Sydney Law School

Legal Studies Research Paper

No. 11/41

August 2011

The Nature of Contractual Indemnities

Wayne Courtney

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 The nature of contractual indemnities

Wayne Courtney 1

Introduction
Indemnities are commonplace in modern commercial contracts, yet it is surprising how
much uncertainty surrounds their nature and effect. The object of this paper is to
consider the essential or defining characteristics of contractual indemnities.
The term ‘indemnity’ is elastic. It may describe a process or arrangement under which
a party will not suffer any loss. At the outset, it is necessary to draw a distinction
between two kinds of arrangements: first, those in which the essential undertaking is to
indemnify a person against loss; second, those in which the essential undertaking is not
to indemnify a person against loss, but in which the promisee is incidentally or
effectively indemnified against a loss. This paper is concerned with the former, that is,
promises of indemnity in the strict sense. Usage of ‘indemnity’ in the latter sense is,
however, quite common. For example, it might be said that A’s payment of damages for
breach of a contract with B, of an amount equal to B’s loss or B’s liability to another, is
an ’indemnity’ to B; 2 or that A’s guarantee to B is an ‘indemnity’ to B against default by
a third party, C; 3 or that A’s promise to pay C, a creditor of B, effects an indemnity
against B’s liability to C. 4
This paper focuses on indemnities in contracts outside the field of insurance. One
reason for this emphasis is that non-insurance indemnities have received far less
attention than those in insurance. Another reason is that the commercial context is
different: the indemnity may deal with losses or events different from those ordinarily
covered by insurance; the indemnity provision may be simply one term in a broader
contract; and the object of the contract, or of the indemnity, may differ from that of
insurance. Contractual indemnities outside the field of insurance take many different
forms. Four kinds appear frequently in practice. The first is a third party claims
indemnity. A indemnifies B against claims by or liabilities to C. This is the archetypal
non-insurance indemnity. The form is often used where the parties contemplate that B
might incur some liability to another arising from a transaction between A and B. For
example, A may indemnify B against liability in negligence for injury to third parties; or
against claims that material supplied by A infringes a third party’s intellectual property
rights.

1 Faculty of Law, University of Sydney.

2 Cf Birmingham and District Land Co v London and North Western Railway Co (1886) 34 Ch D 261 at 276
per Fry LJ; Addis v Gramophone Co Ltd [1909] 1 AC 488 at 491 per Lord Loreburn LC; Lexmead
(Basingstoke) Ltd v Lewis [1982] 1 AC 225 at 273 per Lord Diplock; AMEV-UDC Finance Ltd v Austin
(1986) 162 CLR 170 at 194 per Mason and Wilson JJ.
3 Harburg India Rubber Comb Co v Martin [1902] KB 778 at 784 per Vaughan Williams LJ; Bofinger v
Kingsway Group Ltd (2009) 239 CLR 269 at 280; [7].
4 Cf Wren v Mahony (1972) 126 CLR 212 at 227 per Barwick CJ.

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 The second type of indemnity deals with claims by the promisor. A indemnifies B
against claims by or liabilities to A. Such indemnities appear less frequently and have
been described as ‘most peculiar’ 5 and ‘slightly absurd’. 6 The indemnity may be
intended to effect an exclusion or release of B’s liability to A. 7 It may be found, for
example, in settlement agreements, where the object is to bar further claims by A
against B.
The third type of indemnity concerns performance by a third party. A indemnifies B
against C’s failure to perform as expected in a transaction between B and C. This type of
indemnity is found most commonly in banking or other financial transactions.
Typically, the indemnity covers loss to B arising due to C’s default under a contract
between B and C. Such an indemnity resembles a guarantee by A to B of C’s
performance. This form of indemnity may be used to overcome some of the doctrinal
limitations associated with the enforcement of a guarantee by the creditor.
The final type of indemnity is an indemnity against breach. More particularly, A
indemnifies B against loss caused by A’s breach of a contract with B. The object of an
indemnity against breach is usually to augment the promisee’s right to recover for loss
arising from the promisor’s breach of contract. I will not say more about these
indemnities because Professor Carter will consider them in his paper.
This is not an exhaustive list, nor do all commercial indemnities fit neatly into only
one of these categories: some examples may be an agent’s indemnity from the principal
or a shipowner’s indemnity from the charterer against the consequences of the master
complying with the charterer’s orders or signing bills of lading as presented. And, of
course it is possible for an indemnity to be composite in nature. Thus, A may indemnify
B against third party claims arising from events that may, but do not necessarily,
involve a breach of contract by A. Similarly, an indemnity from A to B may cover claims
against B by any person – A or a third party, C.

The argument
Contractual indemnities do not all possess the same set of characteristics. The theme
developed in this paper is that there is one general characteristic – exact protection –
which is common to contractual indemnities. This is the defining feature of an
indemnity promise. The concept of exact protection comprises two general elements.
The first element concerns the efficacy of protection. The proposition is that an
indemnity will, if properly performed, secure the promisee against loss within the
scope of the indemnity. The method by which the promisor must protect the promisee
depends on the construction of the indemnity.

5 J W Carter, ‘Contractual Issues for Trustees’ (2001) 17 Journal of Contract Law 274 at 292.
6 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194 at [12] per McPherson JA.
7 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194 at [12] per McPherson JA; Westina
Corp Pty Ltd v BGC Contracting Pty Ltd [2009] WASCA 213 at [51] per Buss JA (Wheeler JA and
Newnes JA agreeing); Farstad Supply AS v Enviroco Ltd [2010] 2 Lloyd's Rep 387; [2010] UKSC 18.

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 The second element concerns the exactness of protection: the promisee should not be
underprotected nor overprotected in respect of the loss within scope. The requirement
of exactness is concerned generally with the position of the promisee and, in particular,
the benefits received by the promisee (often through performance of the indemnity) in
relation to a given loss. In the non-insurance cases, the relevant benefit is usually a sum
of money. The requirement of exactness manifests itself in several respects, two of
which are the concern of this paper. First, the promisee generally has no right to recover
under a contractual indemnity unless it has sustained an actual loss. Second, the
promisee recovers the amount of its loss – no more, no less – ascertained in accordance
with the terms of the indemnity. In particular, recovery for loss within scope is not
limited by legal principles such as remoteness or mitigation, which ordinarily apply to
claims for damages.
The argument thus focuses on the promisee’s actual loss. It should be noted that in
certain circumstances the promisee may obtain relief of a quia timet nature in relation to
a prospective, rather than actual, loss. 8 A consideration of this form of relief is beyond
the scope of the paper; it is sufficient to observe here that the availability of this relief
does not affect the validity of the argument developed below.
Finally, exact protection should be understood as a default characteristic. Contractual
indemnities are the product of the parties’ agreement and so the question is ultimately
one of construction. In Morris v Ford Motor Co Ltd 9 James LJ explained that it is ‘open to
the parties to a contract of indemnity to contract on the terms of their choice, and by the
terms they choose they can exclude rights which would otherwise attach to the
contract’. It follows that the parties may also choose to vary or displace the various
incidents of this general characteristic of exact protection.

