What is a Commonwealth indemnity & who can grant indemnities?

Collectively, indemnities, guarantees and warranties are known as indemnities.

Indemnities granted by the Commonwealth create contingent liabilities for the Commonwealth. They are legally enforceable obligations. 

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

The Commonwealth can enter into arrangements involving a contingent liability with any party other than itself. That is, non-corporate Commonwealth entities (NCEs) cannot enter into these types of arrangements with other NCEs (as they are part of the same legal entity). NCEs may enter into such arrangements with corporate Commonwealth entities due to their separate legal personality from the Commonwealth.

If an arrangement does not explicitly allocate liability between the parties, each party’s liability may be determined at general law. To create greater certainty and/or allocate liability, a liability regime may be agreed in a contract. If an NCE grants an indemnity that results in a contingent liability, the Commonwealth is ultimately agreeing to accept particular risks (often a greater level of risk) so that the other party will bear less risk.

Indemnities do not need to be open-ended or unlimited. For example, an indemnity may only be triggered once the indemnified party’s losses reach a certain amount and/or the Commonwealth’s liability to pay in the event an indemnity is triggered may be limited to a dollar amount. 

Why are indemnities granted by the Commonwealth?

The ability to grant indemnities on behalf of the Commonwealth is important in cooperative ventures. The ability of entities to cooperate together and with others outside of government to share resources, knowledge and expertise is increasingly important. Granting indemnities for persons outside of the Commonwealth who are assisting the Commonwealth achieve its outcomes can provide assurance in certain situations.

A liability cap does not create a contingent liability.

A liability cap is an arrangement where an entity agrees to a limit on the liability of another party (for example, a supplier). If the entity subsequently suffers a loss as a result of an act or omission of the supplier in relation to the performance of the contract, the entity has agreed it will not seek to recover from the supplier more than the amount of an agreed cap. 

A liability cap does not create a contingent obligation to pay another person and cannot be treated as 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
• simply caps a supplier's liability for certain expenses that the supplier incurs in the ordinary course of providing services to the Commonwealth, so that the Commonwealth will reimburse the supplier for any relevant expenses over the amount of the cap. 

Circumstances where a liability cap may create a contingent liability:

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

• 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.

The Finance Minister has delegated this power to accountable authorities of NCEs, with directions limiting its use.

An accountable authority can sub-delegate this power, with written limitations that are consistent with the limits in the Finance Minister’s delegation, to officials of their own entity, or officials of another NCE.

A sub-delegate must also comply with any other directions of the accountable authority (subsections 110(1) and (6) of the PGPA Act.). The accountable authority can include directions to suit the context of the entity and their appetite for risk (which must not be inconsistent with the Finance Minister’s directions).

An accountable authority or their sub-delegate must consider whether granting an indemnity is appropriate in the circumstances.

The delegation from the Finance Minister requires that the delegated official must consider 2 overarching principles before granting an indemnity:

that risk should be borne by the party best placed to manage them

benefits to the Commonwealth should outweigh the risks involved.

What are the thresholds?

A delegate can grant an indemnity, guarantee or warranty on behalf of the Commonwealth, if:

• they are satisfied that the likelihood of the event occurring is remote, that is, it has a less than 5% chance of occurring
• the most probable expenditure if the event occurred is not significant, that is, it would be less than $30 million.

In order to be satisfied, the delegate must make reasonable inquiries to determine the likelihood and amount of any contingent liability. A sub-delegate may wish to take a proportionate approach, that is, consider the complexity, risks and materiality of the proposed arrangement. The greater these factors are, the more extensive the inquiry.

When determining the most probable cost in relation to an indemnity, the potential proceeds of insurance must not be taken into account. The availability of insurance to cover a contingent liability may not reduce the most probable expenditure by the Commonwealth as a whole (whether by the NCE, by Comcover and/or from Budget measures).

It cannot be assumed that an insurance claim will result in a payment by an insurer. However, accountable authorities may direct that decisions made in relation to indemnities be recorded in accordance with insurance requirements, such as in the Comcover Statement of Cover.

To rely on a decision of Cabinet, the National Security Committee of Cabinet (or its successor) or the Prime Minister to grant an indemnity, the decision must explicitly provide details on:

• who the party is that the Commonwealth will make the arrangement with
• the time period covered by the arrangement
• the risk of the contingent event occurring
• the most probable cost to the Commonwealth.

A decision may (for example) be made by Cabinet, the National Security Committee of Cabinet (or its successor) or the Prime Minister to grant an indemnity in cases where they are considering a number of aspects relating to a matter and it’s convenient that questions around indemnities be considered at the same time. 

Appendix E of the Legal Services Directions 2017 (LSDs) details the circumstances in which the Commonwealth may approve legal assistance to employees of NCEs. 

Paragraph 11 of the LSDs sets out the types of assistance that may be approved:

• the costs of an employee’s legal representation or related costs of the employee’s involvement in the proceedings (for example, to travel to attend the proceedings),
• any damages and legal costs awarded against the employee,
• a reasonable amount payable by the employee in settlement of the proceedings, and
• a fine or penalty imposed on the employee. 

Only prospective approval of damages and legal costs or a fine or penalty amount to indemnities for the purposes of section 60 of the PGPA Act.

Before granting an indemnity, the delegate must be satisfied that:

• the criteria for legal assistance under Appendix E of the LSDs are met, and
• any relevant conditions for the legal assistance, involving the granting of an indemnity, under Appendix E of the LSDs are met. 

Appendix E of the LSDs provides that when a request for assistance is made by the accountable authority of an NCE the decision is to be made by the responsible Minister. If it is inappropriate for the Minister or accountable authority to make a decision on assistance because of their involvement in the proceedings, the request is to be referred to the Attorney-General to enable a decision to be made on how the matter is to be handled.

A decision whether to provide assistance to a Members of Parliament (Staff) Act 1984 employee is to be made by the Special Minister of State after consultation with the Attorney-General. 

When a decision on legal assistance is to be made by a Minister the Minister will need to write to the Finance Minister to seek an authorisation under the Acts Interpretation Act 1901 to exercise the Finance Minister’s power to grant indemnities if the Minister is contemplating approving assistance that would amount to an indemnity.