers, the Agreement defines when the contract works and public liability insurance has to be in force, and states the party responsible for such insurance.
The Agreement states that the contractor takes full responsibility for the works from the date on which possession of the site is given to the contractor, until the issue of the Certificate of Practical Completion. (Note : this does not mean that the contractor has to effect the insurance!)

It then states that the responsible party has to effect and keep in force contract works insurance, in the joint names of the employer and contractor, as well as the contractor’s subcontractors, during the above period.

The final section of the Agreement consists of a schedule, which contains all variables referred to in the document. These include the details of the contracting parties, the professionals involved, the description of the works, the site address, start and completion dates, penalties, as well as the most crucial detail for insurers, the party responsible for effecting the Works and Public Liability Insurances.

The typical Construction Risks and Public Policy states that “the indemnity by this Policy shall be granted to The Insured Parties to the extent required by The Conditions of Contract(s) between The Principal and The Contractor(s) and between The Contractor(s) and Sub-Contractor(s)”

Therefore, a party to the contract cannot effect the Works and Public Liability insurance if they are not “the responsible party” as stated in the conditions of contract. (The Policy follows the Contract, and not the other way round)

It follows that when approached to provide a Construction Risks Quotation, or when assessing a claim, the first issue to be addressed by Insurers, is to determine the party responsible for the Works insurance.

From the above, it can be seen that the conditions of contract are equally important from a Contractual and Insurance point of view, and Construction Risks and Public Liability Insurers and Brokers should be mindful of this.

For more information contact David Waterworth: David.Waterworth@MF.co.za