On 3 June 2021 the Department of Finance released its updated Resource Management Guide on indemnities, guarantees and warranties by the Commonwealth (RMG 414).
Non-corporate Commonwealth entities must ensure they are using the updated RMG414 when considering any indemnities, guarantees or warranties in their contracts.
Who does RMG414 apply to?
RMG414 applies to officials in non-corporate Commonwealth entities (NCEs) who:
- have been sub-delegated by their accountable authority the power to grant an indemnity, guarantee or warranty on behalf of the Commonwealth;
- need to brief their accountable authority about an indemnity, guarantee or warranty; or
- request the Finance Minister grant an indemnity, guarantee or warranty.
What is a Commonwealth indemnity?
Indemnities are legally enforceable obligations included in contractual arrangements between the Commonwealth and another party.
Indemnities create contingent liabilities. This means that an indemnity may give rise to a contractual liability for the Commonwealth on the occurrence of a future event.
RMG414 differentiates between an indemnity, guarantee and warranty as follows:
- an indemnity is a legally binding promise where the Commonwealth undertakes to accept the risk of loss or damage another party may suffer;
- a guarantee is a promise whereby the Commonwealth assumes responsibility for the debt, or performance obligations of, another party on default of its obligation; and
- a warranty is a promise whereby the Commonwealth provides certain assurances to the other party to an arrangement.
RMG414 key points
- Delegated officials of NCEs can enter into arrangements that provide indemnities, guarantees and warranties (collectively referred to as indemnities) on behalf of the Commonwealth to other parties, subject to the limitations in the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act).
- The PGPA Act enables the Finance Minister to grant indemnities on behalf of the Commonwealth (section 60). This power has been delegated, with directions limiting its use, to accountable authorities of NCEs (Schedule 1, Part 6 of the Finance Minister’s delegations).
- An accountable authority can sub-delegate this power, with written limitations that are consistent with the limits in the Finance Minister’s delegation, to officials of their own entity, or officials of another NCE. A sub-delegate must also comply with any other directions of the accountable authority.
The delegation from the Finance Minister requires that an official who is delegated the power to enter into indemnities must consider two overarching principles:
- that risks should be borne by the party best placed to manage them; and
- benefits to the Commonwealth should outweigh the risks involved.
An official can only grant an indemnity, guarantee or warranty involving a contingent liability in relation to an event on behalf of the Commonwealth, if the delegate is satisfied that:
- the likelihood of the event occurring is remote, i.e. it has a less than 5% chance of occurring; and
- the most probable expenditure if the event occurred is not significant, i.e. it would be less than $30 million.
If an indemnity is beyond these thresholds, a delegate can grant an indemnity on behalf of the Commonwealth if:
- has been explicitly agreed in a decision of Cabinet, the National Security Committee of Cabinet (NSC) or its successor or the Prime Minister; or
- is in accordance with a written determination of the Finance Minister.
Conclusion
Indemnities, guarantees and warranties are legally enforceable obligations that may give rise to a liability for the Commonwealth.
Accordingly, any Delegated officials of NCEs must strictly comply with the PGPA Act in relation to the granting of any indemnities, guarantees and warranties.
The updated RMG414 is a comprehensive guide that all NCE staff should carefully read and strictly comply with when considering the grant of any indemnities, guarantees and warranties.
A full copy of RMG414 can be found here.
Accompanying resources can also be accessed at the following links:
PGPA (Finance Minister to Accountable Authorities of NCEs) Delegation 2014
RMG 203: General duties of officials
RMG 206: Model Accountable Authority Instructions – Non-Corporate Commonwealth Entities
RMG 400: Commitments of relevant money
Commonwealth Risk Management Policy
This article was written by Scott Alden, Partner and Victoria Gordon, Senior Associate.