Indemnity clauses and hire agreements – when wide enough is not good enough

Westina Corporation Pty Ltd v BGC Contracting Pty Ltd [2009] WASCA 213 (December 2009)

Westina Corporation Pty Ltd (Westina) was a haulage contractor trading under the name “Jamieson Transport”.  In 2005 it hired a road train comprising a prime mover and three trailers to BGC Contracting (BGC) pursuant to the terms of a written “wet hire” agreement.  The wet hire agreement obliged Westina to provide the services of a qualified operator for the road train.

The hire agreement contained the following terms:

• a warranty by Westina that the hired equipment was “in sound mechanical condition” and an agreement to “defend, indemnify and hold BGC harmless against any injury, death, claim or other such loss arising out of the use of the plant by BGC except to the extent caused by BGC’s willful (sic) misconduct”.
• a risk allocation and indemnity clause in these terms:

The Supplier (Westina) shall bear the risk of loss in the hiring of the Plant and must defend, indemnify and hold BGC harmless against any injury, death, claim or other loss arising from the hiring of the Plant.

• a clause requiring Westina to effect public liability insurance and workers compensation insurance.

The hired road train was involved in a collision with an oncoming road train on 11 June 2005.  At the time the Westina prime mover was being driven by a Mr Ingold, an employee of Westina.  The road train with which he collided was (co-incidentally) owned by BGC and driven by one of its employees, Mr Keys.  Mr Ingold was killed in the collision.

The trial judge concluded that the accident occurred as a result of the negligence of Mr Keys, and that BGC was vicariously liable for that negligence.

BGC then sought to rely on the indemnities in the wet hire agreement and to argue that the indemnities operated in respect of any loss arising from the hiring of the plant, even in circumstances where the cause of the loss was the negligence of the BGC’s own employee.  The trial judge upheld this contention and found that the risk allocation and indemnity clause, on its clear terms, was wide enough to cover any losses or damages arising out of the hiring.  In the Judge’s view it was “not appropriate to try and establish ambiguity where none exists”.

The Western Australian Court of Appeal upheld an appeal by Westina.  The court unanimously found that the indemnity should be construed in the context of “the surrounding circumstances known to the parties, and the apparent purpose and object of the transaction”.  In the court’s view, the phrase “risk of loss” in the indemnity clause was ambiguous – it was not clear whether the clause was intended to extend to an event in connection with the hired vehicles even if the event was caused by the negligent act or omission of BGC’s employee.

In addition, the Court of Appeal held that whilst the words “arising from the hiring of the Plant” had a broad connotation, there was uncertainty as to whether the indemnity should be characterised as a “reflexive indemnity” (i.e. an indemnity intended by the parties to apply to a liability that arises from BGC’s own default under the agreement).   Here, the Court of Appeal determined that the language of the indemnity left doubt as to whether the parties intended the indemnity to apply to liabilities arising from the default or breach of duty of the indemnified party.

The fact that Westina was required to effect insurance was not relevant in the absence of evidence that any policy taken out in compliance with the hire agreement would have indemnified Westina in circumstances where the loss of the equipment was caused by the negligence of BGC.

The Court of Appeal also went to some lengths to emphasise that a contractual indemnity was the obverse of an exclusion clause and that as such any doubt as to the proper construction of the indemnity must be resolved in favour of the indemnifier (here, Westina).

Lessons to be learned

Indemnities require careful drafting – a reflexive indemnity must “undoubtedly convey the intention of the parties that the indemnity applies to liabilities arising from the default or breach of the indemnified party”.

Evidence of a clause requiring one party to effect insurance is not conclusive evidence that the insuring party is to bear all the risks associated with the use and operation of the particular equipment.