Indemnity clauses: a cautionary tale for businesses
The recent NSW Court of Appeal Decision, CSR Limited v Adecco (Australia) Pty Ltd, illustrates the risks of an ambiguously drafted indemnity clause, as well as the circumstances in which a Court may determine if an indemnity clause continues to operate after the formal expiration of a fixed term contract.
On 1 April 2000, Adecco provided labour hire services to CSR Limited & Holcim (Australia) (CSR). The services were provided on a two year fixed term contract (the Agreement) which was to expire on 31 March 2002 but was mutually extended until 31 July 2002.
The Agreement contained the following indemnity clause:
23.2. Any loss of or damage to property of CSR, real or personal caused or contributed to by the Supplier or its employees, agents, sub-contractors or Temporary Staff.
Notwithstanding any other provision of this Agreement, the Supplier indemnifies CSR against:
23.2.1. any claim by Temporary Staff for personal injury and/or property damage arising out of or in connection with the performance of Assignment duties where; and
23.2.2. any liability to any person (including the Supplier and any workers compensation insurer claiming in the name of the Supplier) in respect of or in connection with such personal injury and/or property damage.
CSR could extend the Agreement for a further two year term, and between 1 August 2002 and May 2004 the parties attempted to negotiate the terms of this extension. During this time, Adecco continued to supply labour to CSR, and CSR continued to pay for those services.
Whilst the extension to the Agreement was being negotiated, Mr Frewin, a truck driver employed by Adecco, suffered a personal injury as a consequence of driving a defective truck at a CSR concrete plant.
Mr Frewin commenced proceedings against Adecco, seeking damages for personal injury caused by driving and he subsequently joined CSR as the second and third defendants. CSR filed a cross-claim against Adecco, claiming indemnity pursuant to clause 23.2 of the Agreement.
On 14 October 2015, Mr Frewin’s claim was settled, leaving CSR’s entitlement to be indemnified by Adecco to be determined by the Court.
CSR submitted that despite the Agreement being “formally” expired at the time of Mr Frewin’s injury, an implied contract on the same terms as the Agreement continued to operate up until March 2003 (the period when Mr Frewin was injured).
In the first instance, the Court found that there wasn’t implied contract after the expiration of the fixed term of the Agreement. CSR appealed.
The NSW Court of Appeal reached a different decision, finding that there was an implied contract and that implied contract continued on the same terms as the Agreement up until March 2003.
In reaching this decision, the Court considered a number of issues and made various determinations including:
- That adopting an objective purpose test, and considering the “commercial purpose” of the Agreement, a fair and broad reading of the Agreement suggested that Mr Frewin was included in the term “Temporary Staff;”
- A reasonable person would infer from the conduct of the parties that they intended the Agreement to continue to operate (save as to the term and expiry);
- The silence of the parties suggested that they considered the Agreement continued to exist;
- The parties were “sizeable and sophisticated” entities, and Adecco continued to provide services over a lengthy period for the substantial sum of $13.285 million;
- Given the commercial benefit in providing these services after the expiry of the Agreement, Adecco essentially circumvented the public tendering process and would have been mindful not to “rock the boat” by departing from the terms of the Agreement;
- Clause 23.2 was “sufficiently clear to indicate an objective intention to cover all claims, whether caused or contributed to by CSR’s own fault,” and that the additional “where” that appears at the end of clause 23.2.1 was likely the result of poor draftsmanship but did not raise doubt as to the meaning of the clause; and,
- The phrase “arising out of” and “in connection with” are to be interpreted broadly, and are “capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote” whereas the phrase “caused by” required a “direct or proximate relationship.”
Lessons to be learned
It is critical to ensure that agreements, and in particular indemnity clauses, are drafted in unambiguous terms, and that the distinction between “caused by” and “arising out of” and “in connection with” is understood by the parties.
It is also necessary for parties to be mindful of when an agreement is set to expire, and to consider whether:
- their conduct after that expiration date would give rise to an implied contract; and,
- it is appropriate to expressly advise the other party of your intention (for instance, whether the terms of the original contract should continue to operate).
Coleman Greig can assist you to draft clear and unambiguous indemnity clauses, to better understand the consequences of an indemnity clauses in your contract, and advise you in relation to disputes involving the interpretation or construction of indemnity clauses.
If you would like to receive our regular legal updates, please subscribe here. For more information, or if you have a query relating to anything in this article, please contact: