LIABILITY UNDER CONTRACTS

Civil liability is divided into: contractual liability and tort, where the former (the subject matter of this paper) is established in case of breach of a contractual obligation, while latter is established in case of violation of a legal obligation. In principle, a contract is made to be implemented, where each party to a contract is entitled to obtain his right in as contained in a contract.

If either party fails to fulfill his contractual obligation, then he is civilly liable, where he is required to compensate an obligee for all damages incurred by him for non-implementation of a contract. Contract liability refers to liability that one party of a contract shoulders on behalf of another party. It is implemented through an indemnity agreement or hold harmless agreement in a contract.

This type of liability can be used to transfer the risk of lawsuits from one party to another, making it an important concept in risk management. When one party agrees to be held liable for the losses and damages incurred by another party, he or she is assuming contractual liability. Similar to many other companies, your business may perform work for another company or hire another company to perform work.

Whichever the case may be, you may have signed a contract that includes an?indemnity agreement. Also called hold harmless agreement, an indemnity agreement occurs when one party promises to bear liability on behalf of another person or entity.

In an indemnity agreement, Party A agrees to indemnify or compensate Party B for the losses and damages resulting from Party C's lawsuit in the event that Party B is sued due to Party A's negligence. A contract of indemnity, or hold harmless clause, establishes a method for transferring financial risk to a third party with a?written contract. It lists all parties involved, the situations covered, and the party or parties that will shoulder the risk

Essentially, a company that indemnifies another company accepts liability related to a specific product or service. Indemnity clauses are common in:

? Commercial contracts

? Legal contracts

? Loan agreements

? Supply agreements

? Licensing agreements

? Leases

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Example of Contractual Liability

A property owner called ABC Properties hires a general contractor called XYZ Builders to refurbish its office building. Then, XYZ Builders hires PQR Electrical to replace the old wiring in the building with new wiring. XYZ is aware that someone may be injured or property may be damaged if PQR makes a mistake while replacing the wiring. If that happens, the injured party may seek compensation by?filing a lawsuit?against XYZ and PQR

In order to protect itself against potential lawsuits, XYZ requires PQR to?enter into a contract?that includes an indemnity agreement. In the indemnity agreement, it is stated that PQR will be responsible for the losses incurred if someone suffers property damage or bodily injury due to PQR's negligence while performing the wiring work. In other words, the contract requires PQR to bear liability for any damages assessed against XYZ because of the lawsuit.

Also, it is likely that PQR will be responsible for the cost of defending XYZ against the laws. As shown in the example above, a contract can also serve as a tool for transferring risk. By using an indemnity agreement, XYZ Builders has transferred the risk of lawsuits to PQR Electrical.

Since it will be performing the wiring work, PQR is in a better position than XYZ to prevent losses that can potentially result from that kind of work. Therefore, PQR should be the party who assumes the risk of wiring-related losses. When liability for losses is transferred from Party A to Party B through an indemnity agreement, it does not erase Party A's liability towards the injured person. The agreement does not prevent third parties from suing Party A and has no effect on his or her liability towards an injured third party

All it does is transfer liability for the?financial losses resulting from the lawsuit, including damages and defense costs, to Party B. Many business owners enter into contracts that include indemnity agreements. Some examples of such contracts include:

? Property leases

? Construction agreements

? Equipment leases

? Easements

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The liability you bear under these contracts is automatically included in a standard general liability policy. Coverage for contractual liability is available through an exception to exclusion under Coverage A, which covers liability for bodily injury and property damage. If you look at the Bodily Injury and Property Damage Coverage section in your liability policy, you may think that contractual liability is not covered. This is because Coverage A has contractual liability exclusion.

This exclusion obligates the insured to pay damages for bodily injury and property damage because of liability assumption in an agreement or contract. The liability policy provides coverage for bodily injury and property damage that you will be liable for in the absence of a contract.

For instance, you have just rented a forklift to move crates outside your warehouse.

Then, you accidentally collided with a truck that belongs to your neighbor. You may have signed a rental agreement that gives you some liability for damage to the forklift or other property. Indemnity is when an individual or business receives compensation for loss or damages. From a legal perspective, it may also refer to gaining immunity from any liability or damages. Indemnity is based on a contractual agreement in which one party agrees to pay for any damages or losses that are caused to another party.

For example, in an insurance contract, one party agrees to pay the other party for losses or damages in return for a premium payment that is paid to the insurer. Indemnity clauses?are usually included in insurance agreements. They specify what is covered, what is not covered, and the extent of coverage. An indemnity agreement will usually contain language about a period of indemnity, which is a specific period in which the indemnity will remain valid.

Also, many agreements will include a letter of indemnity, which ensures that the obligations of both parties will be met. Guarantees that haven't been achieved will require an indemnity payment.

Indemnity is frequently used in contracts between:

? Businesses and individuals

? Businesses and the government

? Governments and other countries

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An indemnification clause is useful in setting parameters around:

? Scope

? Time periods

? Maximum liability

? Insurance covenants

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To simplify, an indemnity clause is a way to transfer the risk from one individual or group to another party.

There are three types of indemnity clauses

First, you have a broad form indemnity

This type of clause makes the Indemnitor responsible for his or her own negligence, as well as any negligence from a third-party. This could make them liable for the indemnitee's negligence.

For example, in certain states, including California, the indemnitee cannot transfer damages caused by their own negligence or the willful misconduct of the Indemnitor

Next, you have intermediate form indemnity

This indemnifies a party for its negligence unless they were completely at fault. This type of indemnity almost always includes the phrase, “... caused in part." Since the word "whole" is not included, it is no longer broad form indemnity. Here, partial negligence of the party in search of indemnity is being covered. Immediate form is the preferred method in the?construction industry. It makes the owner harmless from any claims caused by the negligence of the owner. Basically, it sets up all-or-nothing indemnification.

The third type of indemnity is the comparative form clause

It requires the negligence to be compared. With this clause, the Indemnitor will be held responsible for any losses caused by their proper actions. Common law principals typically recognized in the United States determine this responsibility. The Indemnitor isn't liable for negligence directly committed by the indemnitee.

The conditions outlined in a business contract will determine how much indemnity one party will have to shoulder on behalf of the other. A proper contract will indicate the types of indemnity necessary based on the nature of the transaction. It is recommended that all parties fully understand the indemnity coverage that's provided in the contract.

The best way to avoid indemnification-related downfalls includes:

? Insufficiently defining or excluding indemnification procedures

? Failing to sufficiently address or overlooking direct claims

? Including a conflicting limitation of liability arrangement

? Failing to include or overlooking an individual remedy arrangement

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Resources cited from:

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Legal Nature Of Contractual Liability: A Comparative Study, Nadia Quzmar, , Mohammed Elbayat, INTERNATIONAL JOURNAL OF SCIENTIFIC & TECHNOLOGY RESEARCH VOLUME 9, ISSUE 03, MARCH 2020, www.upcounsel.com/indemnification-contract