Contract provisions that address liabilities28 and indemnities29 are common in many Australian Government contracts and are designed to assign to one or more parties the liability for damage in the event that a specified risk occurs.30 An indemnity is a contract provision that allocates liability between the parties and is generally expressed in the form of one party indemnifying the other for a particular type of liability31 Indemnity provisions that provide for the acquiring entity, on behalf of the Commonwealth, to accept the risk of specified losses or damage the contractor may incur or suffer, can have significant legal, policy and financial implications including the need in many situations to obtain approval from a relevant delegate for providing an indemnity32 Many Australian Government contracts contain an indemnity from the contractor to the acquiring entity that provide for the contractor to be liable for loss, damage or expenses incurred or suffered by the acquiring entity as a result of actions of the contractor. The most significant issue is whether the contractor's liability should be capped or limited. Any decision to cap or limit a contractor's liability should be based on a formal risk assessment. This assessment should be based on the general principle that risks should be borne by the party best placed to manage them, and have regard to the nature and extent of the risks involved.33 A related area is that of consequential loss.34 The advice of a commercial lawyer with experience in Government contracts should be obtained if there are any issues relating to consequential loss. The starting point under Australian law is that contractors can only ever be liable for losses or damages that are actually proven and which flow from reasonably foreseeable consequences of their actions. If consequential damages are to be limited or excluded a proper risk assessment needs to be conducted and a commensurate benefit obtained from the contractor as a result of the limitation of liability. | A significant issue is whether the contractor's liability should be capped or limited. |
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28 A liability is a legal obligation to pay or compensate another party. Liabilities can arise from specific clauses in a contract, or as a result of some other action.
29 An indemnity is a legally binding promise by which one party undertakes to accept the risk of loss or damage another party may suffer. For example, to protect the acquiring entity against claims arising from actions of the contractor.
30 Risk management principles and the policy for FMA agencies on the limitation of liability are contained in the Commonwealth Procurement Guidelines.
31 See Australian Government Solicitor Legal Briefing Number 19 of 26, July 2006 for a discussion of Indemnities in Commonwealth contracting.
32 Finance Circular 2003-02 of September 2003 and Financial Management Guidance No.6 Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letter of Comfort outline the Australian Government's policy applicable to FMA agencies on issuing these instruments including approval, recording and reporting obligations.
33 It is Australian Government policy that the liability of Information and Communications Technology suppliers contracting with FMA Agencies should, in most cases, be capped at appropriate levels with unlimited liability clauses only required when there is a compelling reason. See Finance Circular 2006-03 dated 15 August 2006 and A Guide to Limiting Supplier Liability in ICT Contracts with Australian Government Agencies, issued by the Department of Communications, Information Technology and the Arts, August 2006.
34 Consequential loss is loss subsequent to and related to an immediate loss incurred as a result of some injurious act.