1. Indemnity Clauses – what they are, how they work
and how to make them work for you

2. Introduction
• Effective risk transfer technique so apply the ISO
31000 framework before the contract is signed
• They are subject to the Insurance Contracts Act
(1984) because of the operation of s10(2) so be
mindful of duty of utmost good faith in s13
• The risk transfer effected by the clause is a
essential characteristic of an insurance
arrangement (see Bayswater Car Rental Pty Ltd
v Hannell (1999) WASCA 34 where the Court
held that an indemnity clause in a car hire
agreement was a ‘provision of insurance’ for the
purpose of s10(2) of the ICA)

3. Risk Identification and Allocation
• Critical part of pre-contractual negotiation
• The party with the greatest capacity to control
the risk should be responsible for it
• Different transactions – different industries –
different risks so one size does not fit all
• Map the identified risks in a matrix, evaluate
and analyse their importance, understand their
priority and then allocate responsibility for the
risks to the party with the greatest capacity to
mitigate the risk.

4. How are contractual risks
allocated?
• A party should bear the risk where:
– It lies within their control
– It is economically beneficial to transfer the risk
– It is efficient
– It is not practical or necessary to assume the expense
and uncertainty of a transfer option

5. Definition – what is an indemnity
clause
• A promise – ‘I (the indemnifier) promise to protect
you (the beneficiary) in the event that you suffer a
loss or damage’
• ‘I have a contractual obligation to make good any
loss that you suffer or to compensate you if you
suffer loss as a result of a described and pre-agreed
event’
• Can also be called a ‘hold harmless’ clause meaning
one party will not or cannot sue the other party for
losses (usually bodily injury, property damage or
consequential loss) irrespective of the fault of the
other party
• No need to use the words ‘hold harmless’- that
phrase just emphasises the indemnity

6. Different to a guarantee and a right
to claim damages
• With a guarantee – I (as guarantor) agree to answer for
a debt or default that you (as beneficiary) might incur. I
promise to take over and perform the obligation imposed
on you in the event that you fail to perform it
• With a right to claim damages – I (as plaintiff) have a
legal right to demand compensation for a legal injury
suffered at the hands of another
• In contrast, a right to indemnity can exist
– even if the indemnifier has caused no injury to the beneficiary or
– where the loss or damage was caused by a third party
completely unrelated to the indemnifier and the beneficiary

7. The common law position in
relation to consequential loss
• At common law, if one party to a contract when carrying out
the venture governed by that contract, performs the venture
poorly causing loss to the other party, that injured party had a
right to recover damages for those losses which were
(i) a natural consequence of the breach (measured
objectively using the reasonable person
test) and
(ii) those which were within the reasonable
contemplation of the parties at the time of making the
contract – in other words, the parties knew these losses
were possible (measured subjectively)
• Recovery of damages was subject to a test of what losses
were foreseeable at the time of the contract and the extent to
which the other party could have reasonably mitigated the
loss. (see Hadley v Blaxendale (1854) 156 ER 145)
• BUT the second limb in Blaxendale has been reconsidered

8. The Australian position on
consequential loss
• The second limb in Hedley v Blaxendale has been
reconsidered in Australia as a result of recent cases such as
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd
(2008) VSCA 26 and Alstom Ltd v Yokogawa Australia Pty
Ltd & Anor (No 7)(2012) SASC 49
• In the Peerless case, the Victorian Court of Appeal held that
consequential loss means ‘anything beyond the normal
measure, such as lost profits and expenses incurred through
the breach’.
• In Yokogawa, the Supreme Court of South Australia referred
to the definition of ‘consequential’ in the Oxford dictionary and
noted that consequential loss extends to all damages suffered
as a consequence of a breach. They held that to limit the
meaning of consequential loss to those losses arising under
the second limb in Hadley’s case was unduly restrictive. It is
now settled law that in Australia, consequential loss will
extend beyond reasonable contemplation to those items that
are a consequence of the breach.

9. Types of indemnity clauses
• Third party indemnity –where the indemnifier
(party A) agrees to compensate or hold harmless,
the beneficiary from loss or damage arising from a
claim made by a third party.
• Party to party indemnity – where the indemnifier
(party A) holds the beneficiary harmless against
specific losses suffered by the beneficiary such as
loss arising from a breach of contract.
• Bare indemnity – Party A indemnifies Party B for all
liabilities or losses events and circumstances but
without imposing any specific limitations.

10. Three more for the sake of
completeness!
• Reverse indemnity - Party A indemnifies Party B
against losses incurred as a result of Party B’s own
acts and/ or omissions (mostly Party B’s own
negligence)
• Proportionate or limited indemnities - Party A
indemnifies Party B against losses except those
incurred as a result of Party B’s own acts and/ or
omissions
• Financing indemnities - Party A indemnifies Party
B against losses incurred if Party C fails to honour
the financial obligation (ie the primary obligation) to
Party B (most often these are coupled with a
guarantee

11. Why are indemnity clauses
important
• When they are properly used, indemnities are an
effective risk management tool. If they are improperly
used, they can be expensive and difficult to manage.
Heed the warning given by Giles J in Erect Scaffolding
and DON’T rely on a precedent:
• ‘the operation of any contractual liability must be found in the
application of the facts of the relevant clause, construed as
part of the contract as a whole. Decisions on the operation of
contractual indemnities in different words in different contracts
are likely to be of limited assistance’ (see Erect Safe
Scaffolding (Australia) Pty Limited v. Sutton (2008) 72
NSWLR 1)
•

12. What to think about when
constructing or negotiating an
indemnity clauseUnderstand what the parties are contracting about –
- what is the scope of their agreement,
- what is the form of the agreement,
- who will be protected and
- how much will be paid in the event that loss or damage is suffered by
the beneficiary.
- what insurance provisions will be inserted,
- who will bear the legal costs,
- will there be any limits or caps on the amount of compensation to be
paid,
- what are the conditions on which that will occur,
- what will trigger the operation of the indemnity clause?
- what happens after the contract has come to an end?

13. Approach of the Courts
• Interpretation based on commercial sense and in
accordance with commercial reality.
• Give the words used, their ordinary meaning.
• Avoid using overly technical methods of interpretation.
• Apply an objective test – in other words, look at what the
reasonable person in the position of the indemnified
party would have understood them to mean.
• In the event of ambiguity or uncertainty – apply
Strictissmi Juris principle. Similar to contra preferentum
but in the case of indemnity clauses, the courts will
construe the ambiguous clause in favour of the
indemnifier (see Andar Transport v Brambles Ltd (2004)
217 CLR 424