Indemnity secures the promisee against loss

Constructions of indemnity promises

A contractual indemnity can be described broadly as a promise to ‘save and keep
harmless against loss’, 10 or to ‘secure’ against loss. 11 There are two constructions of

8 See, eg, Johnston v Salvage Association (1887) 19 QBD 458 at 460-461 per Lindley LJ; McIntosh v Dalwood
(No 4) (1930) 30 SR (NSW) 415 at 418-419 per Street CJ; Firma C-Trade SA v Newcastle Protection and
Indemnity Association (The Fanti) (No 2) [1991] 2 AC 1 at 28 per Lord Brandon, at 36 per Lord Goff, at
40-41 per Lord Jauncey; Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 529;
[17] per Gleeson CJ, Gummow, Hayne and Callinan JJ.
9 Morris v Ford Motor Co Ltd [1973] 1 QB 792 at 812.
10 Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 528; [16] per Gleeson CJ,
Gummow, Hayne and Callinan JJ.
11 Yeoman Credit Ltd v Latter [1961] 2 All ER 294 at 298 per Holroyd Pearce LJ; Turner v Leda Commercial
Properties Pty Ltd (2002) 171 FLR 245 at 252; [2002] ACTCA 8 at [34].

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indemnity promises generally recognised in the cases. 12 One construction is that the
promisor will prevent or avert loss to the promisee. The other construction is that the
promisor will compensate the promisee for loss after it is sustained. In McIntosh v
Dalwood (No 4) 13 Street CJ said:
In every case, the contractual obligation must first be ascertained… If the
obligation is merely an obligation to indemnify a person, in the sense of
repaying to him a sum of money after he has paid it, no equitable relief is
needed. Damages will provide an adequate remedy. If, however, the obligation
on the true construction is an obligation to relieve a debtor by preventing him
from having to pay his debt, equity will in such a case give relief.

It will be seen below that the latter construction referred to by Street CJ is tantamount to
a promise to prevent loss to the debtor. These different constructions provide a useful
structure for the analysis below.

Indemnities that operate by way of prevention of loss

Of the two constructions described above, this one appears in the cases far more
frequently. The construction may be applied to an indemnity clause even in the absence
of the words ‘save harmless’ or ‘hold harmless’ 14 or ‘keep harmless’. The traditional
drafting ‘to indemnify and save harmless’ appears nowadays to be tautological, 15
though the expression may be intended to emphasise that the indemnity is to receive a
preventative construction. 16
Indemnities against claims by or liabilities to third parties are often – though not
invariably – construed in this manner. The construction has been applied in relation to
liabilities on bills of exchange; 17 other kinds of contractual liabilities to pay money to
third parties; 18 liabilities arising under statute; 19 and liabilities in damages for tort or
breach of contract.20 If an agent’s right to indemnity has a contractual basis 21 then in

12 See also R Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract Law 54;
N D'Angelo, ‘The Indemnity: It's All in the Drafting’ (2007) 35 Australian Business Law Review 93 at
103-104.
13 McIntosh v Dalwood (No 4) (1930) 30 SR (NSW) 415 at 418.
14 Cf Farstad Supply AS v Enviroco Ltd [2010] 2 Lloyd's Rep 387; [2010] UKSC 18.
15 Cf Carr v Roberts (1833) 5 B & Ad 78 at 82-83; 110 ER 721 at 722-723 per Parke J.
16 Cf Warwick v Richardson (1842) 10 M & W 284 at 288; 152 ER 477 at 479 per Alderson B (‘To restore a
party to his former state, after suffering him to receive harm, is not to save him harmless’).
17 See, eg, Huntley v Sanderson (1833) 1 Cr & M 467; 149 ER 483; Reynolds v Doyle (1840) 1 Man & G 753;
133 ER 536; Coles Myer Finance Ltd v Commissioner of Taxation (1992) 176 CLR 640 at 657-659 per Mason
CJ, Brennan, Dawson, Toohey and Gaudron JJ.
18 See, eg, Abigroup Ltd v Abignano (1992) 39 FCR 74 at 83; Thanh v Hoang (1994) 63 SASR 276.
19 Re Dixon [1994] 1 Qd R 7. Cf Wren v Mahony (1972) 126 CLR 212 at 226 per Barwick CJ.
20 See, eg, Smith v Vange Scaffolding & Engineering Co Ltd [1970] WLR 733 at 740; State Government
Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 at 240 per Barwick CJ, at 253
per Walsh J.
21 This is the explanation propounded in F M B Reynolds, Bowstead & Reynolds on Agency, 18th ed,
Sweet & Maxwell, London (2006) at para 7-058; pp 301-302. Recent Australian cases adopting this
view include Re Clune (1988) 14 ACLR 261; Hazanee Pty Ltd v Elders Ltd (2006) 22 BCL 310; National

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some cases, the principal may be expected to intervene and keep the agent from loss
arising from third party liabilities. 22 The notion of preventing or averting loss in this
context becomes clearer when it is understood that, according to orthodox doctrine, an
indemnified party does not sustain a loss merely because it becomes subject to a third
party claim or liability. Generally, the indemnified party suffers loss only when it pays
the third party. 23
Indemnities by A to B against claims by or liabilities to A may also receive a
preventative construction. Before the fusion of law and equity, such an indemnity
afforded B a defence at law to A’s claim. The defence was based on the avoidance of
circuity of action. 24 If A’s claim against B were to succeed and B were to satisfy the
judgment, then B would have an equal and opposite claim against A, namely, for
damages for breach of the indemnity for failing to keep B from loss. The indemnity is
thus similar in effect to an absolute promise by A not to sue B. 25
At an abstract level, the construction of preventing loss is easily accommodated
within the claim of exact protection. One means of protecting the promisee against a
loss is to prevent that loss occurring. The protection is exact from the promisee’s
perspective because there is no difficulty with under- or over-compensation for loss: the
loss simply has not arisen. It is, however, more challenging in practice to demonstrate
that proper performance of the indemnity promise exactly protects the promisee.
For indemnities against third party claims or liabilities, various acts may constitute
satisfactory performance. Broadly, the promisor must relieve the promisee from having
to meet the claim or liability from its own funds. The promisor may successfully defend
a claim against the promisee. 26 Alternatively, the promisor may pay the third party
directly the amount of an acknowledged liability. 27 This appears to be effective
protection either because it extinguishes the liability or because, at least, it confers upon
the promisee a good defence to a subsequent claim by the third party. 28 The promisor

