Risk is a key consideration in all business transactions. Risk determines whether a transaction is viable. However, risk is a necessary element of the transaction’s overall price. Essentially, the premise of negotiating an indemnity clause is to determine which party is best placed to bear the risks associated with the matter at hand.
What is an indemnity clause?
An indemnity clause is a legally binding promise in which one party undertakes to accept the risks of loss or damage that another party may suffer. Most agreements will incorporate a term such as ‘hold harmless”.
An indemnity clause is incorporated into contracts or agreements. It specifies that a party agrees to hold harmless another party against the risk of damage or loss that the other party may incur. Further, this could include the party’s liability to third parties for third party losses resulting from activities under such contract.
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Get startedHold Harmless
Sunbird Plaza Pty Ltd v Maloney (1988) is the principal authority for the “hold harmless” obligation. The party giving the indemnity will effectively be in breach of the contract as soon as the indemnified party suffers any loss or damage. The result is that a limitation period will start running immediately from the date of the loss or damage.
Anatomy of an indemnity clause
The indemnity clause consist of four key components:
Who
The first element refers to the person that the tenant is indemnifying. For instance, in contractual indemnities, the ‘who’ will typically be the other party.
What
The second element refers to those things which indemnity can grant. These include liabilities for:
- Tangible losses (damage to property, injury and death)
- Intangible losses (disclosure of confidential information or infringement of intellectual property rights)
- Pure economic losses (statutory fines or penalties, loss of opportunity)
When
This element specifically refers to the loss or costs that the other party had suffered or incurred. The term ‘liable’ implies a legal obligation to pay.
How
Finally, the most important element refers to how the clause triggers or involves the indemnity.
A broad provision would be generally stated in property agreements, a trigger is all of those things ‘which arise from the tenants’s use and occupation of the premises’. This broad provision can be activated whether or not there is any fault on the part of the tenant.
A narrow provision would stipulate among the lines of ‘arising out of the negligence of the tenant’. Therefore, actionable negligence is required by the party before the indemnity clause is able to be triggered.
Legislative and Policy Framework
Financial Management and Accounting Act 1997 (Cth) and the Financial Management and Accountability Regulations 1997 (Cth) are the statutory authorities for Commonwealth indemnities. Section 44 of the Act states that the chief executive of an agency must manage the affairs of the agency in a way that promotes ‘proper use’ of Commonwealth resources.
Indemnity Guidelines
Indemnity Guidelines is a Commonwealth policy. These guidelines advise that arrangements should not be entered unless consideration is given to these factors listed in the guidelines. These include:
- time limits on the indemnity (for example, to claims made during the term of the contract)
- use by the contractor of commercial insurance
- reserving a termination right for the Commonwealth
- the imposition of maximum financial limits on claims
- the insertion of subrogation and notification clauses that give the Commonwealth the right to take over any litigation related to the indemnity
Conclusion
Thus, when drafting the indemnity clause, you need to consider what type of losses may arise in the context of your transactions. When approaching negotiations over an indemnity clause consider these two steps. The first step is identify the real risks, liabilities or damages that you or the other party is carrying. Then you can determine which party is best positioned to take on the risks and liabilities. If you are not sure about incorporating an indemnity clause, Lawpath can provide you assistance in this area.
