When it comes to a legal agreement, people – understandably – want to protect themselves. That’s why you’ll often find indemnity clauses in contracts in Australia. But how fair are they to both parties? And how much do you really need to know about the indemnity clauses in your contract?
The good news is that even if you don’t have any background in law, simply knowing more about each type of indemnity clause can help you better understand these parts of your contract. And it’ll make it easier for you to spot potential red flags and know when to call in some help.
What is an Indemnity Clause?
So, what is an indemnity clause? In very simple terms, an indemnity clause is a promise from one party to compensate another party for certain losses or damage. Technically, it’s a contractual provision that shifts the liability from one party to another.
In legal agreements between two parties, indemnity clauses typically occur for the following reasons:
- One of the parties wishes to protect themselves. An indemnity clause aims to protect a party from potential losses, damages, or legal expenses.
- When one party wants to provide reassurance to the other party that they will assume the liability if certain events or losses occur.
How important is it to understand both the implications and scope of indemnity clauses in various agreements? It should never be treated lightly. Because these clauses define who bears the financial burden, it’s critical to have no “grey areas” or misunderstandings. A poorly worded indemnity clause can cause problems for both parties and lead to disputes which are difficult to resolve.
While it’s true that an indemnity clause should be quite specific, it doesn’t mean that it can’t be tailored to the particular needs of each party. This means that you can discuss and negotiate each clause before it is put in your contract. As these clauses can make or break your business financially, you might prefer to use an experienced law firm such as Rosendorff Lawyers to provide expert guidance on drafting and negotiating your indemnity contract.
Types of Indemnity Clauses in Australia
In Australia, you’ll find indemnity clauses in most commercial contracts. The types of indemnity clauses commonly used in Australia are:
- Bare indemnities: This type of clause covers all liabilities or losses that might be incurred in connection with a particular event or circumstance, but it doesn’t set out any specific limitations. With a bare indemnity clause, it’s essential to clearly define what comprises a “loss” to avoid any ambiguity.
- Proportionate indemnities: This puts a limitation on the indemnity. In other words, Party A indemnifies Party B against all losses except when those losses are specifically caused by Party B. For example, Joe (Party A) makes a small dent in a wall panel. Pete (Party B) later tries to fix it but damages the panel further, as well as damaging an adjoining panel. In this case, Joe is only responsible (in terms of damages) for the small dent in the panel. Pete is responsible for the rest of the damage.
- Reverse indemnities: This is where Party A indemnifies Party B against losses caused by Party B. As in our earlier example, Joe makes a small dent in the wall panel. Pete tries to fix it but causes extensive damage. Joe is liable to pay for the original damage he caused with the small dent, plus he has to pay for all of the damage caused by Pete.
- Third-Party indemnities: This means that one party indemnifies the other regarding any claims made by a third party. An indemnity clause example in Australia might be Joe selling Pete a new massage chair. Their sale contract has a third-party clause indemnifying (protecting) Pete. Pete later gets sued by a third party relating to the use of that massage chair. Joe is liable for any damage or loss to the third party.
You can introduce limits to the scope of an indemnity clause to cover only specific situations, depending on your business needs. At Rosendorff Lawyers, we’ll provide you with expert advice on selecting and negotiating the appropriate indemnity clauses.
What Rosendorff Lawyers Can Do
What do you do when the other party insists on an indemnity clause which you think is unfair? What’s the best way to negotiate this? And how do you tailor indemnity clauses so that they fulfil your needs?
Rosendorff Lawyers can assist you with drafting, reviewing, and negotiating indemnity clauses. We will advise you on the potential risks, liabilities, and implications of such clauses. For example, because indemnity clauses are added to a standard contract, they might have too wide a scope. If that scope isn’t limited to the specific activities that you are contracting for, you could be liable for financial losses not directly related to your contract.
Our expertise in indemnity clauses and our associated legal services, such as property and planning, commercial and retail leases and business and commercial law, gives us the ability to tailor indemnity clauses that align with your specific business objectives and risk tolerance.
Frequently Asked Questions (FAQs)
What factors should be considered when including an indemnity clause in a contract?
Some of the more important considerations when drafting indemnity clauses are:
- Scope of the indemnity: If you are assuming the liability, it’s usually best to limit the scope as much as possible. If the other party is assuming liability, having a broader scope provides more protection for your interests.
- Insurance coverage: Most insurers won’t cover you beyond damages recoverable under common law. So you should check with insurers whether they will insure the liability in your indemnity clause.
- Clarity: To avoid ambiguity, your indemnity clause needs to be stated in clear and precise language.
Are there any restrictions or limitations on indemnity clauses in Australia?
Yes. Australian Consumer Law (ACL) imposes limitations on indemnity clauses in consumer contracts. So, if an indemnity clause might be considered “unfair”, it could be difficult to enforce in court. That’s why it’s vital to ensure your indemnity clauses comply with relevant laws and regulations.
Can Rosendorff Lawyers assist in reviewing existing indemnity clauses?
Do you need help with an indemnity clause in your contract? Rosendorff Lawyers can review and analyse your existing indemnity clauses for effectiveness and determine any potential risks. As necessary, we’ll provide guidance on modifying or renegotiating indemnity clauses being presented to you.
How can Rosendorff Lawyers help manage indemnity clause disputes?
At Rosendorff Lawyers, we have extensive experience resolving indemnity clause disputes through negotiation, mediation, or litigation. Because litigation is no one’s first choice, our team are experts in alternative dispute resolution. We are highly skilled in negotiating settlements and drafting settlement agreements. And we are always well-equipped to assist if your case proceeds to litigation.
Conclusion
Why is it so vital to understand indemnity clauses in Australia?
To recap:
- An indemnity clause is a promise from one party to compensate another party for certain losses or damage. It shifts the liability from one party to another.
- There are four common types of indemnity clauses in Australia:
- Bare indemnities, where Party A indemnifies Party B for all liabilities or losses for particular events, but without specific limitations.
- Proportionate indemnities, where Party A indemnifies Party B against losses, except for those losses specifically caused by Party B.
- Reverse indemnities, where Party A indemnifies Party B against losses caused by Party B.
- Third Party indemnities, where Party A indemnifies Party B regarding any claims made by a third party.
- Your indemnity clause needs to be stated in clear and precise language.
- The scope of your indemnity clauses needs to be limited so that you’re not liable for financial losses that aren’t directly related to your contract.
Are you looking for expert assistance with indemnity clauses? Rosendorff Lawyers provide guidance in drafting indemnity clauses, interpreting them for you when written by others, and negotiating clauses with the other party to help you achieve your best outcome.
Because we know how much time and effort is usually required with indemnity clauses, in many cases, we are able to offer a cost-effective fixed-fee quote.
Contact us today to see if you qualify for our fixed-fee rates.
