By Maurice Lynch, Senior Associate
Many persons and entities consider that a contractual indemnity gives them carte blanche to settle claims made against them by third parties with no monetary exposure.
Whether or not this is actually the case will depend upon whether that settlement was reasonable, and whether the indemnity clause when properly constructed allows the indemnifying party to reduce the amount of its indemnity by an amount which represents the contribution to the loss caused by the negligence of the party seeking the indemnity.
The Court of Appeal Supreme Court of New South Wales in Action Workforce Pty Ltd v DHL Supply Chain (Australia) Pty Ltd  NSWCA 321 has clarified the operation of a contractual indemnity in circumstances where a party has settled a claim against it, and attempted through a contractual indemnity to recover that settlement in full from another.
DHL contracted with Sony to provide warehousing and logistics services for Sony’s goods imported into Australia. DHL separately contracted with Action Workforce Pty Ltd to supply an employee to operate forklifts in its warehouse.
While Sony’s goods were being stored in DHL’s warehouse, a consignment of Sony televisions were damaged when sprayed with by water.
Water damage occurred to Sony’s televisions when an employee of Action Workforce drove a forklift into a sprinkler pipe. Sony claimed against DHL for its losses totalling approximately $650,000.
DHL settled Sony’s claim for $270,000, being the contractual limitation available to it under its agreement with Sony plus costs.
Following settlement, DHL pursued a contractual indemnity claim against Action Workforce for $270,000 pursuant to an indemnity clause which read:
Supplier [Action Workforce] shall indemnify DHL in full against all liability, loss, damages, costs and expenses (including legal expenses) awarded against or incurred or paid by DHL as a result of or in connection with:
(b) any negligent act or omission of the Supplier [Action Workforce] or its employees, agents, or subcontractors in connection with the performance of the Services.
Normally, the recovery under such a broadly worded indemnity clause would be straightforward. However, Action Workforce contended:
- The settlement DHL reached with Sony was unreasonable as absent a finding in negligence, DHL could not be liable to Sony; and
- The indemnity, when properly construed, did not extend to require Action Workforce to indemnify DHL to the extent its own negligence caused Sony’s loss.
DHL was entitled to an indemnity, and to recover this indemnity, it need not prove its own liability to Sony. It only needed to prove its settlement was reasonable.
The settlement was reasonable having regard to the fact DHL was:
- Contractually required to keep Sony’s products secure and protected against damage, and exercise all due care and skill expected of persons providing services of the kind it provided; and
- Contractually liable to Sony for any loss or damage to Sony product caused by the negligent acts or omissions its subcontractors.
Due to the express words of the indemnity clause, it was not limited to the liability attributable to Action Workforce’s negligence.
To recover the full amount of any settlement made with a third party pursuant to a contractual indemnity, the following needs to have occurred:
- The settlement must have been reasonable, having regard to the commercial context and the obligations of the parties. It is not necessary to prove that you are liable;
- The indemnity must be clear and unambiguous; and
- The indemnity must not be drafted to provide that the party indemnifying the claimant can reduce its liability by the extent to which the claimant has been negligent or contributed to the loss.
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