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2. Deciphering indemnity clauses in commercial contracts 28 September Presented By: Emily Shoemark, Senior Associate Caitlin Meers, Lawyer Snedden Hall & Gallop Lawyers Association of Corporate Counsel

3. What are indemnity clauses?
An indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party
Mason CJ in Sunbird Plaza Pty Ltd v Maloney (1987) 166 CLR 245
A contract of indemnity is “a contract by one party to keep the other harmless against loss” and is not dependant on the continuing liability of the principal debtor
Gleeson JA in Canty v Paperlinx Australia Pty Ltd [2014] SNWCA 309
Today we are looking at contractual indemnities. These are indemnities where the indemnifier assumes risk under a contract that he or she would not ordinarily have.
Indemnity clauses can often be the source of a negotiation sticking point in trying to finalise contract terms. Some organisations have very firm views about whether or not they will give indemnities. For some larger organisations, they will not enter into a contract unless there is an indemnity given by the other party. The Commonwealth has very specific guidelines about the circumstances in which it will give an indemnity.
The Court has defined contract indemnities in various ways:

4. What are indemnity clauses?
Indemnity clauses are provisions that purport to exempt one party from civil liability which the law would otherwise impose upon it. They are provisions that shift to another party the civil liability otherwise attached by law to the first party. Self-evidently this is a serious thing to do or to attempt to do.
Kirby J in Andar Transport Pty Ltd v Brambles Ltd (2004) 317 CLR 424 at 452

5. Bare indemnities v reflexive indemnities
Bare indemnity:
One contracting party, A, becomes liable to a third party, X, and the other contracting party, B, promises to indemnify A
Reflexive indemnity:
Requires one contracting party, B, who has successfully sued another (but defaulting) contracting party A, to indemnity A.
In Westina Corporation Pty Ltd v BGC Contracting Pty Ltd [2009] WA SCA 213, Buss JA identified types of indemnities as ‘bare indemnities’ and ‘reflexive indemnities’
An indemnity usually operates “where one contracting party, A, becomes liable to a third party, X, and the other contracting party, B, promises to indemnify A.”: Halbury’s Laws of England (4th Ed reissue, Vol9(1), [797] fn2. See also Adams JN and Brownsword R, Key Issues in Contract (1995) 270 which point out that in addition to this kind of “bare indemnity clause”, there is a “reflexive indemnity clause” which requires one contracting party, B, who has successfully sued another (but defaulting) contracting party, A, to indemnify A. A “reflexive indemnity” is distinguishable from a “bare indemnity” in that a reflexive indemnity is intended by the parties to apply to a liability which arises, as between them, from the indemnified party’s own default (for example, a breach of duty of breach of contract).

6. Why include an indemnity clause in a contract?
Protection against risk
Remoteness of damages
Limitation
Mitigation of loss
If one party to the contract has a greater investment into the contract, or has a greater risk if the contract goes pear shaped, then an indemnity clause can help to limit some of that risk
Depending on the wording of the indemnity, you can avoid the usual remoteness principles that apply to a breach of contract claim – when some damages may not be recoverable if they are too remote
An indemnity clause can extend the limitation period for a breach of contract claim. If there is no indemnity clause, the limitation period will run from the time of the breach. If there is an ongoing indemnity – the limitation period will only commence if and when the indemnifying party refuses to indemnify.
For an ordinary breach of contract claim there is an obligation to mitigate any loss suffered as a result of breach of contract. If there is an indemnity in place, then a breach will give rise to a right to claim under the indemnity and no obligation to mitigate loss will arise (unless the clause has been drafted to include this obligation).

