Indemnities are usually the most bitterly fought out clauses in contract negotiations, and often the least understood. The problem lies in the reality that these clauses are in your contracts to deal with that awful 4 letter word – your contract RISK.
Very few people like to spend time thinking about risk, but no-one wants to be the one in their organisation who has signed off on the next ticking time bomb.
As the recent case of Samways v WorkCover Queensland and Ors illustrates, a poorly negotiated indemnity clause may create risks in a contract that far outweigh the value that the contract provides.
In this case the Queensland Supreme Court looked at the impact of the wording of an indemnity clause, and in doing so provided some important reminders for anyone involved in negotiating or overseeing contracts with indemnity clauses.
The Samways case
The case of Samways revolved around injuries sustained by Scott Samways.
Scott was a concreter on a construction site, and was injured when he walked into the raised bucket of a bobcat on the site. He subsequently made claims against his employer (Tessman Concreting), the principal contractor on the site who hired the bobcat (De Luca Properties) and the owner of the bobcat (Lynsha).
While the court found that each party was partly responsible, it found that Lynsha’s negligence was the primary cause of the accident and therefore awarded the majority of the share of damages against Lynsha, as the bobcat owner and the party whose employee had left the bobcat in a location that created the danger.
The clincher however came when Lynsha then sought to recover the damages it suffered because of its own negligence (the amount it was due to pay Scott) from De Luca Properties (who had hired the bobcat), on the basis of the indemnity clause in the agreement for hire.
The indemnity clause
The agreement for hire of the bobcat between Lynsha and De Luca Properties included an indemnity clause as follows:
“The Hirer [De Luca Properties] shall fully and completely indemnify the Contractor [Lynsha] 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 plant and in respect of all costs and charges in connection therewith whether arising under statute or common law.”
A clause that is not altogether unfamiliar in agreements for hire!
The question for the court was whether Lynsha should be indemnified for its losses, even when those losses were a result of its own negligence. Putting this in context, Lynsha’s argument was that De Luca should take full responsibility for any damage that Lynsha caused, simply because De Luca had agreed to hire the equipment.
In the past, the courts have taken a strict approach to the construction of indemnity clauses, and at times refused to find that a clause protects a party against losses caused by its own negligence unless that is specifically stated in the clause.
In this case, however, the court found that the clause was drafted broadly, and therefore open to interpretation that Lynsha should be indemnified against even its own negligence.
So what does this mean for you?
If you are engaging a supplier for anything at all, read the indemnity clause closely. If the indemnity clause requires that you indemnify the supplier against everything – get out your sharp pencil, because you probably have some work to do. Because if you leave it without amendment and your supplier causes loss for itself, you might end up footing the bill – even if your supplier’s loss is due their own negligence!
Here is a snapshot of the sorts of things you should be keeping a wary eye on when an indemnity clause comes through on your watch:
1. How broad is the indemnity you are providing? Could it possibly be read as an indemnification against the supplier’s own negligence? If so, this should be a point of serious consideration. It is best for your liability to be limited to cases where your actions actually “caused” the loss.
2. Who does the indemnity cover? Just the supplier, or a broader collection of parties?
3. Can you cap your liability? Or limit the scope of damages? For example, you might want to exclude “Consequential Loss” (but don’t forget to then define what Consequential Loss means).
4. How is insurance dealt with? In this case, the court also took into account some interesting issues. One being the requirement for a party to take out insurance against an indemnified liability. We will look at insurances more in our next newsletter – but it is interesting to note that requiring insurances can potentially assist when it comes to strengthening your indemnity clauses, if you are the party receiving an indemnity protection.
That is just a very small snapshot of some important things you should be considering. We would be more than happy to provide you with a longer list if you are interested. Just pop us an email to [email protected] and we will send one across.
But of course at the end of the day these clauses should really be reviewed in every instance by a lawyer, to make sure you aren’t missing a large ticking time bomb hiding in the 8 point font. We are only too happy to help. If you would like to take advantage of our contract review services, contact Joanna Oakey at [email protected]