Common issues lawyers face with construction indemnity clauses are their enforceability.
An indemnity clause or agreement is an essential part of any project contract in the construction industry. As an independent contractor, you operate in a high-risk environment covering various building costs. Whether it’s jobsite injuries or property damage caused by third parties, the indemnity agreement defines liability. It is designed to mitigate risk for the indemnified party, protecting its business from heavy financial liabilities.
What is a Construction Indemnity Agreement?
Several terms are commonly used to describe an indemnification agreement. Some call it a hold a non-liability agreement, liability waiver, liability waiver, safeguard or no-fault agreement. Whatever you decide to call it, a construction indemnity agreement protects the indemnified party against any loss or damage associated with a commercial agreement with a third party. The indemnified party wants to protect its business while the indemnifier promises to hold itself harmless. It is a contractual agreement that defines the responsible parties, outlining the various financial obligations.
A comprehensive construction indemnity agreement avoids lawsuits, insurance claims or damages. They usually arise from the main contract between the building owner and the general contractor, protecting the owner from any damage or injury during the construction project. As the project continues, the indemnification clause continues to evolve, requiring each subcontractor to indemnify the general contractor as well as the owner.
You cannot indemnify other parties for your negligence as a contractor. Regardless of the actual cause of the damage, an indemnity clause in a construction contract that indemnifies a party against its errors is void.
Who is who?
A typical indemnification agreement applies to at least three different parties:
- the compensated means the party who is indemnified.
- the compensative represents the part identifying someone else.
- the applicant refers to the person making a claim.
It’s easier to understand in context. Imagine this scenario:
One of your construction workers (the claimant) is at your site. They stumble and fall, seriously injuring themselves. The construction worker decides to sue the owner (compensated party) for damages. However, the client has an indemnification clause with you, the general contractor (the indemnifier). You are then obliged to pay the contracting authority the sum claimed by the applicant.
However, if you have a construction indemnity agreement with your sub-contractors and the fault falls within their parameters, then they owe you the amount owed to the plaintiff.
Types of indemnification agreements
- Extended form compensation
Broad indemnity means that the indemnifier is liable for its negligence and the negligence of a third party. This means that you can be liable solely for the negligence of the indemnified, making it the most extreme form of indemnification.
- Intermediate compensation
Under an intermediate form of indemnification clause, the contractor undertakes to indemnify the owner for all losses, excluding “mere negligence”. Even if the owner is 99% at fault but not responsible for the total 100% loss, the indemnity clause is triggered and the contractor is no longer liable. On the other hand, if the owner is 100% at fault, the indemnificant is released from any obligation. Intermediate indemnity is more in tune with contributions rather than fault analysis, holding contractors liable for any negligence.
- Direct compensation
Direct indemnification clauses cover first party claims or damages created by the acts, omissions or faults of the indemnified party. Direct compensation clauses are generally not included in a construction contract. It is too easy for one party to sue the other for breach of contract.
Understanding the Enforceability of Construction Indemnity Agreements
Common issues lawyers face with construction indemnity clauses are their enforceability. There are two factors to consider; clarity and public policy.
For a court to enforce an indemnification agreement, it must be drafted in a clear and precise manner, without ambiguity. Most states oppose excessive indemnification clauses, instead strictly applying contract language. If the clause conflicts with the contract, it cannot be enforced.
You must have an in-depth knowledge of public policies. Various states have introduced anti-compensation laws rendering the clauses unenforceable. The underlying logic is that if a general contractor can offload the financial burden of their liability, there is no incentive to avoid risk in their own work.
That’s why it’s critical to strike a balance between protecting you and your business from damage beyond your control and covering damage that is within your control. Keep this in mind when formulating your indemnification agreements.
Why is a construction indemnity agreement important for a contractor?
It may seem that a construction indemnity agreement does not benefit a contractor like you. This is where a limited form indemnification clause comes in. This ensures that the entrepreneur is only liable for damage caused to third parties “only to the extent” that the entrepreneur caused them. In other words, you agree to cover the costs of damage resulting from your negligence, keeping you and your construction site up to proper standards.
Incorporating this limited edition into your indemnification clause ensures a comparative fault analysis in which the respective fault of the parties involved defines the financial responsibility.
The path to follow
A construction indemnity agreement is an essential part of any contract. Not only does this hold you liable for negligence, but it also protects your business from third-party negligence or damage. In an environment where defects have a huge price, it is essential to write your documents well. Make sure you’re covered by an indemnification clause that’s right for your business.