7. Common types Breach of contract Claims by 3rd parties No fault
Reflexive
3 classes of indemnity:
Fault based – the indemnifying party has to do something wrong. Indemnities in respect of losses arising out of a breach by the indemnifying party of a contract with the indemnified party. Eg A and B enter into a contract, B indemnifies A for any loss of damage suffered as a result of B’s breach of contract
Indemnities in respect of claims by or liabilities to third parties. For example, when party A brings IP to a contract, there is often an indemnity whereby A indemnifies B from any third party claim for IP infringement. May or may not be fault based
No fault – A indemnifies B for any loss suffered by B. there would be some causal link to the contract, but no negligence of fault of A.
Reflexive indemnities – A indemnifies B for loss arising from party B’s fault

8. Hold harmless or make good?
Sunbird Plaza Pty Ltd v Malonely - a promise by the promisor that he will keep the promise harmless against loss as a result of entering into a transaction with a third party.
Andar Transport Pty Ltd v Brambles Ltd - indemnities ‘are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person
An indemnity, whether falling to any of the classes, will either be worded so that the indemnifying party is holding the indemnified party harmless, or else to make good any damage suffered
In Sunbird Plaza Pty Ltd v Maloney the High Court said an indemnity is ‘a promise by the promisor that he will keep the promise harmless against loss as a result of entering into a transaction with a third party.’;
- This effectively gives rise to a breach of contract as soon as indemnified party suffers any loss or damage. Action would accrue and limitation run from that time
In Andar Transport Pty Ltd v Brambles Ltd the High Court said that indemnities ‘are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person’.
- Indemnifier not required to do anything until called upon to make good. No breach of contract until indemnified call on indemnifier to make good and that is refused.

9. Drafting tips Tailored to suit the specific circumstances
initial questions to scope the indemnity
Indemnity clauses are about allocation of risk – so in negotiating or drafting the clause you need to know what the potential risks are
If an indemnity clause is challenged in court the outcome can turn on the words used – it is important that the scope of an indemnity is drafted in clear and precise terms and unambiguously captures the categories of loss and liability which is intended to be covered. If the clause is unclear, the court will interpret it in favour of the indemnifier
In drafting an indemnity clause, you can ask a series of questions to determine the elements of the clause and ensure the clause is tailored to the transaction

10. Drafting tips Who is providing the indemnity?
Who is protected by the indemnity?
What is the source if any potential loss or damage – ie what events are covered?
What is the extent of the potential loss or damage?
What is the trigger event for obligations to indemnify?
What is the duration of the indemnity?
What is the ability of the indemnifier to meet any obligation under the indemnity?
consider who is providing the indemnity?
usually one party to the contract – A. this is usually the party best able to manage the risk in question
who is the beneficiary of the indemnity?
usually the other party to the contract – B. Sometimes third parties are also protected
what is the source of any potential loss or damage?
what is the risk that the indemnified wants the indemnifier to cover?
Breach of contract by the indemnifier? A claim by a third party (eg for IP infringement)?
what is the extent of that potential loss or damage?
Does it include consequential loss? Personal injury/? Property damage?
what enlivens the obligations to indemnity?
Is the intention to hold B harmless, or to make good any loss suffered by B? When does it kick in? Does there need to be fault by the indemnifier?
what is the indemnity’s extent?
is there a provision that the indemnified party has to mitigate loss?
what is the indemnity’s term or duration?
is it ongoing? It is limited to the term of the contract? The answer will be directed by the nature and extent of the potential loss
What is the ability of the responsible party to meet any obligation under the indemnity?
does the indemnifier have the capacity to meet the indemnity?
have they looked at their insurance to ensure it can be covered?

11. F&D Normoyle Pty Ltd v Transfield Pty ltd [2005] NSWCA 193
The sub-contractor shall indemnify and keep indemnified [the Joint Venture] and their respective officers, employees and agents against all claims, demands, proceedings, liabilities, costs, charges and expenses arising as a result of any act, neglect or default of the sub-contractor, its employees or agents relating to its execution of the Works.
This case is an example of how the drafting of a clause can impact on the outcome of a claim for liability.
Before we turn to the facts of the case, we have highlighted here the elements of the clause as discussed on the previous slide by the series of questions
The underlined words show the indemnifier is the subcontractor, and the indemnified is the joint venture is their respective officers, employees, and agents
The bold black words show the loss covered by the indemnity
The blue words show the causal connection, which we will go into more detail about shortly
The red words show the fault element – that the subcontractor or it employees or agents must be at fault for the indemnity to enliven

