INSIGHTS: Is this the end to using contractual indemnities to apportion liability for workers’ injuries?

June 22, 2016

The Workers’ Compensation and Rehabilitation (National Injury) Insurance Scheme (Amendment Bill 2016) has been introduced into the Queensland Parliament. Along with numerous amendments aimed at reconciling the National Disability Insurance Scheme with the Queensland Workers’ Compensation framework, the Bill also contains a number of amendments, which if enacted, have the potential to seriously impede the right of parties to use contractual indemnities to allocate the responsibility to pay damages to an injured employee.

The current situation

The most common scenario where this occurs is if an employee of one party to a contract is injured and the contract between the parties contains a contractual indemnity where the party who is not the employer (usually a principal contractor or an occupier) has the benefit of a contractual indemnity requiring the employer to indemnify the non-employer for any damages that the non-employer may be liable to pay to the injured worker. The indemnity clause may require the employer to indemnify the non-employer for damages arising out of the non-employer’s own negligent conduct.

As the law stands, assuming the contractual indemnity requires the employer to indemnify the non-employer for damages arising out of the non-employer’s own negligence, the employer is required to indemnify the non-employer for 100% of the damages, which would otherwise be payable by the non-employer. This applies even if apportionment of liability would have been very different under the rules for joint tortfeasor contribution set out in section 6 of the Law Reform Act 1995.

In Byrne v People Resourcing (Qld) Pty Ltd & Anor [2014] QSC 269, the Supreme Court held that the employer was able to obtain indemnity from WorkCover Queensland for all of those amounts (the indemnity provided by WorkCover Queensland did not extend to heads of damage for which the Workers’ Compensation and Rehabilitation Act 2003 (WCRA) does not require WorkCover Queensland to indemnify the employer – this point was not argued at the hearing but conceded by the parties). The employer is then left with a shortfall being those damages for which it is not entitled to be indemnified by WorkCover Queensland.

These amounts are usually amounts for gratuitous care and a portion of general damages and the claimant’s legal costs of the claim against the non-employer. The employer can claim from its public liability insurer for those amounts. However, if the public liability policy does not respond to those claims for liability assumed by contract, the employer is left with an uninsured liability.

Byrne applied the principles set out by the High Court in State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123, CLR 228.

The amendments

According to the explanatory memorandum the amendments are specifically designed to reverse the effect of the judgment in Byrne by prohibiting the contractual transfer of liability for injury costs from principal contractors or host employers to employers with a statutory workers’ compensation insurance policy and providing that an insurer (either WorkCover Queensland or a self-insurer as the case may be) is not liable to indemnify an employer for a liability to pay damages incurred by third party contractor under a contractual arrangement.

Pre Byrne, the generally accepted position was that a non-employer could obtain an indemnity from an employer pursuant to a contractual indemnity that required the employer to indemnify the non-employer for the non-employer’s own negligence. However the employer would not be indemnified by WorkCover Queensland for that amount (i.e. WorkCover Queensland only indemnified the employer for amounts it was liable for as a joint tortfeasor pursuant to section 6 of the Law Reform Act 2005).

The Bill inserts of a new sub-section 10(4) amending the definition of damages and then inserts a new section 236B dealing with the liability of contributors. However, the amendments as proposed in the Bill arguably go much further than anticipated by the explanatory memorandum.

The relevant amendments are set out in full below:

Section 10

(4) Further, a reference in subsection (1) to the liability of an employer does not include a liability to pay damages, for injuries sustained by a worker, arising from an indemnity granted by the employer to another person for the other person’s legal liability to pay damages to the worker for the injury.

Section 236B

(1) This section applies to an agreement between an employer and another person under which the employer indemnifies the other person for any legal liability of the person to pay damages for injuries sustained by a worker.

(2) The agreement does not prevent the insurer from adding the other person as a contributor under Section 278(A) in relation to the employer’s liability or the insurer’s liability for the workers injury.

(3) The agreement is void to the extent that it provides for the employer, or has the effect of requiring the employer, to indemnify the other person for any contribution claim made by the insurer against the other person.

(4) In this section – Damages includes damages under a legal liability existing independently of this Act, whether or not within the meaning of Section 10.

The new section 10(4) specifically removes the requirement of WorkCover Queensland to indemnify an employer for amounts it assumes by way of contractual indemnity only. That is, to the extent that a contractual indemnity requires an employer effectively to pay damages claimed by a worker over and above those that it would pay if the claim were apportioned pursuant to the joint tortfeasor principles set out in section 6 of the Law Reform Act 1995, then WorkCover Queensland is not required to indemnify the employer for those amounts pursuant to the statutory workers’ compensation insurance policy.

The new section 236B dealing with liability of contributors arguably goes further and, depending on the interpretation given to it by a court, may have the effect of removing the ability of parties to allocate the responsibility for damages payable to an employee of one of them by way of contractual provisions. This means that the apportionment of damages could ultimately be governed (with some small exceptions) by the joint tortfeasor provisions set out in section 6 of the Law Reform Act 1995.

The section simply provides that any agreement that has the effect of requiring an employer to indemnify another person for any contribution claim made by the insurer is void. It arguably does not apply to claims for indemnity relating to those heads of damage for which WorkCover Queensland is not liable to indemnify the employer as the contractual provision is not totally void but only void “to the extent that” it requires the employer to provide indemnity to the other party for the contribution claim. As damages outside the ambit of the WCRA cannot be the subject of a contribution claim by the insurer, they are arguably not caught by the provision.

Where there is no direct claim against the non-employer by a claimant, the effect of the amendment seems clear. However, what of the situation where there is also a direct claim against the non-employer by a claimant? A claim based on a contractual indemnity would arguably not be a claim for indemnity in respect of the contribution claim made by the insurer but would instead be a claim for indemnity in respect of the non-employer’s own liability to the claimant. However, the effect on the employer of such a claim is likely to be the same in real terms and thus is likely to be caught by the words “or has the effect of” in s236B(3). This seems much wider than the intention of the amendments as set out in the explanatory memorandum.

Amendments to be retrospective

It should be noted that according to the Bill, the amendments will be retrospective. They will apply (pursuant to section 725) to any claim for damages started before the enactment of the proposed amendments except for those that have at commencement either:

  1. Been settled; or
  2. Where a court hearing has actually started.

The effect

If the Bill is passed in its current form, it is arguable that parties will be unable to use contractual indemnities to transfer liability for damages payable to an injured worker from a non-employer to an employer (such as a principal contractor or a host employer), except for those heads of damages that do not fall within the ambit of the WCRA.

This will effectively mean that contractual indemnities will have limited operation in any claim where the claimant is an injured worker. The retrospective nature of the Bill means that where any claims pursuant to such contractual indemnities are presently being made in proceedings for damages, there is doubt over whether those claims will be maintainable. Given that the parties to those contracts freely entered into them it seems somewhat unfair to retrospectively remove those contractual rights, particularly where the parties may have incurred substantial legal costs in pursuing them.

Interestingly, the Bill only applies to contractual indemnities. It does not mention contractual releases or contractual damages that amount to an indemnity. The Bill is to be referred to a Parliamentary committee so there may be the opportunity for the proposed amendments to be altered to make their operation clearer.

Should the Bill pass in its current form, further litigation on the point seems inevitable.