The limitations of contractual indemnities

The nature of the contractual obligation to indemnify is much contested. Rival analyses include that the obligation is to prevent loss to the indemnified party, and that the obligation is to compensate loss suffered by that party. Controversially, in the context of indemnity insurance, the prevent loss analysis is dominant in England. This analysis was recently applied by a five-member New South Wales Court of Appeal in Globe Church Inc v Allianz Australia Ltd. The analysis of the indemnity obligation has significant consequences, including in relation to the nature of a claim on an indemnity, the recoverability of consequential losses and limitation. This article argues that the New South Wales Court of Appeal has taken Australian law down the wrong path. The nature of an indemnity obligation must be a question of construction of the contract. The usual principles of contractual construction should apply. And for both insurance and non-insurance indemnities, a commercial construction approach should be adopted. Moreover, when an issue concerning a contractual indemnity arises, the starting point for analysis should always be the obligation to indemnify and its construction. This approach will provide a proper perspective for the resolution of issues including limitation.