Australia: The dreaded indemnity clause

The indemnity clause is usually the most contested clause in any contract negotiation including in property transactions.

This is understandable.

After all, the ultimate effect of an indemnity clause is either to reaffirm or to alter the common law or statutory position in relation to the recovery of damages. This can be seen in various situations including leases and licences, transactions involving contaminated land and terms regarding incidents arising from the use of easements.

What is the basic premise of an indemnity clause?

Although it is often a point of contention, the basic premise of negotiating an indemnity clause is to determine which party is best placed to bear the risks associated with the matter at hand.

Most parties seem to forget this when they arrive at the negotiating table.

The importance of understanding the common law and statutory rights of recovery

In order to negotiate effectively in relation to an indemnity clause, it is imperative to understand the common law and statutory rights of recovery that apply to the situation in question.

This knowledge will allow you to negotiate effectively if you need to displace the risks and liabilities that the common law or statute place on either party.

For example, if the damages that you wish the other party to bear are too remote, then they may not be recoverable at common law so you may wish to provide for them explicitly in an indemnity clause.

Key issues to consider when drafting an indemnity clause

Types of losses

When drafting the indemnity clause, you need to consider what types of losses may arise in the context of your transaction.

Common areas that you may want an indemnity clause to cover may include:

  • Negligence
  • Injury or death
  • Infringement of intellectual property rights
  • Destruction or damage to property
  • Environmental issues such as contamination
  • Liability to a government department or authority
  • Legal costs.

Damages that are not foreseeable

One area of recovery that you may wish to include in an indemnity clause is for damages that would ordinarily be excluded due to the concept of remoteness.

Ordinarily, if the loss or damage wasn't contemplated by the parties at the time of contracting or is too remote, it may not be recoverable at common law (see: Hadley v Baxendale [1854] EWHC J70).

Nevertheless, an effective indemnity clause can extend the damages to include those that may be considered 'remote' or that were not contemplated by the parties at the time of the contract's formation.

Basically, you should consider what would be reasonable in the circumstances, so as not to prolong the negotiations.

Should the indemnity clause be 'absolute' or 'proportional'?

One issue you should always bear in mind when considering the scope of an indemnity clause is whether it should be 'absolute' or 'proportional'.

'Absolute' means that the party providing the indemnity bears all liability in relation to the matter at hand.

'Proportional' means that the risk is shared, depending on the circumstances.

A common proportional indemnity provision is one where the party provides an indemnity, but that indemnity is reduced proportionally to the extent that the indemnified party caused or contributed to the loss. This is common in contracts regarding property transactions. It could be drafted as follows:

The indemnity under this clause is reduced proportionally to the extent that the acts, defaults or omissions of the [indemnified party], its employees, contractors or agents caused or contributed to the loss of life, personal injury or damage to property.

In contrast, absolute liability in an indemnity clause would not include the carve-out above, which reduces the liability on a proportional basis. This means that the party providing the indemnity does so in an absolute way.

So, you have an indemnity clause, but can the other party deliver?

While an effective indemnity clause is often crucial to the transaction, it is also important to establish whether the party providing the indemnity is able to comply with the indemnity from a financial perspective.

An insurance policy may provide some comfort to the indemnified party, but you still need to analyse the terms of the insurance policy in order to determine whether there are any gaps that create potential exposure.

For example, in a lease, if you are the party being indemnified (this would be the landlord), you will want to know if there are gaps in the lessee's insurance policy and, if so, you would want to ensure that they have recourse to other funds should the indemnity be triggered (and the gaps are realised).

In short, the provisions of the insurance clauses in your contract are just as important as the indemnity clauses.

If you are the party providing the indemnity (in a lease this would be the lessee), you should show your insurer the clause in question to confirm and provide you comfort in knowing that your cover extends to all potential liabilities provided for in the clause.

If gaps are identified, it may be an appropriate time to extend your insurance cover either to minimise them or to eliminate them completely.

Knowledge of the parameters and limitations of your policy will assist you in your negotiations. It is possible that a point of contention in the indemnity clause is something for which you already have insurance coverage. Don't waste time arguing over something that doesn't even need to be an issue.

Finally, and most importantly, be aware that most insurance policies don't provide cover to a party that offers an absolute indemnity. In other words, to offer absolute indemnity is to put your insurance cover at risk.

How to approach negotiations

There are two steps you should take when approaching negotiations over an indemnity clause.

Step 1: Identify risks, liabilities or damages

Identify the real risks that may arise during the term of your contract, as well as the liabilities or damages that may occur. This may include risks that may be deemed remote at common law but which one party may have specified as being crucial to the deal.

Step 2: Determine the party best placed to wear those risks and liabilities

Determine which party is best placed to bear those risks and liabilities.

Every transaction may require different drafting, depending on the circumstances of the matter. For example, a short term lease over a small premises for a negligible rental will have different considerations to a lease over a large area, for a longer term or for a higher rental.

A few final words

If you are involved in negotiations over a contract that includes an indemnity clause, it will likely be the source of a great deal of discussion (and even frustration).

As a result, you should seek legal advice from the outset to assist you to identify the risks and liabilities, as well as to determine the most appropriate way to apportion them.

Finally, refer back to the fundamental question and ask: which party is best placed to bear the risks associated with the matter in question?

Would you like to find out more?

At Bartier Perry, our property team has extensive experience in contract negotiations and, more specifically, indemnity clauses. If you need assistance in this area, please don't hesitate to get in touch.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions