What is an indemnity clause?

The word indemnity, in its’ legal context, is defined as “legal protection against liabilities arising from one’s actions.”^[1]  An indemnity clause therefore, represents the contractual embodiment of this definition, serving as a formal mechanism which protects one party from the from the actions or inactions of another.^[2]  In effect, it enables parties to allocate risk in a manner that may override the default position from how it would otherwise be established according to common law.^[3]

How is an indemnity clause to be interpreted by a Court?

The High Court of Australia (High Court) takes a strict and narrow approach when interpreting indemnity clauses, adhering to the principle that such clauses should be construed strictissimi juris (in the strictest terms).^[4]  While the Court may consider the commercial context to assist with interpretation, indemnity clauses are strictly construed, with liability limited to what is clearly agreed and any ambiguity resolved in favour of the indemnifier.^[5]

Example of interpretation of indemnity clauses in commercial contracts

Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424

In the High Court case, Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 (Andar v Brambles), Andar Transport Pty Ltd (Appellant) sought to rely on an indemnity clause in a commercial services contract to avoid liability for damages arising from a workplace injury sustained by a driver engaged by Andar to perform courier work on behalf of Brambles Ltd (Respondent).

In Andar v Brambles, the indemnity clause at issue was:

“[to] assume sole and entire responsibility for and indemnify [Brambles] against all claims liabilities losses expenses and damages arising from operation of the Vehicle by reason of any happening not attributable to the wilful negligent or malicious act or omission of [Brambles].”^[6]

The High Court held that Brambles could not claim an indemnity against liability for negligence from Andar Transport Pty Ltd, as the clause did not expressly cover such liability.^[7]  The Court emphasised that indemnity clauses must be construed strictly, and any ambiguity should be resolved in favour of the indemnifier.^[8]  The clause did not explicitly cover negligence, and thus, Brambles was not entitled to be indemnified under this provision.^[9]

Samways v WorkCover Queensland & Ors [2010] QSC 127

In the Supreme Court of Queensland (Supreme Court) case, Samways v WorkCover Queensland & Ors [2010] QSC 127 (Samways v WorkCover), Lynsha Pty Ltd (Third Defendant) sought to rely on an indemnity clause in a construction-related ‘Wet Hire’ contract to shift liability to De Luca Properties Pty Ltd (Second Defendant) for injuries sustained during the use of hired equipment.

The indemnity clause at issue was:

“The hirer shall fully and completely indemnify the indemnifier in respect of all claims by any person or party whatsoever for injury to any person or persons and/or property caused by or in connection with or arising out of the use of the plant and in respect of all costs and charges in connection therewith whether arising under statute or common law.”^[10]

The Supreme Court held that this clause was sufficiently broad to cover liability for injury arising from the negligence of the indemnifier’s own employee.^[11]  However, the Supreme Court reaffirmed that indemnity clauses must be construed strictly, and that clear language is required to transfer liability.^[12]  Despite this strict approach, the Supreme Court found that the broad language used did encompass the relevant liability in this case, and De Luca Properties Pty Ltd was liable to indemnify Lynsha Pty Ltd under the clause.^[13]

What does this mean for businesses?

For businesses, it is important to take care when drafting indemnity clauses to ensure that they are enforceable.  Failure to draft them correctly can have significant legal and financial implications.

While broadly drafted indemnity clauses may be sufficient, as in Samways v WorkCover, the Courts will not interpret these clauses for things such as negligence or unless they are expressly included.^[14]  This means businesses must draft indemnity clauses with precision, ensuring the scope of indemnity is clearly articulated and tailored to the specific risks of the agreement.  Failing to do so may leave a party exposed to liabilities it assumed were contractually covered.^[15]

Links and further references

Cases

Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549

Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28

Samways v WorkCover Queensland & Ors [2010] QSC 127

Further information about indemnity clauses in commercial contracts

If you need advice on including an enforceable indemnity clause in a commercial contract, contact us for a confidential and obligation free and discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Concise Australian Legal Dictionary (4th ed, LexisNexis, 2010).

[2] Kelly, A Recent developments in Indemnities (Thomsons Lawyers).

[3] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 71.

[4] Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 21.

[5] Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 21; Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 17-13.

[6] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 93.

[7] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 28.

[8] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 71.

[9] Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 28.

[10] Samways v WorkCover Queensland & Ors [2010] QSC 127 at 63.

[11] Samways v WorkCover Queensland & Ors [2010] QSC 127 at 74.

[12] Samways v WorkCover Queensland & Ors [2010] QSC 127 at 67.

[13] Samways v WorkCover Queensland & Ors [2010] QSC 127 at 80.

[14] Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 21; Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 17-13.

[15] See generally Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424.

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