What s news in construction law 16 June 2006

2 What s news in construction law 16 June 2006 Warranties & indemnities the lessons from Ellington & Tempo services For as long as contracts have existed, issues have arisen in relation to provisions involving warranties and indemnities. However with lawyers consistently coming up with new and novel ways in which to avoid, circumvent or water down such provisions, it is essential that principals and head contractors ensure that such clauses are carefully drafted and appropriately worded, to ensure, as far as is possible, that any challenge to the applicability and effectiveness of the relevant indemnity clause(s) is not successful. The Queensland Supreme Court, Court of Appeal decision in Ellington v Heinrich Constructions Pty Ltd [2005] 13 ANZ Insurance Cases 61-646 ( Heinrich ) was a stark reminder to all involved in the drafting and interpreting of such contracts, that particular importance must be paid to each and every word of such clauses and the surrounding context in which they appear. The decision in Heinrich is also an example of the decisions principals and head contractors can expect to receive from the Courts should the clauses being relied upon not be appropriately drafted. In Heinrich, the indemnity sought to be relied upon relevantly provided as follows: The Subcontractor shall not commit any act or trespass of commit any nuisance or be guilty of any negligence and shall effectually protect and hereby indemnify the Builder and the Builder's employees against all loss, damage, injury or liability whatsoever that may occur in respect of the Works or through the execution of the Works and in case of any such loss, damage, injury,. or liability occurring the Subcontractor shall make full compensation and shall make good all such loss, damage, injury or liability and if the Builder is required to pay any damages for such loss, damage, injury or liability the amount of such damages may together with all costs which the Builder may have incurred in defending or settling the claim for such damages be deducted from any moneys due or becoming due to the Subcontractor under this Contract 1 In Heinrich the plaintiff (who was not a party to the appeal) was employed by the appellant as a steel fixer. On 30 June 1999 whilst assisting with the erection of a prefabricated steel beam, he was required to stand on a ledge at the perimeter of the construction. Whilst undertaking this task the plaintiff fell from a partly constructed portion of the grandstand to the ground, some 4 metres below, suffering personal injury, loss and damage. The plaintiff was successful at first instance in an action against both the appellant and the respondent with the court apportioning two thirds liability to the respondent and one third liability to the appellant. 2 When the respondent sought to rely on the above indemnity clause, the trial judge concluded that the indemnity clause referred to above did not operate to oblige the appellant to indemnify the respondent against the plaintiff's claim in these circumstances. 1 (2005) 13 ANZ Insurance Cases 61-646 @ 77-888 2 [2004] QSC 155

2 On appeal the respondent argued that the trial judge erred in such finding and that the indemnity clause should apply and the appellant should be liable for the respondent's two thirds liability to the plaintiff. It is important to note that in this case the trial judge found that the respondent itself was two thirds liable for the loss occasioned to the plaintiff and as such, the respondent had failed to take reasonable care for the safety of the plaintiff. As such, in attempting to rely on the above indemnity clause, the respondent was seeking an order that the appellant indemnify it for its (the respondent's) own negligence. In making its decision, the Queensland Court of Appeal noted that the clause being relied upon by the respondent was the same as that previously considered by the ACT Supreme Court in Canberra Formwork Pty Ltd v Civil & Civic Limited (1982) 67 FLR 66 ("Canberra Formwork"), and adopted as correct the reasoning of the ACT Supreme Court in this case. In Canberra Formwork the ACT Supreme Court noted that the clause contained a number of limbs, being as follows: Limb 1 - "the [appellant] shall not commit any act of trespass or... nuisance or negligence ; Limb 2 - "and shall effectually protect and hereby indemnifies the [respondent] against any loss damage injury or liability" whatsoever that may occur in respect of the works or through the execution of the works; Limb 3 - "and in case of any such loss, damage, injury or liability" occurring the appellant shall make full compensation and shall make good all such loss, damage, injury or liability; Limb 4 - "and if the [respondent] is required to pay any damages for such loss, damage, injury or liability the amount of such damages may together with all costs be deducted from any moneys due to the [appellant] under this order " 3 The ACT Supreme Court then noted that the real question was whether the second limb was to be read as a separate and independent obligation, or was to be read as being part of the clause as a whole. 4 Ultimately, the ACT Supreme Court (with whom the Queensland Supreme Court, Court of Appeal in Heinrich agreed) concluded the use of the introductory words was intended to indicate the meaning of those words contained in the second and third limbs and, as such, the indemnity in favour of the respondent was limited to apply only in circumstances where such loss or damage was occasioned by the appellant's negligence, and did not apply where the loss was caused by the respondent's own negligence. The Court noted that there would have been more force in favour of the respondent's argument if the clause were punctuated in such a way to suggest separate subject matters were being dealt with, for example, if a full stop followed at the end of the first limb and the second limb was a new sentence. 5 The writers also opine that a similar result could have been achieved if the second limb contained an additional clause at the end which provided, "howsoever caused, irrespective of whether such loss is occasioned, caused or contributed to by any act, omission, default or negligence of the [respondent]". An example of a suitable indemnity clause which was found to provide the intended indemnity is that relied on in State of New South Wales v Temp Services Limited [2004] NSWCA 4 ("Tempo Services"). 3 (1982) 67 FLR 66 @ 84 4 (1982) 67 FLR 66 @ 84 5 (1982) 67 FLR 66 @ 84