Roads and Motorists' Association Ltd v Whitlam (2007) 25 ACLC 688; [2007] NSWCA 81 at [87]-[89], [96]
per Campbell JA.
22 Rankin v Palmer (1912) 16 CLR 285; Mercantile Credits v Jarden Morgan Australia Ltd (1989) 1 ACSR 51 at
66.
23 See futher below pp 8-9.
24 Connop v Levy (1848) 11 QB 769; 16 ER 662.
25 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2006] QCA 194 at [12] per McPherson JA. See
above n 7.
26 Cf Ex parte Wiseman; Re Kelson, Tritton & Co (1871) LR 7 Ch App 35 at 42.
27 See, eg, McIntosh v Dalwood (No 4) (1930) 30 SR (NSW) 415 at 418 per Street CJ; Firma C-Trade SA v
Newcastle Protection and Indemnity Association (The Fanti) (No 2) [1991] 2 AC 1 at 28 per Lord Brandon;
Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 529; [17] per Gleeson CJ,
Gummow, Hayne and Callinan JJ.
28 Cf Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) (No 2) [1991] 2 AC 1 at
35 per Lord Goff; Sheahan v Carrier Air Conditioning Pty Ltd (1996) 189 CLR 407 at 430 per Dawson,
Gaudron and Gummow JJ.

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may procure a release or discharge of the liability by some other means. 29 In all of these
situations, the promisor eliminates the source of potential loss to the promisee and so
protects the promisee. No funds are directed into the hands of the promisee so there is
no difficulty with over- or under-compensation.
Another method of indemnification recognised in some circumstances is for the
promisor to provide to the promisee a sum equal to the amount of the actual or alleged
liability before the promisee pays. 30 This does not, strictly, relieve the promisee from the
liability but it does allow the promisee to meet that liability without diminishing its
existing assets. The promisee is protected exactly, provided it passes on the funds to the
third party. However, this method of performance carries with it the risk that the
amount so paid will prove to be more than necessary to avert loss to the promisee. The
promisee could, for example, accept the sum and then defend the third party’s action
successfully, or compromise for less, or suffer judgment but evade enforcement.
Whether the law insists on exact protection in this situation is open to doubt. The
general rule 31 is that the promisee is under no obligation to use the sum provided by the
promisor to satisfy the claim or liability in respect of which it was given. 32 Conversely, it
has been suggested that, in some circumstances, the promisee might be obliged to
return excess funds to the promisor. 33 There is, however, also force in the view that the
promisor should not generally be entitled to recover the amount of any overpayment. If
the contract obliges the promisor to pay the promisee in advance, then the possibility of
overpayment is a consequence of the parties’ agreement. If the manner of performance
of the indemnity is left to the promisor’s discretion, then its payment to the promisee in
advance involves a choice of one of alternative modes of performance. The promisor
could have attempted to deal with the third party directly, and it is difficult to see why
the promisor ought to be able to complain afterwards that it has overpaid. 34
Another way in which the promisor may perform the indemnity is to withdraw or
withhold a claim that the promisor could otherwise press. Where A indemnifies B
against claims by or liabilities to A, this is the obvious method of performance. It may

29 Re Alfred Shaw and Co Ltd; ex parte Murphy (1897) 8 QLJ 70 at 73; Rankin v Palmer (1912) 16 CLR 285 at
291 per Griffiths CJ.
30 See, eg, K D Morris & Sons Pty Ltd (in liq) v Bank of Queensland Ltd (1980) 146 CLR 165 at 201-202 per
Aickin J (Mason J agreeing); Coles Myer Finance Ltd v Commissioner of Taxation (1992) 176 CLR 640 at
657-659 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.
31 Cf the position where the promisor has an interest in the application of the funds to discharge the
liability: Re Law Guarantee Trust and Accident Society Ltd [1914] 2 Ch 617 at 633 per Buckley LJ; Official
Assignee v Jarvis [1923] NZLR 1009 at 1018 per Salmond J; Ramsay v National Australia Bank Ltd [1989]
VR 59 at 66-67.
32 Lacey v Hill; Crowley’s Claim (1874) LR 18 Eq 182 at 191-192; Re Law Guarantee Trust and Accident
Society Ltd [1914] 2 Ch 617 at 633 per Buckley LJ, at 639 per Kennedy LJ. See also Carr v Roberts (1833)
5 B & Ad 78 at 84; 110 ER 721 at 723 per Littledale J.
33 Cf Yates v Hoppe (1850) 9 CB 541 at 545; 137 ER 1003 at 1004 per Maule J; British Dominions General
Insurance Co Ltd v Duder [1915] 2 KB 394 at 410 per Bankes LJ.
34 Cf Lacey v Hill; Crowley’s Claim (1874) LR 18 Eq 182 at 191-192.

