Government contracts commonly involve the need for the co-ordination of activities involving a head contractor and several subcontractors operating on a project at any one time. Where a complex contractual framework exists, care must be taken not only for the efficient administration of the contract, but also to protect the interests of the principal, particularly in the event of negligence or non-performance of a contract.

Background

In Erect Safe Scaffolding (Australia) Pty Ltd v Sutton (2008) 173 IR 412, the New South Wales Court of Appeal considered the liability of a head contractor and its subcontractor for the injury of a worker who struck his head on a scaffolding crossbar and fell over. Erect Safe Scaffolding (Australia) Pty Limited (Erect Safe) was subcontracted by Australand Constructions Pty Limited (Australand) to provide scaffolding services and had erected the crossbar (the Subcontract). The worker was an employee of an independent subcontractor to Australand who owed a duty of care to the worker which it breached in its failure to maintain an appropriate safety regime for the site.

The appeal, and relative liability for the injury, was largely decided by the Court of Appeal’s interpretation of the indemnity and insurance provisions of the subcontract between Australand and Erect Safe.

Judgment

In his judgment, Justice McClellan identified the relevant question in relation to the indemnity provided in the subcontract to be whether the indemnity clause confined the liability of Erect Safe to indemnify Australand for liabilities arising from Erect Safe’s performance of the subcontract works, or whether it extends to a liability of Australand which arises in relation to those works. Clause 11 of the subcontract relevantly provided as follows:

“The Subcontractor must indemnify Australand Constructions against all damage, expense ... loss ... or liability of any nature suffered or incurred by Australand Constructions arising out of the performance of the Subcontract Works and its other obligations under the Subcontract.”

In interpreting clause 11, his Honour referred to the decision in Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 in saying that if the clause is ambiguous, it would have to be construed in favour of the surety (in this case, Erect Safe). His Honour said that although the indemnity was initially described in broad terms, it was confined by the word “arising”. Therefore, clause 11 provided that the relevant indemnity obligation can arise either out of the performance of the Subcontract Works, or out of Erect Safe’s other obligations under the Subcontract.

Although Australand’s liability arose out of Erect Safe’s erection of faulty scaffolding, it did not “arise” out of the performance by Erect Safe of any of its contractual obligations but from Australand’s independent act of negligence in failing to maintain an appropriate safety regime for the site. Therefore, Erect Safe was not bound to indemnify Australand for its liability for the injury of the worker.

Under the terms of the insurance provisions of the Subcontract, Erect Safe was obliged to obtain public liability insurance to cover both Australand and Erect Safe “for their respective rights and interests against liability to third parties for loss of or damage to property and the death of or injury to any person”.

Justice McClellan found that as the insurance clause (clause 12) followed the indemnity clause (clause 11) which confined Erect Safe’s liability as outlined above, it would be surprising if the parties intended Erect Safe to obtain insurance for any liability of Australand, even that arising from its own negligence.

His Honour agreed with the decisions of the Supreme Court of the Australian Capital Territory in Steele v Twin City Rigging Pty Limited (1992) 114 FLR 99 and Canberra Formwork Pty Ltd v Civil & Civic Ltd (1982) 67 FLR 66 in stating that, in the absence of express words, the obligation under an insurance clause in a contract which is provided to support an indemnity clause will not require the subcontractor to maintain insurance against loss occasioned by the head contractor’s negligence.

Erect Safe’s obligation was to obtain insurance to cover Australand and Erect Safe “for their respective rights and interests against liability to third parties”. Australand’s “rights and interests” were provided by the indemnity in clause 11. As Australand had no right to recover from Erect Safe in respect of damages occasioned by its own negligence, there was no obligation in Erect Safe to obtain insurance to support Australand’s direct liability to another caused by the negligent act of Australand.

Implications

The lesson to be taken from the Erect Safe decision is that indemnity and insurance provisions should be drafted carefully, taking into consideration a holistic view of the project which is the subject of the contract. For example, where indemnity and insurance provisions are intended to cover the negligence of a principal, the contract should include an express provision to that effect.

It is also important to note that, where an insurance clause is adjacent to an indemnity clause, the insurance provision may be interpreted to relate directly to the indemnity, unless otherwise stated.