How often are Indemnity Clauses used in Queensland conveyancing contracts?

When signing conveyancing contracts, each party seeks to protect their interests, which results in Indemnity Clauses. However, an excessive desire to protect yourself can lead to the failure of the transaction. So, what is the effective practice of using the Indemnity Clause among conveyancing solicitors?

Director of GM Law, Gerard Pagliaro shares his thoughts on this matter: 

1. What Types of Indemnity Clauses Are There in Australia?

In Australia, indemnity clauses are contractual provisions that transfer certain financial risks between parties. They are designed to safeguard one party against potential losses or damages arising due to specific events or actions by the other party. In conveyancing, indemnity clauses provide a layer of protection in the transaction of property ownership. There are several types of indemnity clauses commonly used in Australian contracts, and each serves a distinct purpose: 

  1. Broad Form Indemnity Clauses: This type offers extensive protection, often covering a wide range of losses, damages, liabilities, and costs, including those arising from negligence. However, these clauses are scrutinized closely by Australian courts and may be restricted in scope. Broad indemnities are particularly useful in high-stakes property transactions but should be carefully worded to avoid unintended liabilities. 
  2. Limited or Proportional Indemnity Clauses: Proportional indemnity clauses cover losses but limit the indemnifying party’s liability to only certain situations or to a defined extent, often based on causation principles. In conveyancing, this might mean indemnifying the buyer only for specific issues, such as pre-existing property defects. These clauses tend to be favored when parties want a balanced risk allocation. 
  3. Third-Party Indemnity Clauses: These clauses cover situations where one party is indemnified for liabilities arising from third-party actions. In a conveyancing context, a buyer might indemnify the seller against any claims that arise as a result of the buyer’s consultants carrying out work on the property prior to settlement. 

In Queensland, there are unique considerations due to the Property Law Act, which influences how indemnity clauses function in conveyancing. The Act provides guidelines on contract interpretation, including indemnity clauses, to ensure they do not infringe on statutory protections or consumer rights. Queensland’s conveyancing regulations also emphasize “clear and fair” contract language, making it essential for indemnities to be explicitly defined to avoid misunderstandings and legal challenges. 

2. In What Circumstances Is an Indemnity Clause Typically Used in Conveyancing Contracts?

When a seller makes representations about the property’s condition, they often include indemnity clauses covering any financial loss if those representations prove false. For example, if a Queensland seller states that a property meets building code standards, an indemnity clause can ensure that they bear the repair costs if it turns out otherwise.

These circumstances demonstrate how indemnity clauses are employed to mitigate risks associated with property ownership and prior actions by the seller. In Queensland, the seller’s disclosure obligations are significant, as failing to disclose certain conditions may invoke statutory protections for the buyer in addition to contractual indemnity clauses.

3. What Are the Limitations on Damages in Conveyancing Contracts in Australia?

In Australian conveyancing contracts, limitations on damages are intended to control the extent of compensation one party must provide for breaches or issues arising during property transactions. These limitations are often stipulated to provide certainty and manage the financial impact of disputes. Key limitations include:

  1. Caps on Liability: Conveyancing contracts may include a maximum liability amount that a party can be held responsible for in case of damage. For instance, a seller might cap their liability at a certain percentage of the purchase price. In Queensland, caps on liability are enforceable, provided they are fair and reasonable under the Property Law Act.
  2. Exclusion of Certain Types of Losses: Contracts may exclude specific types of damages, such as indirect or consequential losses. For example, if a buyer experience lost rental income due to a delayed settlement, this type of loss might be excluded from recoverable damages unless explicitly covered in the contract.
  3. Duty to Mitigate: In Australia, the law requires the injured party to mitigate damages. For instance, if a buyer incurs additional expenses due to delayed settlement, they must take reasonable steps to minimize those costs. Failure to mitigate can reduce the damages the other party is liable for.
  4. Time Limitations: Many conveyancing contracts impose time limits on when claims can be made. Queensland’s law permits such clauses as long as they do not unreasonably disadvantage a party’s legal rights. For example, a contract may specify that any claim for defects must be made within a specified period after settlement.

4. What is the Difference Between an Indemnity Clause and a Guarantee?

An indemnity clause and a guarantee differ primarily in their obligations and purpose. An indemnity is a primary obligation where one party agrees directly to cover certain losses or damages incurred by the other, regardless of fault. In contrast, a guarantee is a secondary obligation, involving a third party (the guarantor) who promises to fulfill the obligations if the main party defaults. This makes indemnities faster to enforce, as they require no dependency on a third-party action.

Indemnities usually offer broader protection, covering specific losses directly tied to the contract, while guarantees are more limited, applying only if there’s a failure by the primary party to meet obligations. In conveyancing, these differences mean indemnities provide immediate financial recourse, whereas guarantees offer backup assurance, often involving lenders or third parties who support the primary party’s commitments.

5. How often are Indemnity Clauses used in GM Law practice?

GM Lawyers has experience in drafting indemnity clauses for specific circumstances unique to the particular conveyance. For example, if a buyer wants to conduct an invasive investigation of a property to investigate terminate activity or structural flaws in the property, GM Lawyers if acting for a seller in this situation would recomend an indemnity clause to guard against any damage or claims arising to the the seller as a consequence of the buyers’ investigations.  An indemnity clause may also be required if the seller retains possession of the property after settlement. These are two of many situations where an indemnity clause may be necessary. In GM laws experience often the drafting of special conditions give rise to the need for these clauses. If you are not sure whether one is required, then call GM lawyers who will be happy to guide you. 

We service the entire Brisbane metropolitan area

If you need help to get a contract sorted so you can secure a property for your client, we have set up the GM Law agent hotline.

You can email us at AgentSupport@gmlaw.com.au to get urgent personalized support.

We service the entire Brisbane metropolitan area

If you need help to get a contract sorted so you can secure a property for your client, we have set up the GM Law agent hotline.

You can email us at AgentSupport@gmlaw.com.au to get urgent personalized support.

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