Agreements involving indemnity clauses must be drafted carefully and must clearly state the intention of the parties with regard to the liabilities arising from the breach of the indemnified party. This might appear obvious but a recent case suggests otherwise.

Quick Facts

In Westina Corporation Pty Ltd v. BGC Contracting Pty Ltd [2009] WASCA 213, Westina and BGC entered into a hire agreement. The plaintiff’s side of the deal involved providing a road train and three trailers and a qualified operator for transporting ore and other materials, for BGC.

The plaintiff company was to indemnify and hold the defendants harmless for any injury, death or any other loss arising out of the use of the above equipment. These terms were a part of the hire agreement.

What happened next?

One of the employee’s from the plaintiff company who was driving the hired equipment for the defendant died when the road train owned by the defendants collided with another train. It so happened that the train Westina’s employee collided with was owned by BGC and driven by it’s a BGC employee.

At trial it was held that the accident was due to the negligence of the defendant’s employee.

Post accident

The defendant tried to claim shelter under the indemnity provisions, saying it was drafted to cover any and all loss arising from the hiring of the plant, regardless of the defendant employee’s negligence.

However, at appeal, it was unanimously held that the indemnity must be viewed contextually –‘the surrounding circumstances known to the parties, and the apparent purpose and object of the transaction’ were to be considered carefully.

The Court of Appeal also found other uncertainties in the wording of this clause, which cast uncertainty over when indemnity would arise, to what extent and what responsibility the two parties were to endure when the indemnified party caused a breach under the agreement.

In hindsight

• The Court of Appeal concluded that when faced with such an ambiguous clause, clarity must be found in favour of the indemnifier.

• Needless to say that an indemnity clause must be precisely and vigilantly drafted – the parties’ intention must be transparent and clear.

• The pitfall of making assumptions must be avoided, especially where one party has insured itself against indemnity risks, should not indicate that this party will naturally suffer all ensuing risks.