Contracts and indemnity clauses

If your organisation buys goods and services from third party suppliers, you probably have a contract for that arrangement. Contracts often include indemnity and insurance clauses, which specify your risk obligations. These are important to understand.

Here's a brief guide to help you understand contract clauses and the implications, as well as samples you can use when entering agreements.

Indemnity clauses

Indemnity clauses are commonly used to define who bears the risk. An indemnity is an agreement by one party to meet the expenses or liabilities incurred by another party.

As a VMIA client, it is important that indemnities are not indiscriminately granted to third parties. These indemnities may create potential liabilities that fall outside of your insurance coverage.

Please contact your client relationship manager before providing any indemnity to a third party.
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Whole-of-Government contracts

In contrast to typical contracts, Whole-of-Government contracts (WofG), as published on the Victorian Government Purchasing Board website, require the contractor to provide an indemnity to the state.

This indemnity usually deals with loss or damage arising from a breach of contract, negligent acts or omissions, or breach of intellectual property.
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Outside of standard contract terms

In circumstances where the contractor refuses to accept the standard contract terms, it is acceptable for a contract to remain silent on indemnities.

This means that each party is subject to any of their own liabilities to third parties (including other contracting parties) that arise under common law. Your VMIA insurances will not be affected.
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Adding indemnity and insurance clauses to contracts

Indemnity clause

If you prefer to express liabilities in a contract, you can add an indemnity clause stating that your organisation and the contractor agree that each party is responsible for its own liabilities.

VMIA has drafted a sample indemnity clause [DOC, 62KB] that you can include.

It is worth remembering that this type of clause is unnecessary if the intention is to seek to duplicate the common law position.
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Insurance clause

We strongly advise that you ensure that the contractor has the financial capacity to meet its liabilities arising from an indemnity clause or common law exposure.

Appropriate insurance clauses should be included in the contract to address this. The Whole-of-Government Contracts contain such clauses.

Or you can include the sample insurance clause [DOC, 63KB] in a contract where appropriate.

The level of insurance required by the third party should be adequate for the risk level associated with the contract product or services. We can help you determine the right levels.
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Exceptions

There are two notable exceptions to the standard advice above. This applies to dealings with Victorian municipal councils and other VMIA clients. See below.
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Dealing with Victorian municipal councils

Both VMIA and Liability Mutual Insurance (insurer of the municipal councils) recommend that it is not necessary for VMIA clients and councils to include indemnity and insurance clauses in contracts when dealing with each other.

This recommendation applies if the agreement or contract is for both parties to assume responsibilities for their own risks (i.e. the party at fault pays — common law position).

Presently, the existing insurance of both groups is adequate to cover foreseeable losses arising out of their own potential liabilities, and is provided on the assumption that common law will prevail in such agreements.

Both parties should confirm that the other is insured by VMIA or Liability Mutual Insurance by referencing the Liability Mutual Insurance member list available on their website.
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Dealing with VMIA clients

When dealing with a fellow VMIA client, we recommend that it isn’t necessary to include indemnity or insurance clauses in contracts.

This recommendation applies if the agreement or contract is for both parties to assume responsibilities for their own risks (i.e. the party at fault pays — common law position).

Presently, the existing insurance of both groups is adequate to cover foreseeable losses arising out of their own potential liabilities, and is provided on the assumption that common law will prevail in such agreements.

Contact your Relationship Manager to find out if another organisation is also a VMIA client.
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More information

More information on the insurance provisions for the purchase of goods and services is available on the Victorian Government Purchasing Board website — Victorian Government Purchasing Board: Insurance Provisions Advice.

The website also contains guidance on selecting insurance levels based on a risk assessment methodology.

For queries and advice, please contact us.
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Page last updated: 19 April 2017