Contractual indemnities trump proportionate liability

Legal Directions

Introduction

For the first time in NSW, a Court has held that a party can enforce a pre-existing contractual indemnity so that the other party will not have its liability limited under the proportionate liability provisions in Part 4 of the Civil Liability Act 2002 (NSW) (the Act).

The Court based its decision on s3A(2) of the Act which provides:

‘This Act (except Part 2 [personal injury damages]) does not prevent the parties from making express provision for their rights, obligations and liabilities under the contract with respect to any matter to which this Act applies and does not limit or otherwise affect the operation of any such express provision’.

The decision

The Court of Appeal decision in Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58 followed the Court’s 2012 decision in which it upheld Perpetual’s appeal and found a mortgagor originator, CTC, had breached its obligations of care to Perpetual under a Mortgage Origination Deed (the Deed). The Court of Appeal found that CTC failed to exercise the care required in identifying the proposed borrower and confirming his authority to submit the loan application.

In its second decision, the Court of Appeal dealt with CTC’s notice of contention that its liability to Perpetual should be limited by the apportionment provision in s35 of the Act.

Perpetual submitted that CTC’s liability should not be limited because CTC was liable to indemnify it under the following clause in the Deed:

‘Originator’s indemnity

The Originator [CTC] indemnifies the Trustee [Perpetual] and the Manager against any liability or loss arising from and any costs, charges and expenses incurred in connection with:

(d)      Any breach by [CTC] of any of its warranties or obligations under or arising from this deed or failure to perform any obligations under this deed…’.

The Court said that this clause rendered CTC liable for the full amount of Perpetual’s loss resulting from CTC’s breach of a warranty or other obligation under the Deed. The clause made express provision for the rights and liabilities of Perpetual and CTC that was inconsistent with the application of s35 in Part 4 of the Act. Accordingly, s3A(2) of the Act applied, rendering Part 4 of the Act inapplicable.

The Court also held that:

  • The intention of the parties is not relevant – the question is simply whether a contract makes express provision for the parties’ rights, obligations and liabilities which differs from that provided by the Act
  • No particular form of wording is required to effect a contracting out and it is not necessary for the parties to make any reference to the Act.

The Court said ‘all that matters is that the contractual indemnity is inconsistent with the provisions of Part 4’.

Comment

The Court of Appeal’s decision is welcome as there had been some uncertainty about the enforceability of contractual indemnities following the decision in Reinhold v New South Wales Lotteries Corporation (No 2) [2008] NSWSC 187. In that case, the Court held that s36 of the Act prevented the defendants from enforcing their contractual indemnity and contribution claims against each other. However, no reference was made in the judgment to s3A of the Act.

It will be essential for a defendant who has contracted out of the proportionate liability provisions to consider whether it should issue cross-claims.

Authored by April O’Keefe, Senior Associate, Sydney.


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