Understanding a Contract Indemnity Clause – What to Know

Ensuring Corporate Documents' Enforceability - What to Know

25/06/2021

An indemnity clause is a typical feature in a construction contract. It is an agreement to cover loss and damage suffered from a breach. Despite its seemingly straightforward concept, it is often a cause of disputes and can be a point of contention during contract negotiations. 

A contractual indemnity alters the common law or statutory rights of concerned parties. This is why it does not matter whether you are giving or receiving it. To draft an effective indemnity clause, you must consider the extent to which the other party seeks to alter the existing rights. 

Contractual Losses 

Generally, when one party fails to keep a promise for the other party under a contract, the law of contract states that the innocent party can claim from the other losses. These losses must be reasonably foreseeable at the time of entering into the contract or naturally flowing from the breach. To assess the damages, the parties need to anticipate the losses when they enter into the contract. They must also determine the extent in which the innocent party could reasonably have been expected to mitigate their losses.

Limitations Legislation

Limitations legislation limits the period in which an injured party has to bring a claim for a breach of contract. For example, the Limitation Act 1969, section 14, states that a party cannot bring a cause of action based on a contract created more than six years from when the action first accrues. On the other hand, section 16 of the Act says that the limitation period is 12 years if the cause of action is founded on a deed.

The action first accrues when the circumstances giving rise to the claim first occurred. For instance, this can be when the party breached the contract. However, if the loss is economical, the cause of action accrues when the loss first gets known through reasonable diligence or becomes evident. Indemnity clauses can affect the general law position on what losses can be claimed for a breach of contract. 

When Does a Cause of Action Accrue Under an Indemnity?

A general rule of thumb is loss or damage on an indemnity can be claimed when a party first suffers the loss or damage. It is when the loss is ascertainable or has been ascertained. However, note that the statutory limitation period for the claim will not start to run until the party has suffered loss or damage. This is because loss or damage is a prerequisite to a claim under an indemnity clause.

In addition, the way in which loss is defined on the contract will be considered. Determining the loss that a party has suffered depends on the event that caused such loss. This is because it always depends on the wording of the contract. Keep in mind that the loss and the event that causes the loss may not always coincide. 

Conclusion

A contract indemnity clause provides a right to payment for the losses a party suffers. However, this can become a cause of an issue because the indemnifier is required to establish loss to prove a breach and that they suffered a loss if they wish to dispute the indemnified party’s claim. 

It is important to be aware of the extent of the liability in scope and duration as well as the claimable losses and in what circumstances. To learn more about it, feel free to reach out to experienced contract lawyers like us.
GLG Legal consists of innovative commercial contract lawyers who offer legal and advisory services. Unlike other lawyers, we provide real-world solutions to meet your needs. Contact us to learn more about how we can help you!

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