Local Government Update – Indemnities

Under section 60A of the Statutory Bodies Financial Arrangements Act 1982 (Qld) (SBFA), Councils must seek the approval of the Treasurer before entering into a “type 1 financial arrangement”, which includes granting an indemnity in favour of another party within a contract.

However, on 6 January 2017, the process for Councils looking to provide an indemnity was simplified by the Under Treasurer, Jim Murphy, granting a general approval for Councils to provide indemnities.

The effect of this approval is that, for agreements entered into before 31 December 2017, Councils do not need obtain the Treasurer’s approval before giving an indemnity within the agreement, so long as the contract is being entered into for the purpose of undertaking activities associated with discharging the Council’s statutory functions.

• The indemnity can only be given without the Treasurer’s approval when provided within a contract entered into for the purpose of undertaking activities associated with discharging the Council’s statutory functions.
• The Department of Local Government, Infrastructure and Planning has advised that this approval only applies to Council’s providing indemnities and not guarantees, even though a “guarantee” is defined within the SBFA as including an indemnity. The Treasurer’s approval must still be sought by Councils in all other circumstances before entering into a “type 1 financial arrangement”, including when a Council is proposing to give a guarantee.

FAQ: What’s the difference between a guarantee and an indemnity?

Put simply, a guarantee is a contractual promise by Council (as guarantor) to another party (beneficiary) to fulfil the obligations of a third party (primary obligator) where the primary obligator fails to fulfil an obligation – these are also referred to as obligations to perform.

An indemnity, however, is a contractual promise by Council (as indemnifier) to compensate for a loss suffered by a third party (beneficiary) and is generally not dependant on a failure to perform an obligation by a primary obligator.

Essentially, this approval means that Councils can include a promise within an agreement to pay for loss suffered by a party without an approval, but cannot, without first obtaining the Treasurer’s approval, include a promise where Council will step in and complete the obligations of another party under an agreement.

• This approval is only effective until 31 December 2017, after which time, Councils proposing to give an indemnity within a contract must seek the approval of the Treasurer.

• Councils should:
  • establish and maintain a register of all indemnities given (if not already done);
  • have a policy and process covering the circumstances when Council will and will not consider providing an indemnity, the extent of indemnities that may be given and consultation with the Council’s legal or procurement/contracts team;
  • ensure that before an indemnity is offered or provided that it is approved by Council’s legal or procurement/contracts team;
  • ensure that any indemnity given falls within the scope of the Council’s insurance policies; and
  • ensure that the proposed indemnity to be given (and the clause drafted within the proposed contract) falls within the scope of this approval, and if in doubt, seek legal advice.

Although this approval has been granted, it is recommended that Councils continue to avoid providing indemnities to other parties within their contracts wherever possible, as they can have serious legal and financial consequences. It is also strongly recommended that Council obtain legal advice when considering providing an indemnity within a contract.