Look That Gift Horse In The Mouth

Recently, we were asked to review a contract that would accompany a gift to a local government client, whose astute chief administrative officer recognized that there were potential pitfalls hiding between the lines of the contract.

The contract obliged the recipient to place “all risks replacement cost coverage insurance” on the item, at the municipality’s expense. The municipality’s current deductible is more than the cost of replacing the item, meaning that the replacement cost would be paid for out of the municipality’s own funds.

The insurance requirement and other clauses in the contract oblige the municipality to continue to contract with the manufacturer to maintain and repair the item after the 2 year manufacturer’s warranty expires.

The term of the contract is open ended and there is no provision whereby the municipality may return or dispose of the item if it simply wears out, which is not an insurable factor. Nor is there any specific provision that allows the municipality to replace the item with another brand or decide not to replace it at all for any reason.

The replacement cost insurance provision may have the effect of obliging the municipality to insure and replace the item ad infinitum with the same manufacturer’s product, if it is damaged or lost within the coverage provided under the policy.

This gift comes with strings attached, although the strings may not be intentional. Even though the contract appears to be simple and straightforward, look carefully at it. Remember that some roads are paved with good intentions but may lead to an undesirable place.

Lorena Staples, Q.C.

This article was published in Winter 2007/2008 and may be superseded by changes in the law at a later date. It is for general information only. Specific legal advice should be obtained from a qualified lawyer.