Beware of Contractual Indemnities – a Major Risk to Businesses
For contracting businesses operating in the mining industry, Contracts and Purchase Orders are just day to day business. You may accept a Purchase Order without even reading the terms and conditions attached.
What you may not realise, is that buried in the fine print is often a bomb, in the form of a nasty indemnity, and we are seeing many businesses fall victim to some very big claims, which insurance will not cover - even though the incident was actually the mining company’s fault!
Giving an indemnity under a contract or through Purchase Order Terms and Conditions significantly widens a party’s liability well beyond what a Court may award in damages.
An indemnity is a promise that if an incident occurs which the indemnity covers, then the party giving the indemnity will put the other party in the position they would have been in had the incident not occurred – paying ALL their out of pocket costs (including legal costs) and potentially consequential loss.
Even though a party is usually not liable for the negligence of another party at law, through agreeing to a ‘release of liability’ or giving an ‘indemnity’ under the Contract, you may unknowingly be altering this – and shifting all the risk to your business!
The typical scenario is:
Company A provides a worker or services to site, under a contract with mine site B, which contains a clause by which company A indemnifies mine site B, for everything, including mine site B’s own negligence;
Company A’s worker is injured on site and sues company A and mine site B for their negligence;
Mine site B issues a contribution notice against company A, saying company A should pay for everything, even mine site B’s own negligence;
Company A is told by Work Cover and by its insurer that it will not cover the risk… and so company A has to defend and potentially pay out the claim itself – without any insurance!
We are also increasingly seeing a term requiring the Contractor to “name” or “note the interests of” the Principal in mining contracts and/or terms and conditions. If a business then fails to do so, then it is in breach of the Contract and at serious risk of the above scenario.
What should companies do?
Contractors operating in the mining industry need to:
1) Carefully read the fine print;
2) Seek advice from a solicitor experienced in mining contracts about seeking to negotiate deletion of any onerous terms, or at least watering down ie. having the indemnity ONLY apply to acts or omissions of the Contractor (not the Principal) and excluding any consequential loss;
3) Seek advice from your insurance broker to ensure you are appropriately covered by insurance for any indemnities you give, or risks you take on by a Contract;
At McKays, we review mining contracts day-in, day-out and are very experienced and up to date on emerging issues like contractual indemnities. To contact one of our experts please click here.