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also be relevant where A indemnifies B against third party claims. For example, A may
have a claim against C which, if pursued, would cause C to make a corresponding claim
against B. This occurs in some carriage of goods cases. 35 Another possibility is that A
and B are under a common liability to C, such that A would normally be entitled to
claim contribution from B. If A were to recover contribution from B, however, B would
not be completely protected against the liability to C. This was recognised in the
tortfeasor contribution statutes in various jurisdictions in Australia. Section 5(1)(c) of
the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), for example, states that ‘no
person shall be entitled to recover contribution under this section from any person
entitled to be indemnified by that person in respect of the liability in respect of which
the contribution is sought’. 36

Indemnities that operate by way of compensation for loss

Another construction is that the promisor will compensate the promisee for its loss.
Compensation for loss differs from prevention of loss in two important respects. First,
the promisor is not expected to protect the promisee before the promisee suffers loss.
Second, there is not in practice the same variety in the method of performance. The
promisor generally performs the indemnity by paying the promisee an amount equal to
the loss. 37 An important characteristic of such indemnities is that the relevant losses are,
according to their terms, ascertained or readily ascertainable at the time the promisor is
obliged to pay.
Wardley Australia Ltd v Western Australia 38 provides one example. The National
Australia Bank advanced substantial sums to Rothwells Ltd under a bills facility. The
Western Australian government provided an indemnity to the bank against the bank’s
‘net loss’ arising if Rothwells did not satisfy in full its liabilities under the bills facility.
The indemnity contained several terms relating to the calculation of ‘net loss’. The bank
was required to proceed to the fullest extent of its rights to recover from the assets of
Rothwells before claiming on the indemnity. The indemnity concluded with an
undertaking to pay on demand the sum claimed by the bank pursuant to the indemnity.
The bank called on the indemnity and the government paid a substantial sum. The
principal issue before the High Court was time of accrual of the government’s cause of
action against Wardley under s 82 of the Trade Practices Act 1974 (Cth). In addressing
this point, the High Court considered the nature of the government’s liability to the
bank for the loss. Mason CJ, Dawson, Gaudron and McHugh JJ explained that the
indemnity ‘created a liability on the part of the [government] to the Bank to make

35 See, eg, Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834.
36 See also Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.
37 Though this is not to exclude the possibility of alternative methods of compensation: cf Re Sentinel
Securities Plc [1996] 1 WLR 316 at 326-327.
38 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514.

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payment if and when the Bank’s relevant ‘net loss’ was ascertained and quantified,
subject to the making of a demand for payment by the Bank’. 39
Other examples can be found in some chattel lease or hire-purchase cases, where a
third party indemnifies the lessor or owner in relation to performance by the lessee or
hirer. In Yeoman Credit Ltd v Latter 40 a minor entered into a hire-purchase agreement for
a motor vehicle and the minor’s father entered into a separate agreement with the
finance company. The father undertook ‘to indemnify… against any loss resulting from
or arising out of the [hire-purchase] agreement and to pay… the amount of such loss on
demand’. Another clause of that agreement defined how the loss was to be calculated. 41
Holroyd Pearce LJ and Harman LJ held that the father’s contract with the finance
company was an indemnity and not merely a guarantee. 42 The father’s obligation was,
essentially, to pay the finance company for its loss ascertained in accordance with the
terms of the indemnity.

Indemnified party’s right to recover only for actual loss

The general principle

There can be no objection to allowing the promisee to recover for a loss it has actually
sustained. But the promisee may be overcompensated if it is allowed to recover for a
loss that has not yet arisen. The loss may never occur, or it may occur but to a lesser
extent than anticipated. Before the fusion of law and equity, an indemnified party
generally could not bring an action at law unless the party had actually suffered a loss. 43
In Re Richardson,44 Fletcher Moulton LJ explained that the common law ‘would not help
a man make a profit out of what was merely an indemnity’. The modern position
remains the same: subject to contrary terms, the promisee generally has no right to
receive a sum under an indemnity unless it suffers actual, ascertainable loss.
The orthodox view is that the promisee does not suffer a loss merely because the
promisee incurs a liability to, or is subject to a claim or action by, a third party. Rather,

39 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 524.
40 Yeoman Credit Ltd v Latter [1961] 2 All ER 294. See also, eg, Royscot Commercial Leasing Ltd v Ismail
(unreported, 29 April 1993, English Court of Appeal, Glidewell, Kennedy and Hirst LJJ).
41 Broadly, the loss equalled the total amount the hirer would have to pay to acquire the goods under
contract, less amounts received by the finance company, plus the finance company’s costs of
enforcing the agreement.
42 Yeoman Credit Ltd v Latter [1961] 2 All ER 294 at 297 per Holroyd Pearce LJ, at 299-300 per Harman LJ.
43 Re Richardson; ex parte the Governors of St Thomas’s Hospital [1911] 2 KB 705 at 709 per Cozens-Hardy
MR, at 712 per Fletcher-Moulton LJ; Re Law Guarantee Trust and Accident Society Ltd [1914] 2 Ch 617 at
632-633 per Buckley LJ; Rankin v Palmer (1912) 16 CLR 285 at 290 per Griffith CJ; Wren v Mahony
(1972) 126 CLR 212 at 225, 229 per Barwick CJ; Firma C-Trade SA v Newcastle Protection and Indemnity
Association (The Fanti) (No 2) [1991] 2 AC 1 at 28 per Lord Brandon.
44 Re Richardson; ex parte the Governors of St Thomas’s Hospital [1911] 2 KB 705 at 712 per Fletcher Moulton
LJ.

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the promisee suffers a loss when it pays the third party. 45 The leading Australian case is
Wren v Mahony. 46 Wren indemnified Mahony against ‘all proceedings actions claims
and demands made by the Commissioner of Taxation in connexion with any income tax
payable which has or may become payable by Mr Mahony’. Mahony was assessed as
liable to pay $60,000 for income tax and demanded payment from Wren, who did not
pay. Before Mahony had paid any of that amount to the Commissioner, he sued Wren
by a specially endorsed writ and obtained judgment for the amount plus interest. The
judgment went unsatisfied and was used as the basis of a petition for bankruptcy. A
sequestration order was then made against Wren and he appealed. The High Court by
majority upheld Wren’s appeal. Barwick CJ, who delivered the judgment for the
majority, held that Mahony had no cause of action against Wren under the indemnity
until Mahony paid the Commissioner and so sustained actual loss. 47
Another example concerns the failure to receive an expected payment. In Wardley
Australia Ltd v Western Australia 48 the indemnity expressly required the bank to pursue
recovery from Rothwells’ assets to the fullest extent, including up to the final
distribution paid in liquidation. By that point, it could be said that the bank had
sustained a definite, quantifiable loss under the indemnity. 49 That decision could be
explained on the construction of the indemnity, but a similar approach was applied by
the English Court of Appeal in Montagu Stanley & Co v J C Solomon Ltd. 50 The plaintiffs
were brokers on the Stock Exchange. The defendant introduced clients to the plaintiffs,
under an agreement to share half the commission and to indemnify the plaintiffs
against half of any loss sustained in connection with such business. One client ran up
large debts to the plaintiffs and then executed a deed of assignment of his property for
the benefit of his creditors. The creditors were to be paid in full or, in the case of a
deficiency, in proportion to their respective claims on the debtor. The plaintiffs then
claimed from the defendant half of the amount owing to them by the client.
Their claim failed because they could not establish a definite, ascertainable loss. The
English Court of Appeal rejected the argument that the plaintiffs suffered a loss
immediately upon the client failing to pay debts when due. Greer LJ said bluntly: ‘[t]hat
seems to me to be unarguable. Many debtors fail to pay on the due date, but it cannot
be said that the money not then paid is lost money’. 51 The client’s execution of the deed

