Common issues lawyers face regarding construction indemnity clauses is their enforceability.
An indemnity clause or agreement is an essential component within any project contract in the construction industry. As an independent contractor, you’re operating in a high-risk environment covering various construction costs. Whether it’s construction site injuries or property damage caused by third parties, the indemnity agreement defines responsibility. It’s designed to mitigate risks for the indemnified party, protecting their business from severe financial obligations.
What is a Construction Indemnity Agreement?
Several terms are commonly used to describe an indemnity agreement. Some call it a hold harmless agreement, a waiver of liability, a release of liability, a safeguard, or a no-fault agreement. Whatever you decide to call it, a construction indemnity agreement safeguards the indemnified party against any loss or damages associated with a third-party business agreement. The indemnified party wants to protect their business while the indemnifier promises to hold harmless. It’s a contractual agreement that defines liable parties, outlining the various financial obligations.
A thorough construction indemnity agreement prevents third-party lawsuits, insurance claims, or damages. They usually stem from the prime contract between the project owner and the general contractor, protecting the property owner from any harm or injuries during the construction project. As the project continues, the indemnification clause continues to evolve, requiring each subcontractor to indemnify the general contractor along with the owner.
You cannot indemnify other parties for your negligence as a contractor. Regardless of the actual cause of damages, an indemnification provision in a construction contract that indemnifies a party against their errors is void.
Who is Who?
A typical indemnification agreement applies to at least three different parties:
- The indemnitee means the party that gets indemnified.
- The indemnitor represents the party identifying someone else.
- The claimant refers to the person who makes a claim.
It’s easier to understand in context. Imagine this scenario:
One of your construction workers (the claimant) is on your job site. They trip and fall, injuring themselves badly. The construction worker decides to sue the property owner (the indemnitee) for damages. However, the project owner has an indemnity clause with you, the general contractor (the indemnitor). You are then obligated to pay the project owner the amount requested by the claimant.
However, if you have a construction indemnity agreement with your subcontractors and the fault falls within their parameters, they then owe you the amount owed to the claimant.
Types of Indemnity Agreements
- Broad Form Indemnity
Broad form indemnity means the indemnitor is responsible for their negligence and the negligence of a third party. It means you may be liable for the indemnitee’s sole negligence, making it the most extreme form of indemnity.
- Intermediate Form Indemnity
Under an intermediate form indemnity clause, the contractor promises to indemnify the owner for any loss, excluding “sole negligence.” Even if the owner is 99% at fault but not responsible for the total 100% loss, the indemnity provision is triggered, and the contractor is no longer liable. On the other hand, if the owner is 100% at fault, the indemnitor is relieved of any obligation. Intermediate form indemnity is more in tune with contributions rather than fault analysis, holding contractors accountable for the slightest negligence.
- Direct Indemnity
Direct indemnity clauses cover first-party claims or damages created by the indemnitee’s acts, omissions, or faults. Direct indemnity provisions are generally not included in a construction contract. It’s too easy for one of the parties to sue the other for a breach of contract.
Understanding the Enforceability of Construction Indemnity Agreements
Common issues lawyers face regarding construction indemnity clauses is their enforceability. There are two factors to consider; clarity and public policy.
For a court to enforce an indemnity agreement, it must be written clearly and precisely, without ambiguity. Most States disfavor overreaching indemnity clauses, instead strictly enforcing contract language. If the clause conflicts with the contract, it’s impossible to enforce.
You must have a thorough understanding of public policy. Various states have introduced anti-indemnity laws making clauses unenforceable. The rationale behind this is that if a general contractor can shift the financial burden of liability away from them, there’s no incentive to avoid risk in their own work.
That’s why it’s essential to strike a balance between protecting you and your business from damages outside of your control and taking ownership of damages that fall within your jurisdiction. Keep this top-of-mind as you formulate your indemnity agreements.
Why is a Construction Indemnity Agreement Important for a Contractor?
It may seem like a construction indemnity agreement doesn’t benefit a contractor like yourself. That’s where a limited form indemnity clause comes in. This ensures that the contractor is only liable for damages to third parties “to the extent” that the contractor caused them. In other words, you’re agreeing to cover the costs for damages as a result of your negligence, holding you and your construction site to the proper standard.
Incorporating this limited-form edition into your indemnity clause ensures a comparative fault analysis in which the respective fault of the parties involved defines the financial liability.
The Way Forward
A construction indemnity agreement is a critical component of any contract. Not only does it hold you accountable for negligence, but it protects your business against third-party negligence or damages. In an environment where faults come at an enormous price, it’s essential to get your paperwork right. Ensure you’re covered with an indemnity clause that’s right for your company.