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Indemnities in construction contracts

Indemnities are powerful risk allocation devices. When you indemnify a party for a loss, you hold harmless and absolve that party from any responsibility for that loss. You agree to reimburse that party for the loss, dollar-for-dollar.  By Lisa Rozendaal, associate, and Andrea Lim, solicitor, in Dentons Kensington Swan’s major projects and construction team.

There are three broad categories of indemnities: Indemnities for loss following a breach of contract; indemnities for loss following the negligence of a person or class of person; and indemnities for loss following a specified event or circumstance.

However, not all indemnities are equal. The scope and impact of an indemnity clause will depend on its particular wording. Indemnities are interpreted by the courts strictly, and where ambiguity arises, it will be interpreted against the party trying to rely on the indemnity. That said, the courts will uphold a clear and unambiguous indemnity, even when it is onerous or unusual.

Therefore, care should be taken when drafting any indemnity. In some cases, the breadth of an indemnity may be restricted by statute (e.g. limitations on the ability to give indemnities).

Potential impacts of indemnity

Claiming under an indemnity is a remedy in and of itself. It is not a damages claim. The beauty and danger in a well drafted indemnity is that the common law principles associated with damages claims may not apply. This is what makes it such a powerful provision. For example, in a damages claim, a party must prove that the breach caused the loss, whereas an indemnity may be drafted to remove the requirement to prove causation and any loss may ‘arise out of, or [be] in consequence of the construction of, or remedying of defects in the Contract Works’. 

Further, ordinarily an innocent party will be required to take steps to mitigate the loss; this is not necessary when claiming under an indemnity (unless expressly stated). An indemnity may also extend liability to cover third party actions or claims, such as the actions of a subcontractor. 

However, note that a clause indemnifying a person against loss will not be effective if the loss is caused by his or her own negligence, unless this is expressly stated. This is in line with the strict interpretation of indemnities as exemption clauses. Commonly indemnified events include: Breach of contract or negligence by the Contractor; any acts or omissions of the contractor; death or personal injury arising out of the contract works; breach of health and safety legislation (to the extent permitted by law);  environmental contamination; and claims for breach of copyright.

Statutory exceptions and limitations

Section 29 of the Health and Safety at Work Act 2015 prevents a party from seeking indemnity from another or giving an indemnity for fines or infringement it may incur under that Act. 

Further, the Public Finance Act 1989 prohibits anyone from giving a guarantee or indemnity on behalf of or in the name of the Crown, except as expressly authorised by any Act (section 65ZC). However, the Minister may give guarantees or indemnities on behalf of the Crown if it appears to the Minister to be necessary or expedient in the public interest to do so (section 65ZD). Government departments also have limited authority to enter into guarantees or indemnities on behalf of the Crown (section 65ZE and s 81(1)).

Negotiating indemnities

Giving and requesting indemnities in construction contracts is about allocating risk to the party best able to carry the risk (or insure for it). They are an effective method of risk allocation if used appropriately. They are onerous and dangerous if used inappropriately. An indemnity should only be given when it is adequately covered by insurance. Some insurance policies only cover contractors for losses they would be liable for at law, which may cover some, but would not necessarily cover the whole, of an indemnity claim.

When faced with a request for an indemnity, the best position is to reject it and try and reduce the obligation to a contractual warranty (i.e. if breached, can claim common law damages). Ideally any indemnities will be fault-based or otherwise for matters within your control. If it is not possible to get the indemnity knocked out altogether, here are some options:

This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Dentons Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests for advice. 

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