December 3, 2019


how to Avoid the quagmire of Interpreting Contractual Indemnities and Agreements to insure:

The writer had previously commented that the New South Wales Court of Appeal had killed off the Erect Safe Principle in Adecco – it seems WA is bringing it back!

In Erect Safe Scaffolding Pty Ltd v Sutton [2008] NSWCA 114 the New South Wales Court of Appeal, after interpreting a subcontractor’s agreement to indemnify their principal at clause 11 of the contact as confined to liabilities arising from the sub-contractor’s performance of the sub-contractor’s work and not to the principal’s own independent acts of negligence, went on to say when considering the agreement to insure at clause 12 that:-

“Clause 12, of course, follows clause 11 and I have already concluded that the liability of [the sub-contractor] under clause 11 is confined.  It would be surprising if, notwithstanding that limitation, the parties intended [the sub-contractor] to obtain insurance for any liability of [the principal]), even that arising from its own negligence… The obligation was to obtain insurance “to cover them for their respective rights and interests against liability to third parties…”.  [The principal’s] “rights and interests” referred to are those provided by the indemnity provided in clause 11.  There being no right in [the principal] to recover from [the sub-contractor] in respect of damages occasioned by its own negligence, there was no obligation in [the sub-contractor] to obtain insurance to support [the principal's] direct liability to another caused by the negligent act of [the principal]”.

This passage allowed a sub-contractor to argue that if they have already indicated an intention not to indemnify the principal contractor for its own direct acts of negligence in the indemnity clause it would be completely incongruous to suggest that they would then agree essentially to go out and do just that by paying additional premium to purchase a policy of insurance that covered or indemnified the principal contractor for its own direct acts of negligence.

However, in CSR Limited v Adecco (Australia) Pty Ltd [2017] NSWCA 121 the New South Wales Court of Appeal, the original architect of the “Erect Safe Principle” retreated from that position - declaring that a broadly written indemnity clause will be allowed to “operate on its own terms” and there is no broad principle in relation to interpreting indemnities and agreements to insure. The Court posed the question – why require an indemnity unless you wanted protection from liability for their own fault?  As to “Erect Safe Principle” the Court simply said: “Each case must clearly stand and fall on the terms of the relevant provision construed in the context of the contract as a whole…

The basic question is what did the parties intend?

Sometimes there is no doubt that the parties do not intend to indemnify each other for their own negligence by virtue of a proportionality provision found in the indemnity clause. The question then becomes to what extent that intent carries over into the interpretation of the agreement to insure?

Is the agreement to insure a self-standing provision or simply a device to back up or support the indemnity?

The current view of the NSW and QLD Courts of Appeal seems to be that unless the obligation to effect insurance is specifically, or by clear implication, tied to the indemnity clause then there is no sufficient basis to read down the obligation to effect insurance.

In GIO General Limited v Centennial News Stand Pty Ltd [2014] NSWCA 13 Gleeson JA, referred to the need to construe the contract as a whole and commercially and  noted a number of reasons why the provisions for insurance were separate from the indemnity.

But, just when you may have thought Erect Safe was dead, it was followed in the recent decision of Garnet v Qantas Airways [2019] WADC 89.

In this case, the plaintiff was a passenger on a Qantas flight who was injured after disembarking the plane.

Both Skystar, the Qantas agent operating the flight, and the owner of the airport, Karratha, were found liable to the plaintiff on a 50/50 apportionment. At issue was whether Clause 6.2(c) of the lease between Skystar and Karratha obliged Skystar to effect a public liability policy of insurance which extended coverage to Karratha. The court in this instance found that the answer was no.

The relevant wording was as follows:

“Insurance and Indemnities

 6.1       Indemnities

 (1)        The Lessee occupies the Premises at the risk of the Lessee in all respects.

(2)        Except to the extent caused or contributed to by the Lessor, the Lessee releases and agrees to indemnify the Lessor … from all costs, claims, actions, … or losses of any kind … resulting from or attributable to anything occurring on or in the vicinity of the Premises by any act, neglect, default or omission by the Lessee or any of the Lessee's Employees and Visitors.

