How Will Indemnities in Contracts Be Constructed?

Indemnities are essential in commercial contracts. In essence, an indemnity is a promise by one party to make good on any loss in the event of certain defined events. Put simply, if Jesse indemnified Harry against damages arising from a faulty product, and a fault subsequently occurs, Jesse must then pay Harry the price equivalent to the loss the fault caused (and/or fix the fault).

In complex commercial contracts, indemnities are typically subject to much negotiation and, occasionally, subsequent litigation as to how specific indemnities apply.

In Perry v Anthony [2016] NSWCA 56, the NSW Supreme Court was asked to examine an indemnity provision within a commercial contract, and whether it applied to a certain transaction.

What Happened?

In September 1999, by way of background, an ‘investor’ party (Investor) entered into an agreement with an investment company (Company), under which the Investor would advance to the Company $250,000 for the purpose of currency trading.

The contract entered into at that time contained an indemnity favouring the Investor whereby the Company would indemnify the Investor against her capital. The contract also clearly distinguished ‘capital’ and ‘profit’ (from the trading activities).

Then, in November 1999, the parties agreed that the Investor would advance a further $250,000. The parties recorded this by notation on the bottom of the September 1999 agreement and said it would be on “identical terms and conditions as stated in the above agreement”.

In February 2000, a further note was made on the bottom of the September 1999 agreement for the investment of an additional $200,000.

The company’s investment efforts, however, were poor and it ultimately lost the full amount of all three advances through currency trading (notwithstanding the Investor received a substantial sum of ‘profit’ from the investment before things turned sour). The Investor, relying on the indemnity provisions, then sued to get the full some of the original capital investments back.

Questions for the Court

The Court was asked to consider whether the indemnity forms part of the 1999 Agreement also applied to the subsequent advances. When interpreting the indemnity provision, the Court noted there is no strict principle that a person isn’t entitled to the benefit of an indemnity unless that person has suffered an actual ascertainable loss. Noting that the investor had, in fact, benefited from the contract by way of profits. The nature and extent of the rights and liabilities that arise under an indemnity are always a question of construction, and the Court must examine the precise words of the contract.

Construing Commercial Contracts

The court applied the authority of Wren v Mahony [1972] HCA 5; 126 CLR which provides:

“A commercial contract must be construed as a whole, according to its terms and in accordance with what a reasonable business person would have understood them to mean”.

Here, the notation made to the 1999 Agreement said subsequent advances were on “identical terms”. As such, the Court took the notation to mean just that. Further, the Court interpreted the indemnity in accordance with its strict terms, including that the Company would indemnify the Investor against the advance, notwithstanding any other benefit derived from the contract.

Key Takeaways

The takeaway lesson is clear – the precise words of an indemnity matter. Had the Company intended only to indemnify against a maximum loss equivalent to one or all of the advances, the wording of the indemnity clause should have stated that.

Questions? Get in touch with our contract lawyers on 1300 544 755.