A Cautionary Tale: Indemnities in Infrastructure

As lawyers working in the infrastructure sector, our team spends a lot of time answering questions on indemnities – because they are entirely contractual, the devil is in the detail. Indemnities can be dangerous as much for what they don’t say as what they do say, and of course they are often considered in hindsight, with 20/20 vision.

Indemnities in master agreements can be particularly dangerous, and it seems appropriate to revisit the case of Shamrock Civil Engineering Pty Ltd v Honan Insurance Group Pty Ltd [2024] QSC 313 which highlights exactly how expensive they can be.

Shamrock’s indemnity oversight

The contract in the Shamrock case related mainly to earthworks and building cells for disposing of landfill at the New Chum landfill in Ipswich, Queensland. It was made up of the New Chum Statement of Works dated 5 December 2019, the Master Agreement dated 30 November 2015 and other documents listed in the annexures to the Master Agreement.

In the day-to-day bustle of construction, we all tend to focus on the new works – celebrating the win, then scheduling, ordering materials and equipment and mobilising to site. Did Shamrock have time to consider this indemnity provision in the light of the new $3.7m cell to be built?

Natural disasters: Who foots the bill?

Most Queenslanders will remember that in February 2022, there was a massive rain event and as a result serious flooding occurred at New Chum. It effectively turned much of the landfill site into a large lake, and leachate from the landfill filtered into that lake. The lake started to smell bad and nearby residents complained. As site operator, Cleanaway was given an environmental order to clean it up. Cleanaway allegedly incurred $30,962,566 of remediation costs which it cross-claimed against Shamrock.

We can only imagine the initial conversation at Shamrock might have been along the lines of “they can’t be serious, how can we be liable for a natural disaster?” – but that sentiment (if it occurred) stems, at least partly, from misunderstanding the contract.

Contracts in context

When a contract is made up of different documents, some of which may have been signed months or years earlier, it is vital (at least on the high risk or high value contracts) that all the parts that make up the contract are understood in context. In a perfect world, Shamrock would have checked how the Master Agreement’s terms might apply in the context of the new work order.

Clause 10 of the Master Agreement states:

The Contractor shall be liable for and shall indemnify the Principal against:

(a)             Any liability, loss claim or proceeding whatsoever in respect of loss, destruction or damage to any property, real or personal, arising out of or in the course of or by reason of the execution of the Works.

This is a wide indemnity which might well have been heavily negotiated when the Master Agreement was entered into. Many Principals will not entertain amendments to indemnity clauses and the contractor can be left with a “take it or leave it” situation. When it’s not your own business at stake, it’s easy to say that this indemnity should never have been agreed to. It also should not have included the words “arising out of or in the course of” the Works because this phrase is too wide and its application over a contract lasting several years could not be known.

Words matter: Litigation and expensive consequences

Proceedings were already on foot via Cleanaway’s broker and insurers, and Cleanaway was joined by way of cross claim to these proceedings. Shamrock sought a summary judgement to dismiss Cleanaway’s $31 million cross claim against Shamrock for remediation costs.

The Queensland Supreme Court found against Shamrock. It said there was a real prospect of Cleanaway being able to establish that the $31 million in remediation costs claimed are “in respect of loss, destruction or damage to any property, real or personal” and “arising out of or in the course of …the execution of the Works”. It therefore refused to dismiss Cleanaway’s cross claim.

Shamrock argued it was engaged to do earthmoving works, not to indemnify Cleanaway against the risks of a natural disaster. It argued very clear words would be required before it could be concluded that the parties intended Shamrock to take that risk. Freeburn J did not agree. He said “The process of contract interpretation does not start with an assessment of what the parties can be presumed to have intended”.

Pointing to the decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, Freeburn J concluded “The starting point is the words actually used”.

The Court accepted Cleanaway’s contention that the ordinary and literal meaning of “in the course of the works” does not require a causal nexus (a link between cause and effect) with execution of the Works. All it requires is that damage occurs in the course of the Works ie there is some proximity to the work in time or place.

Shamrock also tried to argue that “damage to any property” means physical damage, not just a reduction in the utility or value of the property like that caused by the presence and removal of the noxious lake. Freeburn J disagreed, saying “Shamrock explicitly accepted all risks in connection with the construction of the works”.  Shamrock had control of the site during construction and was obliged to take out four types of insurance, including for property damage. The court concluded “It is likely that the parties contemplated that any liability Shamrock is concerned would fall within those policies”. In other words, Shamrock arguably accepted this risk.

Standard forms: Design and construction contracts

Would the outcome have been any different if Shamrock had contracted under a commonly used design and construction contract? If you look at an unamended version of Standard Australia’s AS 4902-2000 form of design and construction contract, clause 15.1 (the indemnity by the contractor) states, in pertinent part:

Insofar as this subclause applies to property, it applies to property other than WUC.

The Contractor shall indemnify the Principal against:

(a) loss of or damage to the Principal’s property; and

(b) claims in respect of personal injury or death or loss of, or damage to, any other property,

arising out of or as a consequence of the carrying out of WUC, but the indemnity shall be reduced proportionally to the extent that the act or omission of the Superintendent, the Principal or its consultants, agents or other contractors (not being employed by the Contractor) may have contributed to the injury, death, loss or damage.

Under this standard form contract’s indemnity, it seems Shamrock could still be on the hook for the damage caused by the rain event, as the damage arguably arose ‘as a consequence of the carrying out of WUC’.

Indemnity lessons from Shamrock

1. The court interprets a contract as a whole.
   This includes a contract made up of a master agreement whose terms and conditions that were agreed months or years before. That means when you are offered a new work order, review the master agreement’s terms in the context of the new work order.
2. Ensure your insurances sit consistent with the agreed risk allocation in the context of the new work order.
   Reviewing insurances relating to a term agreement every now and then is a good idea, and especially when a new work order is issued. Having the right insurances in place to address the works you are doing is a necessary and prudent business practice.
3. Limit your liability.
   Most contractors and subcontractors seek to limit their liability under their agreements and to exclude liability for indirect and consequential loss. Depending on how these liability caps and exclusions are drafted, they may be useful in avoiding some of the liability Shamrock may be now facing in this case. Beware though – there are usually ‘market-standard’ exclusions to liability caps and exceptions to the exclusion of indirect and consequential losses. These often require a party to accept uncapped liability for damage to property or third-party property (on the basis that the principal under the construction contract cannot limit its liability to third parties for such losses).
4. The devil is in the detail.
   Many businesses would not survive a $31 million loss (and Shamrock and Cleanaway are still litigating this). Regardless of the value of the contract to the business, if you are giving an indemnity, you need to understand it in detail and in context. If the indemnity is wide and changes cannot be negotiated, you should ask how much you want that work. It may well be the difference as to whether or not your company survives to fight another day.

The future of indemnities

While currently not universally accepted in the market, issues like the expanded unfair contract terms regime are arguably pushing us  to move to a fairer indemnity model, where for example  only fault-based indemnities are given. Were Shamrock’s indemnity to have been linked to Shamrock’s fault, the case may have been decided in a significantly different way.

Contact our Infrastructure, Construction and Energy team for advice

Getting a contract right from the outset can be make or break for a business. Our Infrastructure, Construction and Energy lawyers have experience advising on every stage of the project lifecycle and can tailor your contract to safeguard your liability. Contact our team today.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.