Application/interpretation of contractual indemnity clause in Managing Agency Agreement
Claim for Principal to pay Agent’s costs of claim by injured party relating to performance of the Agent’s powers, duties or authorities under the Agreement
Pavlis v Wetherill Park Market Town Pty Ltd  NSWCA 292
The Court of Appeal of New South Wales (Court of Appeal) has recently upheld the entitlement of managing agents to be indemnified by owners of rental premises for the agent’s costs of successfully defending an unmeritorious claim brought against it by an injured party.
On 28 August 2014, the Court of Appeal acknowledged that the general approach to contractual indemnities was not free from controversy. Nevertheless, the Court determined the indemnity clause should be interpreted consistent with the general law that an agent was “indemnified by its principal against all liabilities reasonably incurred or discharged by the agent in execution of its authority” and entitled an agent to be indemnified for costs incurred in defending a claim, where the agent was found to have properly performed its duties under the managing agency agreement.
On 4 October 2009, Fotini Pavlis (the plaintiff) was approaching an external ATM at Wetherill Park Market Town (shopping centre) when she slipped and fell, sustaining injury. The pavement was wet due to recent rain. The plaintiff alleged breach of duty of care by both Wetherill Park Market Town Pty Ltd (the owner) and Pretti Real Estate Pty Ltd (the agent).
Breach was denied on the basis that the agent, on the owner’s behalf, had arranged for the footpath surface near the ATM to be painted with non-slip paint less than 6 months prior.
The agent also cross-claimed against the owner seeking a contractual indemnity for its costs of defending the plaintiff’s claim, based upon the following contractual indemnity:
“The Principal will hold and keep indemnified the Agent against all actions, suits, proceedings, claims, costs, and expenses whatsoever which may be taken or made against the agent in the course of or arising out of the proper performance of any of the powers, duties or authorities of the Agent hereunder.”
The owner asserted the indemnity clause did not apply as the claim pursued by the plaintiff was one of alleged non-performance, as opposed to negligent performance of its duties and functions as agent.
First Instance decision
Judge Olsson of the NSW District Court dismissed the plaintiff’s claim, finding no breach of duty by the owner or the agent.
Her Honour acknowledged that indemnity clauses were to be construed according to their natural meaning in the context in which they occurred and found that the indemnity was wide enough to require the owner to indemnify the agent for its costs in successfully defending the plaintiff’s claim.
The plaintiff appealed, as did the owner concerning the operation of the indemnity clause.
In a joint judgment, Basten, Meagher and Leeming JJA upheld Judge Olsson decision in favour of the owner and agent on liability and also upheld the contractual indemnity in favour of the agent.
On appeal, the owner relied upon Laresu Pty Ltd v Clark, where McFarlane JJA stated:
“[The indemnity clause] is concerned with the “performance” of the powers, duties or authorities of the Managing Agent. The Managing Agent’s breach of duty in the present case constituted a failure to perform, not a performance of, its duties under the Management Agency Agreement. Bearing in mind the strict approach to construction that is appropriate in these circumstances, the conclusion follows that [the indemnity clause] is inapplicable and does not entitle the Managing Agent to the indemnity it claims.”
The Court of Appeal distinguished Laresu on the basis that the owner was seeking to apply that decision out of context; in Laresu, the indemnity clause was not upheld as the agent failed to perform its duties and was held to be negligent. In this case, the agent was not negligent and had properly performed its duties. The Court of Appeal rejected the construction of Laresu proffered by the owner, who sought to rely upon the plaintiff’s allegations rather than findings of fact to limit the operation of the indemnity clause.
It was accepted that the general approach to contractual indemnities, namely that ambiguous contractual provisions would be construed against the party seeking to rely upon them, was not free from controversy. The Court of Appeal here seemed to be referring to the tension which has arisen in recent caselaw as to whether or not an agent’s costs incurred in defending proceedings, for which they seek to be indemnified by the owner, can be said to “arise out of” the agent’s performance of its contractual obligations so as to trigger the indemnity, rather than arising out of the injured party’s decision to bring an unmeritorious claim against it.
The Court of Appeal acknowledged that it was not required to resolve this controversy as the owner had not argued that point. Whilst the judgment hints that a more liberal interpretation might have been upheld if the owner had pursued that point, the Court focused on the general law principle that “an agent is indemnified by its principal against all liabilities reasonably incurred or discharged by the agent in the execution of its authority” to justify its decision to uphold the operation of the indemnity clause.
The Court held that there was no reason to read the contractual indemnity as restricting the agent’s right of indemnity under the general law. Nor was the Court prepared to read the indemnity to exclude non-negligent performance of its duties. The Court rejected the owner’s submission that the application of the clause was to be determined by the allegations made by the plaintiff. It said that there was no sensible reason for adopting a construction of the clause in this way.
Effect of Pavlis v Wetherill Park Market Town Pty Ltd  NSWCA 292
Although the question of whether an agent can successfully call upon a contractual indemnity will still depend upon the circumstances of each case and the wording of the particular clause, if an agent can demonstrate it properly performed its contractual obligations, it is likely that they will be entitled to call upon a contractual indemnity from the owner for their costs of successfully defending a claim.
The Court’s decision is valuable as the ability to enforce costs orders against plaintiffs is often questionable, particularly in personal injury litigation. There is clearly a considerable benefit in being able to recover costs from a party that retains assets of some value.
Gilchrist Connell acted for the agent.
Date: 29 August 2014