Tender Negotiations, Indemnity and Exclusion of Liability

1. Tender Negotiations, Indemnity and Exclusion of Liability Kathryn Walker Senior Associate (08) 8236 7632 kwalker@lynchmeyer.com.au Local Government Forum, 15 September 2010

2. What is the nature of the project Is it standard? Are all of the materials available? Are there any new or untested methods being used? Who are the right proponents? Who will prepare the Request for Tender? What is the purpose of the project What is the objective? Are there any sensitive or site specific requirements? What impacts will the services have on the community? Selecting the right contract model. Selecting the right procurement model. Tips for Negotiating a Workable Contract Local Government Forum, 15 September 2010

3. What is the scale of the project • What is the estimated value? • Who will evaluate financial capacity? • How will work flow be monitored? • What are the time frames for Practical Completion? • What are the funding and time limit constraints – Building the Education Revolution or the Nation Building Program? • Who will benefit from the project? • What are the contractual, statutory or legal obligations or restrictions on the project • Legislative requirements? • Existing or proposed contractual relationships? Local Government Forum, 15 September 2010

4. Consultants agreements? • Site specific approvals? • Risk allocation? • Will other contractors be involved on the project • The impact of contractual terms in other contracts. • Market Issues • Are sub-contractor arrangements necessary? • Are there any pre-nominated sub-contractors involved? Local Government Forum, 15 September 2010

5. Managing Your Risk • Identify the specific risks for the project. • Assess the risks and the consequences. • Allocate the risks between the contracting parties. • Implement methods to minimise the risks. • Manage the risks on an ongoing basis. Local Government Forum, 15 September 2010

6. Risk Passing Methods • Warranty clauses. • Exclusion of liability clauses. • Indemnity clauses. • Liability limits. • Liquidated damages. • Obligations to obtain and maintain insurance. • Termination rights. • Guarantee clauses. Local Government Forum, 15 September 2010

7. Indemnity Clauses An indemnity clause is a mechanism used to shift contractual and legal responsibility from one party to another. The recipient of an indemnity is in effect exempt from the possibility of incurring specified losses and/or liabilities. The risk for such losses and/or liabilities is assumed by the indemnifier. Local Government Forum, 15 September 2010

8. Types of Indemnity Clauses • Third party indemnity clauses • Indemnifier to beneficiary from a claim by a third party. • Party to party indemnity clauses • Indemnifier to beneficiary for specific occurrences. Local Government Forum, 15 September 2010

9. What to look at when drafting an Indemnity Clause • Scope • What is the purpose of the indemnity clause? • Limit on liability • Ensure you have adequately covered the amount of the liability. • Will it cover consequential loss (loss of profits, loss of revenue, loss of goodwill)? • Does it comply with proportionate liability legislation? Local Government Forum, 15 September 2010

10. Insurance • Ensure the party providing the indemnity has an appropriate insurance policy to cover the indemnity. • Capacity • Ensure the party providing the indemnity has the resources to pay any claim. Local Government Forum, 15 September 2010

11. The General Interpretation Principal “Such a document falls to be construed strictly; it is to be read contra proferentem” However: “Where there is an ambiguity in an indemnity clause, the principals of interpretation require the provisions of such clause to be construed in favour of the party providing the indemnity.” (Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987)162 CLR 549 and Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424) Local Government Forum, 15 September 2010

12. Exclusion of Liability • These clauses aim to reduce or exclude a party’s liability for conduct that would otherwise be a breach of contract or negligent. • A valid clause cannot seek to exclude liability for non-excludable loss. • Clauses must be drafted clearly and with the specific nature of the project in mind. Local Government Forum, 15 September 2010

13. Clauses of this nature must be brought to the attention of the contracting party. • If a dispute arises, the Courts will construe an exclusion clause in accordance with its natural and ordinary meaning, in light of the contract as a whole. (Darlington Futures Ltd v Delco Australia Pty Ltd (1986)161 CLR 500) Local Government Forum, 15 September 2010

14. Case Study BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173 • “The subcontractor shall take out and maintain workmen’s compensation insurance and public risk insurance policies in respect of the subcontract works and shall pay all premiums thereon and all fees required by any public or local government authority in respect of the subcontract works and shall indemnify the builder against all liability relating to the subcontract works”. Local Government Forum, 15 September 2010

15. How should the Indemnity Clause be Constructed • What was the proper construction of the indemnity clause? • Was it confined to BIC employees? • Was is broad enough to cover Baulderstone employees? • Did it operate despite the negligence of the indemnified party? Local Government Forum, 15 September 2010

16. The Trial Court found that the clause covered Baulderstone. • BIC appealed to the Full Court of the New South Wales Supreme Court. The Appeal was dismissed. Local Government Forum, 15 September 2010

17. The Starting Point • The Clause should be construed strictly, in the context of the contract as a whole. • Where there is any ambiguity in the strict construction, the indemnity ought be construed in favour of the indemnifier. Local Government Forum, 15 September 2010

18. In this Case • The language of the clause was in its widest terms. • As a matter of ordinary construction the clause would encompass the injury, loss and damage for which Baulderstone was liable to its employees. • There was no ambiguity in the clause so as to require it to be construed in favour of BIC. Local Government Forum, 15 September 2010

19. “…it is probable that the parties had it in their contemplation…that BIC should be responsible for whatever loss or damage was caused by the carrying out of those works…it is apparent from its terms that cl 6 is a risk allocation clause and it was intended to allocate the risk for all liability that arose relating to that part of the building works undertaken by a particular sub-contractor.” Local Government Forum, 15 September 2010

20. Summary • At the start of negotiations turn your mind to the nature and objectives of the project. • Reality test the risks. • Assess the implications which may flow from the occurrence of the risks. Local Government Forum, 15 September 2010

21. Determine the type of risk allocation you need for each project. • Carefully draft any indemnity and exclusion of liability clauses to meet your specific needs. Local Government Forum, 15 September 2010