Indemnities

Indemnities

An indemnity is an enforceable agreement by a party to compensate another party for loss, damage or expense. This may be in the form of a stand alone document or be part of a contract. The loss, damage or expense will usually be all losses incurred as a result of certain stipulated events (often including third party claims).

Indemnities typically specify the circumstances when a cause of action will arise and impose an obligation on the party providing the indemnity to indemnify the other party for all loss suffered. Consequently:

• The range and scope of circumstances under which losses may be payable under an indemnity are agreed between the parties. They are not necessarily determined by the principle of causation, as is generally the case with damages (although, in interpreting an indemnity, a court may refer to what the parties reasonably contemplated as the scope of the indemnity provided). As a result, an indemnity may provide a broader range of ‘causal’ events, and may specify exclusions or limitations.
• A party will need only show that the circumstance for which it is making the claim is covered under the indemnity.
• The party liable under the indemnity will be obliged to pay for losses on the basis stipulated in the indemnity, which may well be different (and frequently more) than would be the case if calculated as damages for breach of contract.
• Generally, an indemnity does not require the claimant to show that the loss was not too remote or that the loss was foreseeable.

An indemnity will be interpreted in accordance with its terms and, if it is not clear, in the context of the contract as a whole. Therefore, it is important that parties draft an indemnity that is clear and unambiguous. A court will generally not interpret ambiguous clauses in favour of the indemnified party.

Proportionate liability

The apportionment of liability between defendants is governed by state legislation so that each defendant is only liable for that proportion of the loss for which it is responsible.

The legislation varies across Australia, but there is potential for it to affect the amount recoverable under an indemnity, by limiting it to only that part of the loss for which the indemnifying party is responsible.

The Northern Territory, Tasmanian and Western Australian proportionate liability schemes specifically preserve contractual indemnities. However, federal proportionate liability legislation and other state and territory schemes do not address the issue. Although the New South Wales Supreme Court has previously suggested that proportionate liability legislation may override contractual indemnities in the jurisdictions that do not preserve contractual indemnities (Reinhold v New South Wales Lotteries Corporation (No.2) [2008] NSWSC 187).

A  New South Wales Court of Appeal decision (Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No.2) [2013] NSWCA 58) held that a contractual indemnity may exclude the operation of the proportionate liability legislation, in which case the liability of the other party under the indemnity will not be limited by the legislation. This decision was based on an express provision in the New South Wales legislation that permitted contracting out of its proportionate liability regime.

The legislation in Western Australia and Tasmania has similar express provisions, while the Queensland legislation prohibits contracting out. See Chapter 21 – Proportionate liability for more detail.