6.2       Insurances

Throughout the Term the Lessee must effect and keep current a public insurance office [sic]… on behalf of the Lessee and the Lessor for their respective rights and interests…”

The Court held:

“The indemnity in cl 6.1 expressly does not cover Karratha for liabilities caused or contributed to by Karratha.  It does not extend to claims arising from the negligence of Karratha.  I am satisfied in accordance with the reasoning in Erect Safe, the promise to procure insurance in cl 6.2 should be construed as supporting that limited right of indemnity and going no further. I am fortified in that view by the plain reading of the lease. Clause 6.1 is immediately adjacent to cl 6.2 and under the heading insurances and indemnities. That there is a second indemnity clause at 10.3 of the lease demonstrates 6.1 is not to be read as a stand-alone clause. Applying that construction, the promise to insure in cl 6.2 did not require Skystar to effect insurance covering Karratha for its own negligence.”

Looking at the results of a wide interpretation of the contract, the Judge said: “The construction urged by Karratha would involve requiring a tenant occupying a space of a little over 48 square metres of the airport terminal to effect insurance covering Karratha for claims arising from its negligence over its entire operations at the airport.  I am satisfied that no reasonable person in the position of the parties to this lease would have considered that the promise to insure had that meaning.”

The Court then considered the “commercial purpose” of the contract and said:

“… the commercial purpose of the contract was the lease of premises inside the terminal. The permitted use for the purpose of the lease of those premises was ground handling, office and ramp functions. The 'rights and interests' referred to in cl 6.2 are limited to the rights and interests of Karratha pursuant to the lease. That permitted use cannot … extend to an interpretation of the insurance clause that requires Skystar to enact public liability insurance to cover Karratha for any occurrence outside of the demised premises, in this case on the tarmac. The tarmac and the construction and maintenance of structures thereon was the sole responsibility of Karratha. It is beyond the ambit of the lease.”

This case shows that placement of the agreement to insure immediately after the indemnity; the commercial purpose of the contract, and the ambit of the indemnity and insurance cover if the agreement to insure does stand alone, are all important considerations in predicting the outcome of this issue.

Below are some factors that might assist you in determining which way the result will go:

Factors pointing to the Agreement to insure being a standalone agreement:

  • Relevant clause commences: “Without in any way limiting or effecting other obligations under this agreement…” or similar.
  • Clause requires the contractor to pay the deductible in connection with any claim made in respect of any loss or risk covered by the insurance effected– this would be mere surplusage unless the intent was that the policy extend cover to the Principal for its own negligence.
  • The agreement to insure is limited to claims “arising out of the provision by the Contractor of services provided by the Contractor to the Principal under the Contract”. It is not proposed to cover the principal for their liabilities to the world at large, just the liabilities arising out of provision of services to the Principal by the Contractor. Therefore it does not have an overly harsh or unfair outcome if it is enforced as a standalone provision.
  • The terminology in the agreement to insure goes beyond respective rights and interests and also includes the words “and liabilities”. You would question what that word would mean if it was not intended to cover a liability of the principal arising out of the supply of services by the contractor.
  • There is a requirement to keep the principal appraised of how any claim is being handled.  Why would the Principal require this unless their position was also being covered?
  • The agreement to insure extends beyond the obligations under the indemnity clause.  

Factors leading to the Agreement to insure existing only to support the indemnity:

  • The indemnity with a proportionality clause appears immediately before the agreement to insure in the Contract.
  • numerous proportionality provisions indicate an overall intent in the contract not to hold the contractor liable for the acts/omissions of the Principal.
  • The agreement to insure contains a specific reference to the Indemnity.
  • The commercial purpose of the contract reveals an intent to write back any obligations of the subcontractor to the extent the principal has caused or contributed to any loss.
  • The indemnity is for a limited purpose.

As always, clarity of expression is the best way to achieve certainty in the contract. If you have any concerns with a proposed indemnity or agreement to insure please contact us for an assessment of your obligations.