45 Collinge v Heywood (1839) 9 Ad & E 634; 112 ER 1352; Wren v Mahony (1972) 126 CLR 212 at 226, 227,
230 per Barwick CJ; Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) (No 2)
[1991] 2 AC 1 at 28 per Lord Brandon, at 35 per Lord Goff, at 40 per Lord Jauncey.
46 Wren v Mahony (1972) 126 CLR 212. See also Port of Melbourne Authority v Anshun Pty Ltd (1981) 147
CLR 589 at 595 per Gibbs CJ, Mason and Aickin JJ; Firma C-Trade SA v Newcastle Protection and
Indemnity Association (The Fanti) (No 2) [1991] 2 AC 1 at 35 per Lord Goff, at 40 per Lord Jauncey.
47 Wren v Mahony (1972) 126 CLR 212 at 225, 228-229 (Windeyer J and Owen J agreeing).
48 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514.
49 Cf Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 533.
50 Montagu Stanley & Co v J C Solomon Ltd [1932] 2 KB 287.
51 Montagu Stanley & Co v J C Solomon Ltd [1932] 2 KB 287 at 291.

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of assignment was not, of itself, sufficient to sustain the plaintiffs’ claim, because the
amount the plaintiffs would receive under that deed was, at that point, still uncertain.

Reconciling the principle with the two constructions of indemnity

It is necessary first to consider the nature of an action to recover for actual loss under an
indemnity. Before the abolition of the forms of action, claims involving contractual
indemnities were brought at common law using several forms including covenant, 52
debt on bonds of indemnity, 53 and assumpsit. For simple contracts, the action was
generally in assumpsit for damages. 54 The gist of the action was the promisor’s breach by
failing to indemnify the promisee against the relevant loss. Occasionally, the facts of a
particular case also supported a claim in indebitatus assumpsit. The common count for
money paid was the most relevant. In appropriate cases, a promisee who had paid a
third party to discharge a liability within the scope of the indemnity could sue the
promisor to recover the amount so paid by an action in this form. 55 In such cases,
however, the suffering of loss – payment of money – was implicit in the form of action.
These cases are only of limited assistance in understanding the nature of a promise to
indemnify.
The modern position derives from the original cases in assumpsit for damages. The
promisee’s action to recover for actual loss is conventionally regarded as one for
damages for breach of the contract of indemnity.
Where an indemnity is construed to require the promisor to keep the promisee from
loss, the promisor commits a breach upon the promisee suffering a loss within the scope
of the indemnity. This is because the promisor has, at that point, failed to avert loss to
the promisee as required by the indemnity promise. Thus, the promisee’s right to
recover for a loss (by way of damages) accrues upon the promisee actually suffering the
loss. 56 From this perspective, the treatment of third party liabilities as potential rather
than actual losses under indemnities appears to be unusually strict. For other kinds of
contractual obligations, it seems that a promisee may recover damages for a third party
liability incurred through breach, even though the promisee has not yet paid money to
discharge it. 57 The difference, perhaps, can be explained by the concept of exact

52 See, eg, Carr v Roberts (1833) 5 B & Ad 78; 110 ER 721.

53 See, eg, Taylor v Young (1820) 3 B & Ald 521; 106 ER 752.
54 See, eg, Hardcastle v Netherwood (1821) 5 B & Ald 93; 106 ER 1127; Huntley v Sanderson (1833) 1 Cr & M
467; 149 ER 483; Betts v Gibbins (1834) 2 Ad & E 55; 111 ER 22; Collinge v Heywood (1839) 9 Ad & E 634;
112 ER 1352.
55 See, eg, Hutchinson v Sydney (1854) 10 Ex 438; 156 ER 508; Crampton v Walker (1860) 3 El & El 321 at
331; 121 ER 463 at 466 per Hill J; State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd
(1969) 123 CLR 228 at 245 per Kitto J; Firma C-Trade SA v Newcastle Protection and Indemnity Association
(The Fanti) (No 2) [1991] 2 AC 1 at 36 per Lord Goff; Victorian WorkCover Authority v Esso Australia Ltd
(2001) 207 CLR 520 at 528; [16] per Gleeson CJ, Gummow, Hayne and Callinan JJ.
56 Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) (No 2) [1991] 2 AC 1 at 35-
36 per Lord Goff, at 40 per Lord Jauncey.
57 H McGregor, McGregor on Damages, 18th ed, Sweet & Maxwell, London (2009) at para 8-023; p 337.

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protection and the concern to avoid overcompensating the promisee for a liability that it
may then not meet in full.
For indemnities of a compensatory nature, the analysis is straightforward. The
promisor generally undertakes to compensate the promisee for actual loss as defined by
the terms of the indemnity. The promisor is not obliged to perform before the promisee
has sustained actual loss. The promisee cannot recover unless and until the promisor is
obliged to perform. It follows that the promisee cannot recover unless it has sustained
actual loss.

Amount of loss is determined by reference to terms of indemnity

Accepting that the promisee’s cause of action is for damages for breach, it might then be
supposed that ordinary damages principles apply and, in particular, that principles of
remoteness and mitigation may restrict recovery of loss. Yet the extent to which, if at all,
general contract law principles govern the assessment and measure of the promisee’s
loss under an indemnity is unclear. The striking feature of the case law is just how
rarely reference is made to ordinary damages principles or authorities. It seems to be
generally assumed that ordinary damages principles do not restrict recovery, at least for
losses within scope.

