Have you ever paused to wonder just how far your indemnity provisions might reach and who can enforce them? A recent decision of the Supreme Court of Victoria serves as a reminder that particular care is required when drafting broad indemnities with multiple indemnified parties.

This is one of those cases where the legal issue is not new, but the facts present a cautionary tale, warning readers to be careful when dealing with indemnities.

The Affinity case involved a string of indemnities which flowed from Symbion down through its subsidiaries and new purchasers of those subsidiaries to Hobart Private Hospital Developments. The various indemnities are set out in the diagram below.

Click here to see table.

Symbion's liability all started when Hobart Private Hospital Developments was issued a tax bill. The liability for this tax bill initially flowed up to Hobart Private Hospital under an indemnity in an operations and maintenance agreement between those two parties. From there, the liability made its way to Hobart Private Hospital's former parent, Australian Hospital Care (this payment was itself the subject of a separate proceedings).  

By this stage, Australian Hospital Care had been purchased by Affinity and, as part of that transaction, Symbion gave Affinity (and Australian Hospital Care as an indemnified third party) an indemnity. This indemnity was the subject of the current proceedings.

While the indemnity was contained in an agreement between Symbion and Affinity, it was broadly drafted to also indemnify "any Group Buying Member", which included Australian Hospital Care. Consequentially, once Hobart Private Hospital Development's tax liability made its way up through the various indemnities and proceedings referred to above to Australian Hospital Care, Affinity sought specific enforcement of Symbion's indemnity on behalf of Australian Hospital Care, the third party beneficiary of that indemnity.

Justice Sifris took it as settled law that Affinity could seek specific performance of an indemnity for the benefit of a third party, and so the tax liability found its final resting place, 8 years, 3 indemnities and 2 proceedings later, with Symbion.   

Standing of third party indemnified parties

While Australian Hospital Care had the benefit of its parent being able to bring proceedings on its behalf, there is an open question as to whether the result would have been different had Australian Hospital Care sought standing to enforce the indemnity in its own name, due to lack of privity.

In this circumstance, issues such as implied agency, trust or unjust enrichment would come into play. Statutory and common law exceptions to the doctrine of privity may also apply.

In this context, it's worth noting that where the intention of the parties is clear that a third party is a beneficiary of an indemnity, the courts (both in Australia and overseas) may be reluctant to prevent the indemnified party from avoiding a claim on the basis of lack of privity and, as a result, may be receptive to arguments (such as implied trust) which allow the indemnity to be enforced.

For example, the New York Supreme Court recently went so far as to give standing to a third party beneficiary of any indemnity, notwithstanding the existence of a "no third party beneficiary clause" which sought to override a judicially accepted exception to the doctrine of privity (Ius quaesitum tertioz, which provides intended third party beneficiaries standing in certain circumstances). We note that this exception is not recognised in Australia.

In that case (Diamond Castle Partners v IAC/InterActiveCorp), a third party beneficiary of an indemnity sought to enforce the indemnity. Despite the defendant's assertion that the "No third party beneficiary" clause meant that the plaintiff had no standing, the court accepted the argument that the undefined term "parties" included not only the signatories to the agreement but also indemnified parties. As such, the "no third party beneficiary clause", which excluded non-parties from bringing an action, did not prevent an indemnified third party from enforcing their rights.

Whilst the Diamond Castle decision largely turned on the precise language used in the relevant no-third party beneficiary clause and otherwise relied on a particular US exceptions to the doctrine of privity, the court's strong desire to give effect to the clear and unequivocal meaning of the indemnity provision is illustrative of the need for lawyers and commercial teams to analyse indemnities on the basis that they may be enforceable by third parties, notwithstanding legal arguments to the contrary.

Lessons learned

When negotiating indemnity provisions, care must be exercised with respect to scope. It is easy to focus on the types and nature of losses which may be incurred by the signatory, but particular care should also be taken to analyse the types of losses that may be incurred by more remote third parties.

The remoteness of third party loss makes it difficult to assess the risk associated with signing up to a broad indemnity of this nature and, particularly in group contracting or sale of business scenarios, thorough due diligence may be required to ensure that the indemnifying party is not exposing itself to significant and unforeseen risk.

Careful consideration is also necessary to ensure the proper interaction between any express exclusion of consequential loss and the relevant indemnity.

Conversely, when analysing indemnities from the point of view of the beneficiaries, consideration is required with respect to the structure of the arrangement and the mechanisms through which indemnified parties may seek to enforce the indemnity. Properly establishing these mechanisms is likely to avoid the sorts of costly litigation that the Affinity case demonstrates, by removing the scope for any technical legal arguments that third party beneficiaries should not be able to enforce the indemnity.