12. The causal connector – choose your words wisely
…in relation to…
…arising out of…
…in connection with…
…caused by…
…As a direct result of…
…directly cause by…
The words used to show the causal connection between the subject matter of the indemnity (eg the loss, liability or claim and the triggering event:
Widest scope - In relation to
McHugh J in O’Grady v The Northern Queensland Company Limited (1989) 169 CLR 356
– the prepositional phrase “in relation to” is indefinite. But, subject to any contrary indication derived from its context or drafting history, requires no more than a relationship, whether direct or indirect, between two subject matters.
Toohey and Gummo JJ in PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301
– it is apparent that the words “in or in relation to” are particularly wide. We have already referred to the idea that, as a facultative provision, there is no apparent call to read the words down, or to give them any constricted operation.
Arising out of
Dickinson v the Motor Vehicle Insurance trust (1987) 163 CLR 500
- the words in the indemnity clause included “arising out of the use of the motor vehicle”
- a parent drove up to the super market and left the infant son in the car for 10 minutes while shopping. The child found a box of matches and lit them, and was badly burned. The insurer denied the claim on the basis that the injury did not arise out of the use of the MV.
- The court held that the words ‘arising out of” were wide enough to cover injuries suffered by the infant.
In connection with
Frewin v Adecco industrial Pty Ltd [2015] NSWSC 1568 – “…the words “in connection with” are of wide import and ought not be read down without good reason”
Lane v Dive Two Pty Ltd [2012] NSWSC 104 – Adamson J:
In my view, the words “in connection with the Insured’s Business” are apt to include the promotion of the business, whether by way of thanking persons for referring business or by entertaining people with a view of obtaining further business. It is well established that the words “in connection with” it be read as extending the scope of the noun they precede and should not be read narrowly. The words merely require a relationship between one thing and another.
Caused by
Casual relationship, but not the only one.
As a direct result of
Martin v Comcare [2015] FCAFC 169 – the words ‘as a result of’ make it clear that a casual relationship must be established
Difference between ‘a direct result of’ and ‘the direct result of’
Narrowest scope - Directly caused by

13. Both sides of the transaction
Issue
Indemnifier
Indemnified
Limitation of liability
Proportionate reduction in liability for contribution to loss by indemnified party
Financial cap
Full indemnity
No cap
Indemnity for breach of contract
Avoid – can extend limitation and damages available
Include – limitation, damages
Fault?
Fault based indemnity only
“as a result of a negligent act or omission”
General indemnity regardless of fault
“any loss or damage arising out of the contract”
There are some elements of indemnity clauses that may be the subject of negotiation or sticking points

14. Both sides of the transaction
Issue
Indemnifier
Indemnified
Capacity to meet indemnity
Is the indemnity consistent with insurance policies?
Want to ensure indemnifier can pay
Causal connection
As narrow as possible – caused by, directly resulting from
As wide as possible – in relation to, arising out of
Type of loss
Define the types of loss, or exclude types of loss
Keep general – loss and damage suffered
Term
Limited to life of contract
Ongoing
There are some elements of indemnity clauses that may be the subject of negotiation or sticking points

15. Pitfalls Using precedent clauses or ‘cut and paste’
What is the actual risk trying to be protected?
Choose your words carefully
If liability under an indemnity clause comes under dispute, the outcome of the dispute will turn on the words used in the indemnity clause and the court will carefully construe the term. Using a general clause, or a clause that is not tailored to the transaction, could result in the indemnified party not being indemnified at all, or conversely the indemnifying party being liable for much more than intended.

16. Questions?
If liability under an indemnity clause comes under dispute, the outcome of the dispute will turn on the words used in the indemnity clause and the court will carefully construe the term. Using a general clause, or a clause that is not tailored to the transaction, could result in the indemnified party not being indemnified at all, or conversely the indemnifying party being liable for much more than intended.

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