Indemnity Clauses - Andar Transport V Brambles - High Court says Indemnity Clauses read strictly against party receiving indemnity

Summary

The High Court in Andar Transport v Brambles stated that indemnity clauses remain special provisions with special interpretation rules so, unless the indemnity is absolutely clear in providing an indemnity in favour of a contracting party who was negligent in causing a loss, it will not be effective.  The approach by lawyers which developed since Darlington v Delco that an indemnity was simply another clause in a contract and that the usual rules of contract construction apply, can no longer be accepted.  Indemnity clauses will have to be reviewed to ensure there is no ambiguity at all so as to avoid them being read down in favour of the party providing the indemnity.

Andar v Brambles

The High Court has considered the principles used in the construction of indemnity clauses in a recent High Court decision, Andar Transport Pty Limited v Brambles Limited (15 June 2004).  The Victorian Court of Appeal had found that Brambles was entitled to rely on an indemnity in circumstances where Brambles were being indemnified for their own negligence.  Since Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 exclusion and indemnity clauses had been construed according to their natural and ordinary meaning without resort to special rules. An example of a special rules is one of the rules derived from Canada SS Lines Limited v King [1952] AC 192 that an exclusion or indemnity will not be construed as applying to liability for negligence unless it expressly refers to negligence or it is clear that negligence was within the contemplation of the parties.  A general view had developed which was adopted by the Victorian Court of Appeal that exclusion and/or indemnity clauses were no longer “special” and were merely another clause in the contract which needed to be construed in the ordinary way.

In Darlington v DelcoMason, Wilson, Brennan, Deane and Dawson JJ said:

“The interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and where appropriate, construing the clause contra proferentem in case of ambiguity.”

The majority in Andar Transport v Brambles, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ stated that analysing an indemnity required reference to principles of construction applicable to contractual indemnities.  The majority then referred to a decision, Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 which is a case about contracts of guarantee which said that in a contract of guarantee, ambiguous contractual provisions should be construed in favour of the party giving the guarantee.  This is the contra proferentum rule.  The majority, whilst noting that guarantee provisions are different to indemnity clauses both in form and effect, stated:

“However, notwithstanding the differences in the operation of guarantees and indemnities, both are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person.  The principles adopted in Ankar and applied in Chan (Chan v Cresdon Pty Limited (1989) 168 CLR 242), are therefore relevant to the construction of indemnity clauses.”

The majority then construed the particular indemnity clause which was included in a contract where Brambles subcontracted the provision of laundry services but assured the subcontracting company was badged as Brambles so, for example, there was an obligation on Andar to paint their vehicle with Brambles’ colours and name.

Brambles were seeking to rely on the indemnity in the contract in circumstances where an individual was both a director and sole employee of Andar was injured whilst carrying out the laundry services.  The majority accepted submissions from Andar that the indemnity clause was drafted to indemnify Brambles only against injury or property loss suffered by third parties.  The Victorian Court of Appeal and Justice Callanan had no difficulty in coming to the conclusion that the clause as drafted provided such an indemnity but, when read in light of the principle of contra proferentum so that any ambiguity was construed in favour of Andar, the majority found the indemnity clause did not indemnify Brambles in circumstances where the injured party and the person who caused the accident was the sole employee and a director of Andar. He was found not to be a third party.

Conclusion

Andar v Brambles establishes that an indemnity clause remains a special type of clause within a contract and that special rules apply to its interpretation.  There is no doubt that the principle of contra proferentum applies to all indemnity clauses and there is a clear inference from the High Court’s decision that the special rules regarding the construction of an indemnity clause, for example, the Canada SS rules continue to apply and great care will have to be taken in drafting indemnity clauses if they are to be effective.  There is always the problem that if one searches for an ambiguity in any clause, an ambiguity can usually be found. It will now be an unusual case where a party accepts that an indemnity clause is effective early in the litigation.

For more information contact David Farrell.