Legal management of machinery failures: Legal instruments securing performance and safety

Safety engineering aims at reducing the incidence of failure. In order to limit the loss in cases of failure, purchasers of plant equipment and machinery seek to protect themselves in various ways. The level of legal protection available varies considerably. An assessment is made of the value of various types of legal protection usually found in international plant equipment and machinery contracting. In particular, the following are reviewed. (i) Comfort letters are assurances issued by the contractor or its parent company. The legal value of letters of comfort is very limited and in many cases enforceability is non-existent. (ii) Warranties are either legal warranties available under the national law applicable to the contract and as such subject to legal prerequisites or formalities sometimes not fully contemplated by the parties, or express stipulations of the parties and as such are subject to the enforceability and construction of the terms chosen. (iii) Ondemand guarantees provide a high degree of comfort as collateral for securing warranties. The unfair calling of on-demand guarantees, and any disparity in the legal evaluation of on-demand guarantees under different legal systems are areas of major concern. The rules published by the International Chamber of Commerce (ICC) and the Convention drafted by UNCITRAL are discussed. (iv) Stand-by letters of credit in documentary form provide a high degree of security to both the contractor and the buyer. The documents to be tendered under stand-by letters of credit are capable of providing reliable legal evidence in cases of failure. Documentary letters of credit are subject to the ICC Uniform Customs and Practices for Documentary Credits (UCP 500). They enjoy worldwide reputation and secure informity in their application. (v) Sureties in the USA are reliable and effective devices that industry has developed over the years. A surety company guarantees the timely and conforming completion of construction and plant contracts. The underwriting company supervises the progress of the contract and steps in or replaces the contractor in cases of failure. Unfortunately, the activities of the surety companies traditionally is restricted to the USA, and some time will pass before a surety industry will develop in other parts of the world. Recommendations are made on how to manage the risk of failure from a legal point of view. The use of effective forms of legal protection is an indispensable aspect of safety engineering and high wire risk management.

Keywords:

• Contracts
• Legal Protection
• Warranties
• Guarantees