Remoteness
The general approach appears to be that if a loss falls within the scope of the indemnity
on its proper construction, then it may be recovered; there is no additional limitation
that the loss not be too remote. 58 Muhammad v Ali 59 provides an illustration. The
respondents entered into a contract to sell land. The purchaser paid part of the purchase
price but the transaction was never completed. The respondents then entered into a
second contract to sell the same land to the appellants and the contract dealt with the
possibility of claims by the original purchaser for a refund or damages. In clause 3, the
appellants undertook ‘to guarantee and to pay all these amounts on behalf of the
[respondents] on condition that they will not exceed the amount of £P.2017’. The
original purchaser sued the respondents to judgment. The judgment was not satisfied in

58 See, eg, Triad Shipping Co v Stellar Chartering & Brokerage Inc (The Island Archon) [1994] 2 Lloyd's Rep
227 esp at 237-238 per Nicholls VC; Mediterranean Freight Services Ltd v BP Oil International Ltd (The
Fiona) [1994] 2 Lloyd’s Rep 506 at 522 per Hoffmann LJ; Kingston v Francis [2001] EWCA Civ 1711 at
[21]-[23] per Sir Martin Nourse, at [29]-[30] per Rix LJ; Bovis Lend Lease Ltd v RD Fire Protection Ltd
(2003) 89 Con LR 169; [2003] EWHC 939 (TCC) at [65]; Zaccardi v Caunt [2008] NSWCA 202 at [33] per
Campbell JA (Barr J agreeing, Allsop P agreeing generally). Cf Australian Coastal Shipping Commission
v PV 'Wyuna' (1964) 111 CLR 303 at 309-310 per Kitto J; Total Transport Corporation v Arcadia Petroleum
Ltd (The Eurus) [1996] 2 Lloyd's Rep 408 at 424, 432 per Rix J (remoteness limitation may apply as a
matter of construction); Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus) [1998] 1 Lloyd's
Rep 351 at 360-361 per Staughton LJ; Caledonia North Sea Ltd v British Telecommunications Plc (Scotland)
(The Piper Alpha) [2002] 1 Lloyd’s Rep 553 at 572; [101] per Lord Hoffmann. Contrast Rail Corp NSW v
Fluor Australia Pty Ltd [2009] NSWCA 344 at [101].
59 Muhammad Issa El Sheikh Ahmad v Ali [1947] 1 AC 414.

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full and the purchaser levied execution on other property of the respondents. That
property was sold at auction for an amount well below its market value.
One issue was whether the respondents’ capital loss at auction was too remote to
recover as damages for the appellants’ breach of cl 3. Lord Uthwatt, who delivered the
advice of the Privy Council, held that the loss was recoverable. Characterising cl 3 as an
indemnity, Lord Uthwatt explained: 60
Whether the contract be read as a contract to indemnify the vendors at all stages
or as a contract to indemnify the vendors against the amounts due to [original
purchaser] with a right in the vendors to fight [the original purchaser] to such
extent as they chose, the result is, in their Lordships' opinion, the same… On the
first basis the damages claimed fall within the terms of the contract on its true
construction, and on the second they are damages which, on the facts found by
the trial judge, might reasonably be expected to be in the contemplation of the
parties.

The difference between the two constructions of cl 3 is instructive. On Lord Uthwatt’s

first interpretation, the scope of the indemnity extended to loss arising through the
original purchaser’s enforcement of his claim against the respondents. The capital loss
at auction was a loss within scope and so Lord Uthwatt made no reference to principles
of remoteness. On Lord Uthwatt’s second interpretation, the indemnity only covered
the extant liability of the respondents to the original purchaser. 61 The capital loss was
beyond the scope of the indemnity and principles of remoteness were relevant.

Mitigation
Authorities on mitigation of damage are rarely cited in the indemnity cases. 62 There are
even judicial statements that principles of mitigation of loss do not apply, though these
presume that the promisee’s claim under the indemnity is not a claim for damages. 63
The better view – assuming that the promisee’s claim is for damages – is that there are
certain characteristics of indemnities that operate in place of mitigation principles.
These characteristics resemble mitigation but cannot be explained entirely by such
principles. Two important characteristics are considered below.
According to general principles, a party is not expected to act to mitigate loss prior to
breach. 64 Whether an indemnity is of a preventative or compensatory nature, the

60 Muhammad Issa El Sheikh Ahmad v Ali [1947] 1 AC 414 at 427 (emphasis added).
61 Another clause (cl 7) dealt with legal costs.
62 But see Vickers v Stichtenoth Investments Pty Ltd (1989) 52 SASR 90 and Wenkart v Pitman (1998) 46
NSWLR 502. Both cases concerned indemnities against third party defaults. However, in Vickers and,
it appears, also in Wenkart, mitigation principles were discussed with reference to the third party’s
breach, rather than breach of the indemnity.
63 Royscot Commercial Leasing Ltd v Ismail (unreported, 29 April 1993, English Court of Appeal,
Glidewell, Kennedy and Hirst LJJ); Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus)
[1996] 2 Lloyd's Rep 408 at 422.
64 H McGregor, McGregor on Damages, 18th ed, Sweet & Maxwell, London (2009) at para 7-020; p 243; J
W Carter, Carter on Contract, LexisNexis Butterworths, Sydney (2002-) at [41-380].

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analysis above shows that there is no breach at least until the promisee sustains a loss
within scope. Nonetheless, the promisee under an indemnity may be subject to a
constraint that applies to its conduct in incurring losses within scope as well as failing to
mitigate losses once they have arisen. The constraint is applied, through construction, to
limit the extent of the promisee’s protection. 65 The promisee is prevented from
recovering for losses that were incurred or exacerbated by its conduct falling short of a
certain standard. The standard is expressed in various ways, though the balance of
authority suggests reasonableness as a minimum. 66
Another aspect of mitigation is that benefits to the plaintiff that arise as a
consequence of the breach and diminish the loss may be taken into account in assessing
the quantum of damages. 67 For indemnities, the essential principle of exact protection
produces a broadly similar result. Benefits that diminish the indemnified loss are
brought to account, for if they were not the promisee would be overcompensated. In
Burnand v Rodocanachi 68 Lord Blackburn said:
where there is a contract of indemnity (it matters not whether it is a marine
policy, or a policy against fire on land, or any other contract of indemnity) and
a loss happens, anything which reduces or diminishes the loss reduces or
diminishes the amount which the indemnifier is bound to pay; and if the
indemnifier has already paid it, then, if anything which diminishes the loss
comes into the hands of the person to whom he has paid it, it becomes an equity
that the person who has already paid the full indemnity is entitled to be
recouped by having that amount back.

