Indemnities are some of the most powerful, yet often overlooked, clauses in construction contracts. They look routine, but they can shift enormous amounts of risk onto the contractor, often without the contractor even realising it.
Take a broad indemnity, for example. It might say the contractor indemnifies the principal for “any loss or damage arising from the works.” On its face, that sounds standard. But in practice, it could mean the contractor is on the hook for:
- Third-party claims (for example, a neighbour suing over property damage),
- Consequential losses such as lost profit or delay damages, and
- Losses caused by the principal’s own negligence or breach of contract.
And here’s the real sting: many professional indemnity (PI) and public liability policies exclude liability under contractual indemnities. That means the builder may end up with exposure well beyond insurance cover—leaving them personally or corporately liable for potentially catastrophic sums.
Red flags to watch out for
- Catch-all language: Phrases like “in connection with” or “arising out of” cast a very wide net.
- No carve-out for the principal’s conduct: Without this, you could end up indemnifying the principal for their own mistakes.
- No cap on liability: Unlimited indemnity equals unlimited financial exposure.
Safer terms to negotiate
- Limit the indemnity to direct losses only (not indirect or consequential loss).
- Exclude matters outside your control—for example, events caused by the principal, consultants, or other contractors.
- Carve out the principal’s negligence, breach, or wilful misconduct.
- Cap indemnity to a sensible amount—such as the contract value or available insurance limit.
Workplace Health and Safety (WHS), Intellectual Property (IP) and Fraud
Under AS4902 contracts, certain risks such as workplace health and safety (WHS), intellectual property (IP), and fraud remain within the contractor’s control and can be actively managed. Contractors retain legal obligations for safety, which can be addressed through proper procedures and compliance measures. IP risks can be controlled by ensuring ownership clarity and using licensed materials, while fraud risks can be mitigated through internal controls and staff training. By proactively managing these areas, contractors can accept these risks without unexpected liability.
Conclusion
At its core, an indemnity is a financial backstop. It can be fair if it matches the risks you can realistically manage and insure against. But if it’s drafted too broadly, it becomes a financial trap. Always read indemnity clauses with caution, seek advice if in doubt, and never assume your insurance will automatically protect you.