What is the statute of limitation on an indemnity clause in a contract?

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We have no doubt all seen advertisements for insurance companies where a chain of often humorous, bizarre events leads to catastrophic results. An ice-cream is dropped – the car door is opened to find it – a passing truck swerves – a car on a trolley jack is bumped and rolls down the hill … and eventually … a caravan rolls into a river.


Is the person who dropped the ice-cream legally responsible for the write-off of the caravan? Or is that resultant event seen as too remote from the original act?


Possible, foreseeable, hold harmless, make good?


‘Too remote’ is a legal term, but has nothing to do with geography. Too remote refers to how close or removed a result may be from the original causal act. While common law may exclude coverage due to remoteness, a properly constructed indemnity clause may serve to include such risk. There are many other terms used within contracts, and specifically within indemnity clauses, but the aim here is not to investigate each one.


If issuing indemnity, you should make sure safeguards are in place to properly define exposure. If receiving indemnity, ensure there are no restrictions that limit what you think you are covered for.


Common law and statutory rights provide a starting point, and indemnity clauses will seek to either affirm or alter those positions. Contract indemnity clauses will provide further detail to cover various possibilities, and will often become serious points of negotiation in construction contracts, as they should.


What matters here is that the clause fits the circumstances.


It is vital that the indemnifier is absolutely aware of their liability. Are they liable only for their own actions, or also for the conduct of the other party? Are they liable for a claim made by third parties? Are there exceptions or limitations? What is the scope of liability? 


The answers to these questions lie in the individual wording of the indemnity clause, and it is imperative that both sides, both indemnifier and indemnified, fully understand the implications of the words.


Start the clock!


The ability to make a claim under indemnity clauses begins when the first event occurs that has given rise to the claim. How long after that event may a claim be made? There is a statute of limitation on such claims, but the specifics will depend on whether the claim is made under a contract, or a deed.


Under a contract, the limit is six years, whereas, in NSW at least, the limit under a deed is 12 years. However, while that is the statutory limit, if the indemnifying party refuses to honour that obligation, that refusal then becomes a triggering event, and the clock will start again from that time, which may be substantially later than the original event.


It is essential that a lawyer is consulted for the wording of any contract, but in particular, in the construction of indemnity clauses. There are many variations, and the consequences will remain for many years. If you are the indemnified party, ready to sign and formalise an agreement, it is essential that you understand the ramifications. Do not simply assume that ‘there is an indemnity clause, so I’m covered’. The construction of such clauses varies enormously, as do the implications for possible claims down the track.


Indemnity clauses – handle with care. Contract Law – we know it! It will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help.

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