This passage reveals two distinct aspects of the principle of exact protection. The first is
seen in cases where the promisee, B, seeks protection against or payment for a loss from
A1 and then later claims indemnity from A2 in respect of the same loss. If B has already
fully recovered for the loss from A1, B usually cannot enforce its right to indemnity
from A2. 69 B’s loss has been reduced to zero. 70

65 See, eg, Smith v Howell (1851) 6 Ex 730; 155 ER 739; Hornby v Cardwell (1881) 8 QBD 329 at 337 per
Brett LJ; Scottish & Newcastle Plc v Raguz [2007] 2 All ER 871; [2007] Bus LR 841 at [53] per Lloyd LJ,
approved in dicta in Scottish & Newcastle Plc v Raguz [2009] 1 All ER 763; [2008] 1 WLR 2494 at 2515-
2516; [72] per Lord Walker.
66 See, eg, Smith v Howell (1851) 6 Ex 730; 155 ER 739; Scottish & Newcastle Plc v Raguz [2007] 2 All ER
871; [2007] Bus LR 841 at [53] per Lloyd LJ and on appeal [2009] 1 All ER 763; [2008] 1 WLR 2494 at
2499; [16] per Lord Hope, at 2515-2516; [72] per Lord Walker.
67 H McGregor, McGregor on Damages, 18th ed, Sweet & Maxwell, London (2009) at para 7-097ff; pp
288ff.
68 Burnand v Rodocanachi (1882) 7 App Cas 333 at 339.
69 British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 at 95 per Kitto, Taylor and Owen JJ;
Sydney Turf Club v Crowley (1972) 126 CLR 420 at 424 per Barwick CJ (Walsh and Stephen JJ agreeing).
Cf Caledonia North Sea Ltd v British Telecommunications Plc (Scotland) (The Piper Alpha) [2002] 1 Lloyd’s
Rep 553.
70 Cf Stratti v Stratti (2000) 50 NSWLR 324 at 331 per Fitzgerald JA (the enforcement of the second
indemnity would be unjust).

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 Lord Blackburn’s second proposition describes a form of subrogation as that doctrine
may be understood in its extended sense. 71 In a strict sense, 72 subrogation allows the
promisor to exercise for its own benefit the promisee’s subsisting rights against other
parties in diminution of the indemnified loss. The basic point, however, is that the right
of subrogation – in its strict or extended sense – is not a general incident of a promisor’s
obligation to pay damages for breach of contract. Subrogation derives from the nature
of a contract of indemnity 73 and gives effect to the concept of exact protection, as one of
its functions is to avoid overcompensation of the promisee. 74

Explanation – indemnities that operate by way of prevention of loss

How can these characteristics of a claim for actual loss under an indemnity be explained
as a matter of doctrine?
One view is that the promisee recovers for all loss arising from breach of the
indemnity in accordance with ordinary damages principles, including remoteness and
mitigation. 75 The perspective has never been the subject of rigorous exposition. It is not
entirely clear how these damages principles are to be applied in conjunction with the
terms of the indemnity, particularly the scope of the indemnity. The issue of scope
must, logically, be the first consideration. The indemnity cannot be engaged unless and
until there occurs a loss against which the promisor has undertaken to indemnify the
promisee.
Nor is this perspective easy to reconcile with the general trend in the cases, where
principles of remoteness and mitigation of damage are not explicitly applied to losses
within scope. A partial explanation in relation to remoteness may be this. Assume that
the promisor undertakes to prevent loss within the scope of the indemnity. A
consequence of failing to prevent a loss within the scope of the indemnity is that the
promisee suffers that loss. Such loss arises naturally from, or may reasonably be
supposed to be within the parties’ contemplation as a probable result of, the promisor’s
breach by failing to prevent it. In other words, if a loss is within the scope of the

71 Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 181 per Wilson and Dawson
JJ; Lord Napier and Ettrick v Hunter [1993] AC 713.
72 British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 at 94 per Kitto, Taylor and Owen JJ. Cf S
R Derham, Subrogation in Insurance Law, Law Book Co Ltd, Sydney (1985) at p 1.
73 Simpson & Co v Thomson (1877) 3 App Cas 279 at 284 per Lord Cairns LC; State Government Insurance
Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 at 240-241 per Barwick CJ; Transport
Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436 at 441-442 per
Wilson, Dawson, Toohey and Gaudron JJ.
74 AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655 at 663 per Mason J (McTiernan and Menzies
JJ agreeing); Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR
436 at 442 per Wilson, Dawson, Toohey and Gaudron JJ. See C Mitchell and S Watterson, Subrogation
Law and Practice, Oxford University Press, Oxford (2007) at paras 10.06, 10.30; pp 309-310, 320.
75 See, eg, A Berg, ‘Rethinking Indemnities. Part 1’ (2002) 17 Journal of International Banking and Financial
Law 360 at 365; R Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract
Law 54 at 65-66; N D'Angelo, ‘The Indemnity: It's All in the Drafting’ (2007) 35 Australian Business Law
Review 93 at 103-104.

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indemnity on its proper construction, the loss will not be too remote to recover as
damages because it satisfies the first, or at the least the second, limb of Hadley v
Baxendale. 76
I would like to offer another perspective. The premise is that a promise of indemnity
by way of prevention of loss may represent an agreement about the promisor’s
responsibility for the promisee’s loss. The agreement functions on two levels. On one
level, there is a primary obligation with an active element: to avert loss within the scope
of the indemnity. On another level, there is also an implicit agreement about the
damages recoverable by the promisee for losses within scope. It is this. If a loss within
the scope of the indemnity occurs (a breach) then the amount of that loss may be
recovered (as damages) on an indemnity measure, subject only to the terms of the
indemnity. As the arrangement concerns the damages payable by the promisor upon
breach of a contractual obligation it owes to the promisee it is, in effect, a form of agreed
damages.
Several features of this explanation should be noted. First, the implicit agreement on
damages may concern the kind of loss recoverable and the basis for quantifying that
loss. But an indemnity does not, characteristically, fix any particular sum in advance as
the amount of a loss.
Second, each discrete occurrence of a loss within the scope of the indemnity is a
distinct breach, 77 for which damages can be recovered on the agreed basis.
Third, as with other kinds of agreed damages clauses, the parties’ agreement
displaces principles of remoteness and mitigation that would ordinarily apply to a
claim for damages. This explains why these principles are generally not mentioned in
relation to losses within the scope of the indemnity. Restrictions on recoverable loss
may, however, be applied through construction.
Fourth, it is sufficient for the present analysis that the implicit agreement applies to
losses within the scope of the indemnity. Whether the promisee can ever recover for a
loss, L2, which is beyond scope but arises due to the promisor’s failure to prevent a loss,
L1, which is within scope, is a more difficult point. The promisee cannot recover for L2
if, properly characterised, it is merely a loss arising from the ‘late’ payment of damages
for L1. 78 Otherwise, the answer may depend upon the construction of the indemnity in
each case. It is suggested that the usual inference would be that the scope is
exhaustive, 79 particularly where the indemnity is the subject of detailed drafting as
often occurs in modern contracts. There is, of course, nothing to prevent the parties
expressly stipulating whether the scope exhaustively defines the recoverable losses. If

76 Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145.

