Every business expects to get the benefit of contractual terms drafted in its favour.  What is the point of negotiating contractual indemnities, if they do not shift risk as intended? So how are businesses to cope with legislation that looks to void the benefit of contractual indemnities? 

As a result of recent changes to the Workers Compensation and Rehabilitation Act 2003 (Qld):

  • Risk management strategies, dependent on the ability to enforce contractual indemnities against employers, may no longer be effective;
  • Principals and host employers may be prevented from enforcing contractual indemnities in their favour against employers; and
  • Insurers cannot use their rights of subrogation to enforce contractual indemnities in favour of their insureds.

The legislative changes were designed to overcome the decision in Byrne v People Resourcing (Qld) Pty Ltd & Anor[1], which widened the interpretation given to the WorkCover Queensland statutory policy of insurance. WorkCover Queensland now has to indemnify employers not only for their negligence, but also for any contractual indemnity liability that might arise due to an injury to a worker.

To get around this, section 236B was inserted into the legislation.  It voids the operation of the contractual indemnity in circumstances where WorkCover Queensland on behalf of the employer, seeks a contribution from the party holding the benefit of the contractual indemnity.  Similar provisions exist in Victoria.

Section 236B reaches behind the contractual bargain struck between parties and prevents the transfer of risk that had been commercially agreed.  As a result, third parties such as principals and host employers, who thought they had protected themselves by contractually transferring risk, may not be able to rely on the indemnity as anticipated.

Is there any silver lining here?

Well, while it is still to be judicially considered, it is arguable that section 238B only applies where WorkCover Queensland is seeking contribution from the third party.  It would seem that if an injured worker makes a direct claim against a third party, that party can still rely on the benefit of its contractual indemnities, including one that shifts responsibility to the worker’s employer.  There might be other scenarios that fall outside section 238B also.

The take away message is that businesses (and their insurers) should;

  • carefully consider the terms of relevant agreements;
  • identify indemnity clauses affected by the legislation;
  • insure and reserve for claims that would otherwise have been defeated by contractual indemnities; and
  • enforce unaffected contractual indemnities.

[1] 2014 QSC 269.