Indemnities, guarantees and warranties

This page is about the requirements for granting indemnities, guarantees and warranties on behalf of the Commonwealth.

It is relevant to accountable authorities and officials of non-corporate Commonwealth entities.

RMG-414 Indemnities, guarantees or warranties granted by the Commonwealth provides addtional guidance and is available under Tools and templates
 

What are indemnities?

Indemnities, guarantees and warranties (indemnities) granted by the Commonwealth create contingent liabilities for the Commonwealth.

Contingent liabilities are commitments that may arise depending on the outcome of a specific event.

Indemnities allocate the risk of the contingent liability between parties to an arrangement.

  • An indemnity is a legally binding promise that the Commonwealth will cover loss and damage suffered by another party
     
  • A guarantee is a legally binding promise that the Commonwealth will be liable for the debt, or performance obligations of, another party on default of its obligations
     
  • A warranty is a legally binding assurance that provides certainties to another party from the Commonwealth.

If an arrangement does not explicitly allocate liability between the parties, each party’s liability may be determined at general law.
 

What are NOT indemnities?

The following examples are NOT indemnities:

  • An entity agrees to reimburse another party for expenses that party incurs in the ordinary course of providing services to the Commonwealth
     
  • The Commonwealth warrants that it has title to property that was the subject of sale agreement, or that it is authorised to enter into a transaction
     
  • Two non-corporate Commonwealth entities enter into an arrangement with one another (this is not considered a contingent liability as they are both part of the Commonwealth).
     

Are liability caps indemnities?

A liability cap is an arrangement where an entity agrees to limit the liability of another party (e.g. a supplier).

A liability cap may result in the creation of a contingent liability, if:

  • it involves limiting a supplier’s contingent liability to a third party so that the Commonwealth is liable to the third party for any excess above that cap or
     
  • it limits a supplier’s exposure for damage the supplier has suffered itself, so that the Commonwealth is liable to the supplier for any excess.

A liability cap does not create a contingent liability, if it:

  • limits a supplier’s liability to the Commonwealth, under that arrangement with the Commonwealth, so that the Commonwealth cannot recover damages from the supplier if the Commonwealth is sued by a third party
     
  • limits a supplier’s liability to the Commonwealth, under that arrangement with the Commonwealth for damage it directly causes the Commonwealth or
     
  • limits a supplier’s liability for certain expenses that the supplier incurs in the ordinary course of providing services to the Commonwealth, the Commonwealth will reimburse the supplier for any relevant expenses over the amount of the limit.
     

Who can enter into an indemnity arrangement?

The Finance Minister has the power to grant indemnities on behalf of the Commonwealth.

The Finance Minister has delegated this power to accountable authorities of non-corporate Commonwealth entities for routine indemnities necessary for the day-to-day running of their entities. 

*A delegate cannot grant a guarantee for the payment of any amount of principal or interest due on a loan, or grant an indemnity that would expressly meet the costs of civil or criminal penalties of the indemnified party.
 

What must you consider before granting an indemnity?

Officials must consider two overarching principles before entering into an indemnity arrangement:

  1. risks should be carried by the party best placed to manage them
     
  2. benefits to the Commonwealth should outweigh the risks involved.

Officials must make reasonable inquiries to be satisfied that:

  • the likelihood of the event occurring is remote, i.e. it has a less than 5% chance of occurring
     
  • the most likely cost if the event occurred is not significant, i.e. it would be less than $30 million*.

*Insurance must not be taken into account when determining this figure.

Officials must also ensure that:

  • risk management arrangements, appropriate to the complexity and potential costs, are in place before entering, after entering and for the duration of the arrangement
     
  • requirements under the PGPA Act and the delegations (of the Finance Minister and the accountable authority) are satisfied.

Entities need to follow the terms and conditions outlined in the Comcover Statement of Cover

Officials should discuss with Comcover if they are considering entering into an arrangement above any liability cap in the Comcover Statement of Cover.
 

What if the indemnity arrangement is beyond the scope of the delegation?

Indemnity arrangements beyond the scope of the Finance Minister’s delegation require either:

  • a decision of Cabinet or the National Security Committee of Cabinet
  • the Prime Minister’s agreement
  • a written determination of the Finance Minister.   

Finance has developed a model Indemnity Grant Request Form to assist entities requiring a written determination of the Finance Minister’s.
 

Managing and reporting contingent liabilities

The Commonwealth Risk Management Policy requires accountable authorities of entities to establish and maintain systems and appropriate internal controls for the oversight and management of risk.

Legislative requirements for reporting contingent liabilities are contained in the Charter of Budget Honesty Act 1998.

Contingent liabilities with a possible impact on the forward estimates greater than $20 million in any one year, or $50 million over the forward estimates period are disclosed in Budget Paper 1 – Budget Strategy and Outlook.

Non-corporate Commonwealth entities are required to report contingent liabilities in their annual financial statements in accordance with the PGPA Financial Reporting Rule 2015.


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