No-fault indemnity clauses are becoming more common in commercial contracts in Australia. At first glance, they may appear to offer strong protection, but they can carry significant legal and financial risks.
In this article, our contract lawyers explain what no-fault indemnities are, why they’re problematic under Australian law, and what you should do before agreeing to one. If you’re negotiating or reviewing a contract, this guide can help you avoid exposing your business to unfair or uninsured liabilities.
Key Takeaways
No-fault indemnities shift liability even when there is no fault or negligence.
These clauses can override proportionate liability laws in Australia.
Many insurance policies exclude cover for liabilities assumed under no-fault indemnities.
Such clauses may be unenforceable if they’re ambiguous or unfair.
Poor drafting can lead to disputes, legal uncertainty, and costly litigation.
What is a No-Fault Indemnity?
A no-fault indemnity is a contractual provision requiring one party to compensate another for losses, regardless of who was at fault or whether any breach or negligence occurred.
Unlike traditional indemnities, which require proof of fault, no-fault indemnities can impose liability even when the indemnifying party did nothing wrong.
Real Example
A construction consultant agrees to indemnify the project principal for losses from design defects – without specifying whose design caused the issue. Even if a third party was at fault, the consultant may still be liable under the indemnity clause.
How No-Fault Indemnities Undermine Australian Legal Principles
1. They Disregard Causation and Fault
Australian contract and tort law is built on the principles of causation and apportionment of responsibility.
The High Court of Australia has made it clear that indemnity clauses should not circumvent these balanced risk allocations (Andar Transport Pty Limited v Brambles Ltd [2004] HCA 28). No-fault indemnities undermine this by shifting all liability to one party, even if they were not at fault.
2. They Override Proportionate Liability Laws
Australia’s proportionate liability regimes – such as those in the Civil Liability Act 2002 (NSW) ss 34, 35 – ensure that liability for loss is shared according to each party’s level of responsibility.
No-fault indemnities can override these protections, contractually making one party wholly liable for losses, contrary to legislative intent.
3. Insurance May Not Cover These Liabilities
Insurers in Australia frequently exclude cover for liabilities assumed under no-fault indemnities or for liabilities not arising at law. The Insurance Contracts Act 1984 (Cth) (s 54) does not require insurers to cover losses outside policy terms, especially those assumed purely by contract.
Many policies exclude cover for contractual liabilities like no-fault indemnities – leaving businesses exposed.
4. They Can Be Unconscionable or Unfair
No-fault indemnities are often found in contracts between parties with unequal bargaining power, such as large corporates and small suppliers.
The High Court has recognised that unconscionable conduct can render contracts unenforceable, particularly where one party’s stronger position results in unfair terms. Overly broad indemnities may also breach Australian Consumer Law provisions on unfair contract terms (Schedule 2, s 23 of the Competition and Consumer Act 2010 (Cth).
5. They Create Legal Uncertainty and Risk
Ambiguously worded indemnities are interpreted against the drafter under Australian law (Sydney Water Corp v Transfield Pty Ltd [2003]).
Vague or overly broad clauses are more likely to be challenged in court and may lead to unpredictable outcomes.
Common Risks of No-Fault Indemnities
- May require you to cover losses caused by other parties
- Can extend to losses not ordinarily recoverable at law (e.g. remote or indirect losses)
- Sometimes cover potential or contingent losses, not just actual losses
- May not be covered by standard business insurance policies
- Often result from commercial pressure or power imbalances
Practical Steps: How to Manage Indemnity Risks
1. Review Indemnity Clauses Carefully
Clarify who is liable for what
Limit indemnity to losses caused by your acts or omissions
Exclude liability for losses outside your control
2. Cross-Check Insurance Policies
Ask if your policy covers contractual indemnities
Review contract exclusions related to assumed liabilities
3. Negotiate Fair Terms
- Push for mutual or proportionate indemnity clauses
- Avoid vague or “catch-all” language like “howsoever arising”
4. Seek Legal Review Before Signing
A contract lawyer can flag unfair terms and explain your exposure
Legal advice ensures your contracts align with statutory protections
Frequently Asked Questions
What is a no-fault indemnity clause?
A no-fault indemnity clause requires one party to compensate another for losses, regardless of who was at fault or whether there was any breach or negligence
Are no-fault indemnities enforceable in Australia?
While they are enforceable in some cases, courts may refuse to uphold them if they are unconscionable, ambiguous, or contravene statutory protections such as those under the Competition and Consumer Act 2010 (Cth).
Will my insurance cover liabilities under a no-fault indemnity?
Often, standard insurance policies, such as Professional Indemnity Insurances, do not cover liabilities assumed under no-fault indemnities. It is essential to check your policy and consult with your insurer.
Can I negotiate a no-fault indemnity clause?
Yes. It is advisable to negotiate these clauses to limit liability to losses caused by your own actions and to avoid covering risks outside your control.
What should I do before signing a contract with an indemnity clause?
You should review the clause carefully, compare it with your insurance coverage, and seek legal advice from a qualified Australian contract lawyer.