3 In Tempo Services, the relevant indemnity clause provided as follows: "The Contractor shall be liable for and indemnifies and shall keep indemnified the Government against any liability, loss, expense, damages, claims, suits, actions, demands or proceedings, whether arising out of any statute or at common law, in respect of personal injury (including illness) to or death of any person arising out of or in connection with or caused by the performance of the services." 6 The State of New South Wales in Tempo Services had settled its claim with the plaintiff, obtaining a verdict in its favour. The State was now seeking to recover its costs of and incidental to the defence of the matter, pursuant to the contractual right of indemnity contained within its contract with Tempo. On appeal, the New South Wales Court of Appeal concluded that the costs incurred by the State clearly arose out of, or in connection with, the work specified in the contract and, as such, questions of fault and who was responsible, or to blame, for the incident did not arise for consideration, rather, it was simply a matter of contractual interpretation. Accordingly, the Court of Appeal held that the State was entitled to recover its costs pursuant to the above indemnity clause. One may argue that this decision is easily distinguishable in circumstances where the party seeking to rely on the indemnity clause is found to have some liability to the injured plaintiff. In the writers' opinion however, in light of the comments of the New South Wales Court of Appeal that the issue of blame has no relevance to the question of interpretation of the indemnity clause, if the State had been found to have such liability to the injured plaintiff, any such exposure is likely to have been recoverable from Temp on the basis that it was a liability arising out of, or in connection with, the performance of the services. A simple addition of the words "howsoever caused, irrespective of whether such loss is occasioned, caused or contributed to by any act, omission, default or negligence of the [respondent]" may well also add strength to this argument. This can be compared with the indemnity clause in the New South Wales Court of Appeal decision in F & D Normoyle Pty Ltd v Transfield Pty Ltd (2005) 63 NSWLR 502 ("Transfield") in which the relevant indemnity clause provided as follows: The sub-contractor shall indemnify and keep indemnified [the Joint Venture] and their respective officers, employees and agents against all claims, demands, proceedings, liabilities, costs, charges and expenses arising as a result of any act, neglect or default of the sub-contractor, its employees or agents relating to its execution of the Works. 7 Whilst the Court of Appeal's comments are obiter, as the decision in relation to such issue was irrelevant, the Court noted that, when interpreting the above indemnity clause, the Joint Venture would have been entitled to obtain an indemnity in relation to its liability, despite the fact that it breached its statutory obligations to the injured plaintiff, provided that the injuries suffered by the plaintiff were caused by an act or omission of the sub-contractor which amounted to negligence, breach of contract or breach of statutory duty. 8 Ultimately, the Court held that the injuries were not caused by any such breach and, as such, the indemnity clause did not apply. The decision in this case clearly indicates the importance of carefully considering each particular word and phrase in an indemnity clause to determine its meaning and effect. For instance, in this case, fault became relevant to the issue 6 [2004] NSWCA 4 @ [1] 7 (2005) 63 NSWLR 502 @ 509 8 (2005) 63 NSWLR 502 @ 512

4 of the indemnity as the indemnity was stated to arise in relation to claims arising as a result of any act, neglect or default of the subcontractor provided such act, neglect or default related to its execution of the works. This can be contrasted with the indemnity clause in Tempo Services where the trigger for the indemnity was personal injury arising out of, or in connection with, the performance of the services and, as such, issues of fault were not relevant. This clause can also be contrasted with that in Heinrich on the basis that it did not contain the introductory words used in the clause in Heinrich, although it is interesting to note that the court in Transfield did not refer to the Queensland Court of Appeal decision in Heinrich. A final example of the importance of considering the exact terms of each individual contract can be found in the Victorian Supreme Court decision of Burch v Shire of Yarra Ranges & Anor (2004) 42 MVR 1 ("Burch") where the Victorian Supreme Court was required to consider the relevance of an indemnity clause in a contract between the Shire and a roadworks contractor following the death of the plaintiff's husband, as a result of a car accident on the road in question. One of the issues which arose for determination was whether the Shire was entitled to rely on the indemnity in its favour in the contract. The indemnity in question relevantly provided as follows: The Contractor shall indemnify the Council and its commissioners, Councillors and employees from and against all actions, claims, losses, damages, penalties or demands - consequent upon, occasioned by or arising from its performance or purported performance of its obligations under the contract. 9 In interpreting the contract, the court noted that it was common ground that where "its" was used twice, it referred to the contractor. Whilst on its face the above clause appears similar to the indemnity clause relied on successfully in Tempo Services, the court in Burch, by reference to the "natural meaning" of the clause, concluded that the application of the indemnity clause was limited to circumstances where the Shire faced a liability in consequence of some default by the Contractor in its performance or purported performance of the contract, but not in circumstances where the Shire faced some Common Law liability by reason of its breach of duty, and the Contractor also faced Common Law liability by reason of a breach of duty it owed independently of the Shire. 10 Whilst this decision may at first glance appear difficult to reconcile with that in Tempo, it is important to note that in Tempo the indemnity clause in question was wider as it contained the words "in connection with", such words not being included in the clause in the above case. Conclusion If a party wishes to have a full contractual and common law indemnity, there must be clear words in the contract providing that the indemnity applies irrespective of fault and that the words cover the actions of all relevant parties. To date the major construction contracts such as the Australian Standards and ABIC contracts have not addressed this issue, and parties may be more exposed to liability than expected unless the provisions are amended. If you would like to discuss any aspect of this article, please contact: Stephen Pyman Partner e: stephen.pyman@holdingredlich.com.au t: +61 7 3854 3625 Troy Lewis Senior Associate e: troy.lewis@holdingredlich.com.au t: + 61 7 3854 3614 9 (*2004) 42 MVR 1 @ 31 10 (2004) 42 MVR 1 @ 34

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