Why the NSW Government shouldn’t be asking you to indemnify for breach

It has become standard practice for NSW Government contracts to include an indemnity from the contractor for any losses suffered or incurred by the government due to a breach of contract by the contractor.  A typical example is:

“The Contractor must indemnify the Government Agency for any Loss suffered or incurred by the Government Agency as a result of or in connection with a breach of this contract by the Contractor.”

Contractors accept that if they breach the contract, they will be liable to pay damages that compensate the Government Agency for the losses it incurs as a result.  They assume their liability under this indemnity will be the same.  This assumption is incorrect.  The indemnity significantly extends the contractor's liability beyond breach-of-contract damages for the following reasons:

• 1. Liability for remote loss

  The usual rule protecting contracting parties from liability for unforeseeable losses resulting from a breach of contract will not apply.  Instead, the contractor will be liable for every loss suffered by the government agency because of the breach, regardless of whether the contractor should have foreseen, when it entered the contract, the nature and amount of the loss as a probable consequence of the breach:

  • because the loss follows from the breach in the ordinary course of events, or

  • because the loss occurs due to special circumstances, outside the ordinary course of events, that the contractor had reason to know.

• 2. No requirement to mitigate loss

  The standard rule concerning the mitigation of loss will not apply; therefore, the contractor will be responsible for losses that could have been avoided or reduced if the government agency had taken reasonable steps to mitigate its losses.

• 3. No reduction for contributory negligence

  The contractor’s liability for breaching a contractual duty of care will not be reduced for contributory negligence by the government agency.

• 4. No proportionate liability

  The indemnity overrides the NSW proportionate liability legislation, which would otherwise limit the contractor’s liability to its proportionate share of the loss if other wrongdoers also caused it.

• 5. Uninsured liabilities

  The contractor’s public liability and/or professional indemnity insurance policies will not cover its liability under the indemnity if it exceeds its liability under general negligence law.

• 6. Intervening events that don’t break causal chain

  The phrase “in connection with” may overcome an intervening event that could sever the chain of causation in a damages claim for breach of contract.  In other words, the loss may still be considered “in connection with” the breach of contract, despite the presence of intervening events that break the causal link.

• 7. Voluntary payments to third parties

  Similarly, the indemnity mentioned above would cover amounts that the government agency pays in response to third-party claims arising from the breach, even if the government agency is not legally liable to the third party for the full amount paid.

• 8. Exposure to all legal costs

  The government’s loss would ordinarily include the legal costs it incurs because of the breach on an “indemnity basis”, which can be significantly more than those a court would award on an “ordinary basis” following successful litigation.

• 9. No time limit on claims

  NSW Government Contracts also include a standard clause (buried in the miscellaneous clauses at the end of the document) that “each indemnity is a continuing obligation that survives the termination, completion or expiration of the contract.”  This means the Government can make a claim under the indemnity at any future time, including after the contract has ended.  The usual 6-year statutory limitation period that bars a claim for breach of contract made more than 6 years after the date of the breach will not apply.

Why does the NSW Government ask for it?

In my experience, the NSW Government doesn’t include this indemnity for breach in its contracts because it considers it necessary to override common law and statutory rules relating to the recovery of damages for breach of contract to protect its interests.  Instead, these and other ‘over-the-top’ clauses have found their way into the NSW Government contracts because:

• lawyers who act for the government are generally too risk-averse and lack commercial awareness;

• most government employees seldom question the legal advice they receive; and

• competitive tendering processes for government contracts compel tenderers to accept and underprice unreasonable contract terms, to win government contracts. 

What to do about it?

Contractors hope their relationship with the government agency and its minister will lead to reasonable contract administration. However, my experience indicates this is a risky strategy. Ministers and government employees change frequently, and the ‘new sheriff in town’ will often enforce the contract strictly, without regard to previous ‘give and take’.

A better approach is to remove the indemnity for breach or suggest amendments that reflect the above-mentioned common law and statutory rules. I suggest you use the above reasons to justify your request.

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Before establishing Infralegal, Owen advised the NSW Government on some of its most significant infrastructure projects including the Sydney Metro Northwest PPP, the Waratah Train PPP and various toll roads. If you need legal support to bid for or negotiate a NSW Government Contract, there’s no one better placed to assist you.

Contact Owen at owen.hayford@infralegal.com.au or +61 412 664 580.