Indemnities and Risk Assessments
Nowadays most contracts contain an indemnity clause. In theory, the purpose of an indemnity is to provide for an appropriate contractual allocation of risk and to define each party’s liability obligations. However, in practice, it seems that not much consideration is given to these clauses when they are inserted in contracts. In many cases they are inserted by lawyers without explaining them to their client or even without the lawyer really understanding the clause. Furthermore, quite often the operational or commercial people involved in a deal view the indemnity clause as pure “legalese” or just a “standard legal clause”, to be isolated from the operational or commercial terms of the contract. This approach is wrong because it ignores the important function of the indemnity clause in allocating risk and defining potential liability. It also leads to many contracts being delayed because Swinburne Legal and Finance will advise against signing a contract that contains a one-sided or inappropriate indemnity clause.
Overall, an indemnity clause can serve a useful purpose if it is carefully drafted. Perhaps the best way to approach these clauses is to examine them and ask if the clause makes it clear what damages are not recoverable and then assess if that is a reasonable allocation of risk and acceptance of potential liability. A blanket statement that one party is liable for and indemnifies the other for all loss will rarely be acceptable. Likewise a clause that seeks to exclude all liability or that places a low cap on liability.
In practical terms, there are 4 acceptable approaches for Swinburne:
| No. | Approach | Remarks |
|---|---|---|
| 1. | Use a Swinburne Legal Template. | Template documents are available on Swinburne Legal’s website. The indemnity provisions in these documents have been approved by Swinburne Legal and Finance. The documents have not been drafted to provide a one-sided contractual benefit to Swinburne. Rather, they adopt what the University considers to be an even-handed and reasonable approach to the allocation of risk and acceptance of liability.
In summary:
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| 2. | Negotiate the contract to ensure that it contains indemnity provisions that are consistent with the Swinburne Legal Templates. | To do this, ensure that any indemnity clause in the contract contains the 2 limitations set out above [1(a) and (b)]. You can refer to the templates on Swinburne Legal’s website to see the wording required. |
| 3. | No indemnities in the contract. | This approach does not mean that the parties avoid liability to one another. Rather, common law principles will apply equally and fairly to both parties in assessing liability for any breach. |
| 4. | In government contracts, the standard indemnity clauses as drafted by the government are likely to be broader than those contained in the Swinburne Legal Templates. However, given that Swinburne will be contracting with the government, such contracts may have a lower risk profile. As such, those indemnities may be acceptable if the head of the Division, Faculty or School at Swinburne responsible for the project has undertaken a proper risk assessment. | The risk assessment must consider both the likelihood and size of the potential risks arising under the contract. In order to proceed with the contract and the project, the risk assessment should conclude that there is no realistic risk of Swinburne being liable for things like a significant loss of profits, economic loss and exemplary damages compared to the benefit for Swinburne (i.e. the profit or status/reputation from doing the work). Please refer to Risk Assessment Questionnaire section for more detail. |
