Indemnity… …What a Liability! - Contract Review Series - Anvelo

Might as well just give my business away!

When reviewing a contract one of the first places I look in the Contract is Indemnity. Some of you ready this will know exactly why. For those who do not, it is because we need to understand the level of risk the business is being exposed to in the unlikely event of an incident. If you do not cap the indemnity, define parameters and cross-reference with insurances, you might as well just give your business away.

 

What is in this week’s blog post?

 

In this four-part blog series focusing on Contract Review practices, I will take you through the high-level items I look out for when reviewing Contracts, Scope of Works, Departure and Clarification Schedules, Responsibility Matrices and more.

In part two, I am highlighting the importance of understanding ‘Indemnity’ in the contract documentation. I will show you an example of an Indemnity Clause in contracts and demonstrate the remedy.

 

Contract Review

Contract Clauses

In Australia, we tend to use Standard Forms of Contracts, AS4000 family of contracts and GC21 here in NSW for a range of construction, civil engineering, design and construct among others. There are others, of course, NEC3, JCT and FIDIC for our international friends. From recent statistics, 84% of AS Forms of Contracts were amended. Therefore, it is imperative we do not take these for granted, regardless of how long we have worked with them. Here is a straight forward example of an Indemnity clause found in a contract recently:

The Subcontractor is liable for and indemnifies and shall keep indemnified the Contractor (to the maximum extent permitted by law) against:

(a) all cost, loss, damage and expense (including legal fees on an indemnity bases) suffered by the Contractor and any of its employees or agents; and

(b) all liabilities incurred by the Contractor as a consequence of any liability the Contractor has or may have to the Principal or another third party in relation to, arising out of or in connection with the Head Contract, the work under the Head Contract or work under a separate subcontract or consultancy agreement,arising directly or indirectly as a result of or in connection with the performance of the Subcontractor’s obligations under this Subcontract, any breach of Subcontract by or any negligence of the Subcontractor, its employees, secondary subcontractors or agents. However, the Subcontractor’s liability to indemnify the Contractor, its employees, or agents is reduced proportionally to the extent that the act or omission of the Contractor, its employees or agents caused or contributed to the cost, loss, damage, expense or liability.

 

The issue for me is the “all” costs and “indirectly” as a result of the Subcontractors obligations. For me, this is too open-ended, subjective, in fact! Therefore, needs to be defined and capped.

One way to approach such a clause would be to request the indemnity to be capped at X% of the contract value and set parameters. I have given an example of how this clause can be amended to ensure there is some cap to the liability.

The Subcontractor shall indemnify the Main Contractor against foreseeable costs relating to the following which were caused by negligent acts or omissions of the Subcontractor:

(a) loss of or damage to the Contractor’s property; and

(b) claims in respect of personal injury or death, arising out of or as a consequence of the carrying out of the Subcontract Works, but the indemnity shall be reduced proportionally to the extent that the act or omission of the Principal, the Contractor or the consultants, agents or other Contractors (not being employed by the Subcontractor) of the Principal or the Contractor may have contributed to the injury, death, loss or damage and/or the Contractor failed to reasonably mitigate the injury, death, loss or damage.

This subclause shall not apply to:

i. the extent that the Subcontractor’s liability is limited by another provision of the Subcontract;

ii. damage which is the unavoidable result of the construction of the Subcontract Works in accordance with the Subcontract”

(c) the Subcontractor shall indemnify the Contractor againsts foreseeable costs capped at the value set out in “Item X in Schedule 1 of the Contract” (Input Item and Set % of Contract Value in Schedule 1)

The main point of this blog is for construction professionals to make a concerted effort to fully understand the Indemnity Clause. If the clause raises the risk exposure to the business, one must try to negotiate the Indemnity Clause in Contracts. It will limit the liability and protect the business you are working for. There is one thing for sure you do not want this to be open-ended as you might as well just give your business away.

Departure, Clarification and Other Return Schedules

My last point of this week’s blog is any correspondence which is returned to the client must be clear and not ambiguous. The same way you have reviewed the contract document is the same for the tender schedules in return.

I hope you have found this blog helpful and if you require further clarification please do not hesitate to get in contact with us or email info@anvelo.com.au or LinkedIn. View our contract management page for more information.

N.b. Nothing in this article constitutes legal, professional or financial advice.