Australia: Indemnity And Insurance Clauses Come Up Short – Could It Happen To You?

In another decision¹ highlighting the need for careful drafting, the NSW Court of Appeal has read down both an indemnity clause and an insurance clause to not only conclude that the sub-contractor's indemnity did not extend to liability incurred by a head contractor as a result of the head contractor's own negligence but also that the sub-contractor's insurance obligations were similarly limited.

Mind your head

In 2002, Australand Constructions Pty Limited (Australand) engaged Erect Safe Scaffolding (Australia) Pty Limited (Erect Safe) to provide scaffolding services.The claimant was injured when he struck his head on a protruding cross-bar erected by Erect Safe. A week or two prior to the incident, a safety committee formed by Australand noticed the protruding cross bar. The defect was not recorded and there was no evidence of a direction to Erect Safe to remedy the problem. Consequently, it was held at both first instance and on appeal that, although Erect Safe created and failed to rectify the problem, Australand was liable for breach of its own duty of care owed to the claimant.

The sub-contract between Erect Safe and Australand contained the following, seemingly expansive, clauses.

The trial judge found that the indemnity clause was engaged with the consequence that Erect Safe was required to indemnify Australand. Australand was further entitled to damages for breach of Erect Safe's obligation to maintain public liability insurance.

Construing the indemnity

The Court of Appeal considered whether clause 11 required a causal link between the liability incurred by Australand and the performance of the subcontract works or, alternatively, whether Erect Safe was also required to indemnify Australand for its acts or omissions as head contractor. Erect Safe submitted that the trial judge's findings effectively rendered Erect Safe an insurer of Australand for Australand's own negligence.

The leading judgment of Justice McClellan concluded that the clauses lacked ambiguity and confined indemnity to liability causally linked to the sub-contractor's performance of the works. Consistent with the High Court's approach in Andar Transport², justice McClellan also observed that, so far as it is ambiguous, an indemnity should be construed in favour of the surety. Accordingly, the status of Darlington Futures³, in which the "ordinary and natural meaning of the words" was considered the favourable approach, remains in doubt.

The Court also applied the recent case of F&D Normoyle Pty Ltd v Transfield Pty Ltd⁴, in which the word "act" in the phrase "arising as a result of any act, neglect or default by the sub-contractor..." did not extend to an act that did not involve either neglect or default by the sub-contractor.

What about insurance?

Adding insult to injury, clause 12 was also read down to be consistent with clause 11. As a result clause 12 only required Erect Safe to obtain insurance against any liability of Australand arising from the negligence of Erect Safe and did not require Erect Safe to insure the liabilities of Australand arising from Australand's own negligence. Justice McClellan held that it would be surprising if, notwithstanding the limitation of clause 11, the parties intended Erect Safe to obtain insurance for liability incurred due to Australand's own negligence. His Honour stated that "Australand's rights and interests referred to are those provided by the indemnity provided in clause 11". As such, the two clauses were read together.

Clause 11 adopted a wording commonly employed to ensure that a principal is fully insured, including in respect of its own negligence. This decision casts doubt on such an approach and highlights the difficulty faced in consistently construing insurance clauses.

In 2005, the NSW Court of Appeal held that an insurance clause in arguably less onerous terms was a self-standing provision that should not confine the insurance cover to liability that arose solely out of the indemnity clause under another part of the contract⁵. In that case, the contractor was liable for failing to effect insurance in respect of the principal's own negligence. However, the insurance and indemnity clauses were not adjacent terms in the contract.

The Court has repeatedly stressed that decisions on the operation of contractual indemnities in different terms and in different contexts are likely to be of limited assistance.

Implications

The need for careful drafting of indemnity and insurance clauses cannot be overstated. It is clear that if a principal wishes to be held harmless in respect of all liabilities arising out of a particular project, including where it is also at fault, very clear language must be used⁶. Otherwise, the indemnity is likely to be read down to only apply where the contractor has been negligent.

While this much has been reasonably clear since Andar, the scope of insurance clauses requiring cover for the parties' "respective rights and interests" is now uncertain. Much may depend on whether the insurance clause is adjacent to an indemnity and the scope of that indemnity.

Therefore, rather than relying on a general reference to "respective rights and interests", parties may be well advised to expressly state whether the insurance cover must extend to the principal's own negligence.

This decision provides a timely reminder to check your indemnity and insurance clauses to ensure they provide the intended level of protection. Otherwise your indemnity and insurance clauses may also come up short.

Footnotes

1 Erect Safe Scaffolding (Australia) Pty Limited v Sutton [2008] NSWCA 114

2 Andar Transport Ltd v Brambles Ltd [2004] 217 CLR 424; see also Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549

3 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

4 [2005] NSWCA 193; 63 NSWLR 502

5 NSW Arabian Horse Association Inc v Olympic Co-Ordination Authority [2005] NSWCA 210

6 Such broad indemnities may not be covered by the contractor's insurance to the extent the contractor's liability would not have arisen in the absence of the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.