Interpretation of indemnity clauses – a trend towards the commercial approach
July 4, 2017
Whilst indemnity provisions were once the sole domain of insurance contracts, it is becoming increasingly common in construction contracts in Australia to include broad indemnities as a means of allocating risk between the parties, particularly in major infrastructure projects.
The Courts in Australia have generally adopted two competing approaches to the interpretation of indemnity clauses, by either:
- applying a “commercial” construction (as one would with any other contractual provision), and if ambiguity remains it is to be resolved in favour of the party giving the indemnity; or
- applying a “strict” construction in favour of the party giving the indemnity (referred to as the ‘strictissimi juris’ doctrine) prior to the identification of an ambiguity.
In AAI Ltd t/as Vero Insurance v Kalnin Corporation Pty Ltd; Kalnin Corporation Pty Ltd v AAI Ltd t/as Vero Insurance  NSWSC 548, the Supreme Court of New South Wales recently handed down a decision in relation to (among other things) the proper approach to construction of an indemnity clause.
The decision concerned the proper construction of an indemnity which was expressed as being for claims made under a policy. “Policy” was defined to mean a specifically identified policy, however it was not the policy which had been issued by the party giving the indemnity when a claim was first sought to be made. In determining the correct construction of the indemnity, the Court applied the first of the two approaches above, and held that a reasonable business person in the position of the parties would have understood that “policy” meant whatever policy had in fact been issued.
This decision adds to the body of cases where a commercial construction has been adopted, departing from the historically strict interpretation of indemnity clauses, even when there is no ambiguity. It also underscores the importance for parties to take care when negotiating or agreeing to an indemnity provision, as the recent approach of the Courts suggests that parties can no longer necessarily rely on a narrow reading of indemnity provisions being taken.