77 See, eg, Crampton v Walker (1860) 3 El & El 321 at 328; 121 ER 463 at 466 per Cockburn CJ.
78 Cf Ventouris v Mountain (The Italia Express) (No 2) [1992] 2 Lloyd’s Rep 281 at 292; Sprung v Royal
Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; Mandrake Holdings Ltd v Countrywide Assured Group Plc
[2005] EWCA Civ 840.
79 Cf Zaccardi v Caunt [2008] NSWCA 202 at [33] per Campbell JA.

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the scope of the indemnity is not regarded as exhaustive, recovery for loss beyond
scope would appear to be governed by ordinary damages principles. 80

Explanation – indemnities that operate by way of compensation for loss

The analysis is simpler. If a loss is within the scope of the indemnity, the promisee is
entitled to be compensated for it in accordance with the terms of the indemnity. If the
promisee’s claim is properly characterised as one for unliquidated damages for breach,
the relevant breach must be the failure to compensate the promisee at the appointed
time. The promisee suffers two kinds of loss from breach: (1) the failure to receive the
sum that ought to have been paid, 81 and perhaps (2) other loss that flows as a result of
the sum not being paid at the appointed time. Only the first of these losses is, strictly,
relevant to the argument in this paper. The sum not paid, by definition, represents the
amount of the promisee’s loss within scope.
On this analysis, neither remoteness nor mitigation principles affect the promisee’s
claim for damages for an amount equal to the sum not paid. The loss is not too remote
from the promisor’s breach by non-payment. Furthermore, a promisee is not expected
to mitigate loss until breach occurs 82 and mitigation principles are directed to the
consequences of breach. Thus, the principles do not affect the accumulation of loss
within the scope of the indemnity.
This is sufficient to support the claim in this paper, but it is appropriate to consider an
alternative view that has gained currency. 83 The premise is that a compensatory
indemnity may amount to a promise to pay a liquidated sum. From this basis, it is
suggested that a promisee who frames its claim accordingly may enhance the extent of
its recovery when compared to a claim for unliquidated damages. This is said to be
because a claim for a liquidated sum is not subject to principles of remoteness or
mitigation.
Although the promisee’s claim was, as a matter of history, generally regarded as a
claim for unliquidated damages, there is no theoretical objection to acknowledging that
in appropriate cases the promisee might claim for a liquidated sum. There is some
support for this approach in recent cases. 84 However, it does not follow that because an
indemnity is compensatory in nature, the promisee’s claim for the amount of the loss

80 Muhammad Issa El Sheikh Ahmad v Ali [1947] 1 AC 414 at 427.

81 Cf Forney v Dominion Insurance Co Ltd [1969] 1 Lloyd’s Rep 502 at 509.
82 H McGregor, McGregor on Damages, 18th ed, Sweet & Maxwell, London (2009) at para 7-020; p 243.
83 R Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract Law 54 at 65-66,
68-69; N D'Angelo, ‘The Indemnity: It's All in the Drafting’ (2007) 35 Australian Business Law Review
93 at 106-108. Cf Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus) [1996] 2 Lloyd's Rep
408 at 422 per Rix J.
84 Royscot Commercial Leasing Ltd v Ismail (unreported, 29 April 1993, English Court of Appeal,
Glidewell, Kennedy and Hirst LJJ). Cf Chief Commissioner of State Revenue v Reliance Financial Services
Pty Ltd [2006] NSWSC 1017 at [31]-[34] and New Cap Reinsurance Corp Ltd (in liq) v A E Grant (2008)
221 FLR 164; [2008] NSWSC 1015.

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within scope must be a claim for a liquidated sum. 85 Whether the amount of the loss is
capable of being liquidated must depend in each case on the nature of the loss and the
terms of the indemnity.
If the promisee does claim for a liquidated sum then, clearly, ordinary damages
principles would not apply. The promisee would recover an amount for its loss within
scope calculated in accordance with the terms of the indemnity. However, the analysis
above shows that the same is true even where the promisee’s claim for the sum under
the indemnity is regarded as one for unliquidated damages. Any limitations on
recoverable loss that arise through construction of the indemnity would apply to either
form of claim. Thus, the issue of liquidation is actually irrelevant to the extent of the
promisee’s recovery for loss within scope under an indemnity of this nature.

Conclusion
The classification of indemnities as either preventative or compensatory, as adopted in
this paper, provides a useful schema for analysis but it does have limits. Some
indemnities appear to be composite or, perhaps, protean, depending on the kind of
loss. 86 The classification is also quite general. Within each of the two classes are different
types of indemnities with different characteristics. These variations may be more
significant or distinctive than the class itself. For example, an indemnity by A to B
against claims by A can be characterised as an indemnity of a preventative kind, but its
most important quality is that it may operate to bar action by A against B.
In some cases, the classification of the indemnity may have important practical
consequences for the promisee. 87 It may, for example, affect the time at which the
promisee’s cause of action accrues, or the promisee’s entitlement to relief in advance of
loss, or to claim for losses beyond scope which have arisen due to the promisor’s failure
to indemnify. In other cases, however, the difference may be of little or no real
significance. The indemnity promise, whatever its construction, is simply a legal
mechanism for imposing upon one party exact responsibility for the other’s loss. Where
the promisee claims for actual loss within the scope of the indemnity, the analysis
developed in this paper suggests that the amount recovered will generally be same.

85 Cf R Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract Law 54 at 64-
66; N D'Angelo, ‘The Indemnity: It's All in the Drafting’ (2007) 35 Australian Business Law Review 93 at
104-108.
86 An agent’s indemnity from the principal may be one example. The nature of a shipowner’s
indemnity from the charterer may be similar: cf Telfair Shipping Corp v Inersea Carriers SA (The Caroline
P) [1985] 1 WLR 553.
87 R Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract Law 54 at 65-66.

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