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Rights of Recourse - Explained


From time to time businesses are faced with issues of right of recourse in contracts but what are rights of recourse and how do they affect your position regarding liability for a product?

Rights of recourse is the ability of one party to enforce another party to accept its common law liabilities and responsibilities in a contract or similar relationship, i.e. the right to have recourse to the responsible party.

How do rights of recourse come about?

Rights of recourse come about because one party in a contract may incur a liability or claim due to the fault of another party, and the innocent party has the ability to pass the liability or claim on to, or receive reimbursement or indemnity from, the party at fault.

There is normally a chain in the supply of any goods or services. The chain may be very short, as in the case of a raw material producer dealing directly with a customer, or very long chain involving numerous raw material suppliers, processors, agents, wholesalers, retailers and consumers. Each link in the chain will receive reward for work undertaken and will have a responsibility for that work. It is an important principle that each link retains the responsibility for their work, and any liabilities incurred by the goods or services are met by the responsible party(ies).

Why are rights of recourse important?

Rights of recourse are important as any amendment to the common law position may place an undue liability upon another party, that the other party may not be aware of and may not have insurance protection against.

In a relationship, it seems only fit and proper that each party should be liable for the consequences of their own actions or responsibilities, especially if involving payment or some other benefit.

Any attempt to limit or remove the rights of recourse is at odds with this fair minded approach, and usually means that one party seeking to gain an advantage by avoiding their common liabilities or responsibilities and transferring these to another party by agreement.

Why are rights of recourse important in insurance?

Rights of recourse are extremely important in public liability and product liability insurance as it is a key factor in the assessment of the risk by the underwriter including whether to offer cover at all and the premium charged.

For example, if a retailer waives its rights of recourse against a manufacturer, then, as far as risk and responsibility are concerned, the retailer becomes the manufacturer. This is because any liabilities or claims incurred as result of the good sold will be primarily the responsibility of the retailer, but cannot be passed to the manufacturer where the liabilities or claims may truly belong as the rights of recourse to the manufacturer have been waived by  the retailer. The insurer of retailer may not want to, or be able to, insure the liability for the manufacture of the goods sold by the retailer, and this may lead to claims being repudiated.

An insurer will expect its insured to maintain rights of recourse, so that the insurer has an unrestricted ability to make a recovery of any outlay from a responsible party. Any situations that restrict rights of recourse should be advised to the insurer, whether or not this information is specifically requested, as this is a material fact and may affect the terms and conditions of the insurance offered.

How do I know if I have rights of recourse?

As the doctrine that everyone is responsible for their own actions is enshrined in common law, rights of recourse are automatically in place whether specifically stated or not.

Rights of recourse have to be removed or amended by agreement. This will normally be in writing, e.g. in a contract or terms of business. It is important that this should be one of the considerations when deciding whether or not to accept a contract. The waiving of rights of recourse may not be referred to as such, and may be contained in, or be consequence of, contractual clauses such as Indemnity Agreement or a Hold Harmless Agreement.

Best advice is to avoid contracts where waiving of rights of recourse is required, but this may not always be possible.

 

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