Contingent liabilities

Today’s presentation:
• What are contingent liabilities (broader than indemnities)
• Overview of the requirements for managing contingent liabilities
• Discussion – examples of contingent liabilities

Marc Mowbray-d’Arbela Kerry Markoulli

Branch Manager Director
Legislative Review Branch Financial Framework Policy Branch
Financial Management Group Financial Management Group
Sources of liability
• Government agencies engage in transactions that involve risk.
• Risk involves loss or damage to people, property or resources.
• Risk may be managed the following ways:
– The Australian Government may require the party providing the
property or services to assume responsibility for the risks (i.e. the
provider may be required to indemnify the Government );
– Risk may be shared between the provider and the Government (e.g. the
provider or the Government’s liability may be capped); or
– The Australian Government may assume greater risks in relation to the
transaction.
• Today we’re considering the scenarios where the Australian
Government assumes liability.
What are contingent liabilities?
• Contingent liabilities are commitments to pay arising from uncertain
future events. The event that gives rise to the liability:
– may or may not eventuate
– may or may not be in your Agency’s control

• Contingent liabilities include:

─ indemnities
─ guarantees
─ warranties and
─ letters of comfort

• Contingent liabilities are important to identify, as they may increase

the potential cost of the spending proposal.
Indemnities
Are legally binding promises where one party undertakes to
accept the risk of loss or damages that another party may suffer.

To help understand to level of risks, indemnities issued by the

Australian Government can be classified into two groups:
• limited (defined) indemnities
• broad (unrestricted) indemnities
Limited (defined) indemnities
Potential losses or damages for which the Australian
Government, without having issued an indemnity, may
otherwise be liable (eg. for negligence at common law) although
the initial loss would accrue to the other party.

Example
In providing goods or services, the Australian Government, may
indemnify the recipient against possible losses arising from legal action
by a third party, who is injured or otherwise affected, as a result of the
Australian Government’s actions (such as negligently providing
defective equipment to the recipient).
Broad (unrestricted) indemnities
Potential losses or damages for which the Australian
Government, without having issued an indemnity, would not
otherwise be liable.

Example
In using goods or property owned by another party, the Australian
Government indemnifies the owner against losses that may be suffered
if a third party damages those goods (such as losses that may result
from destruction of an exhibit by a member of the public).
Assessing the scope of an indemnity

• Who can best ‘manage the risk’?

• Who have you been asked to indemnify?

– (limited) contracted parties
– (broad) the world at large

• What is being indemnified?

– Actions, claims, proceedings, losses, costs, expenses, damages
Assessing the scope of an indemnity

• When will the indemnity apply?

– (limited) from the negligence of the Australian Government
– (broad) from the Government’s use or occupation of the
premises

• How long will the indemnity apply?

– (limited) for a defined period
– (broad) indefinitely
Guarantees
Are promises where the Australian Government assumes
responsibility for the debt of, or performance obligations of,
another party should that partly default in some way.

Guarantees issued by the Australian Government will cover

potential losses that would not otherwise be met by the
Australian Government.

Example
Where the Australian Government guarantees payment of bank
borrowings, performance or liabilities by a third party.
Warranties
Are promises where one party provides certain assurances to
another party.

Warranties generally relate to the type, sufficiency, and

condition of assets and typically form part of a sale agreement.

Example
• A vendor selling a product may warrant that the item is fit for use, and that for a
specified period defective parts will be replaced or otherwise rectified.

• Warranties may also address the ownership of the assets, ownership of copyright,
completeness of financial statements, payment of taxes, disclosure of material
matters, legal proceedings and employee entitlements.
Letters of comfort

• Instrument that are used to facilitate an action or transaction

but are constructed with the intention of not giving rise to a
legal obligation.

• However, letters of comfort can lead to an actual liability,

either through a court finding that the party receiving the
letter was entitled to rely upon its contents, or through a
moral obligation for the Commonwealth to make good on its
assurance.

• Best advice, avoid letters of comfort.