Indemnification is when you agree by contract to hold someone harmless for damage arising out of the contract. For example, this occurs when a subcontractor agrees to indemnify the general contractor for any instances where their employees are hurt on the worksite, even if the injury was not caused by the subcontractor. Construction, dangerous by its nature, is full of contracted indemnification clauses that place full or partial liability on one party or the other. While the idea of “indemnity” in a contract is often used to describe a wide variety of risk-shifting tools in a contract, almost all jurisdictions have rigorous requirements for the enforceability of such agreements in a construction contract. While you can protect your company against the risk of nonpayment by entering into subcontracts that are not one sided, it is sometimes a difficult task to do without legal guidance, given the typical one-sided subcontract.
Some states have enacted anti-indemnity statutes to try and protect the businesses and laborers lower down the contracting chain from entities with more negotiating leverage. These statutes either bar broad indemnity provisions where someone is asked to assume wide liability over a situation, even when they did nothing to contribute fault, or bar even more limited indemnity provisions. Despite these restrictions, however, contractors may still put indemnification clauses into contracts and attempt to hold others to them.
Most indemnity provisions are limited with subcontractors and laborers assuming the risk only for negligent acts of their business or employees. Intermediate options hold the subcontractor at fault if they’re partially to blame for a problem. These should be read with particular attention because some clauses will hold you liable for the whole problem even if you’re only partially at fault. Indemnity provisions can also be broad, meaning that the subcontractor is at fault, regardless of what happens. It’s essential to know the implications of the terms your reviewing in a subcontract or purchase order. Legislative trends toward limited or anti-indemnification developed with the common purpose to restore the doctrine that an entity is responsible for that entity’s own actions.
Anti-indemnity provisions were created in some states as good “public policy” or in the best interest of both the construction industry and general public. Understanding whether the law in a jurisdiction prohibits broad or limited indemnity policies can sometimes come down to a debate in court and the details of the wording of the specific contract clause.
To help protect your business against overly broad indemnification clauses, especially in jurisdictions where there are anti-indemnity provisions in place, you need someone on your team who is comfortable reading the contract and reviewing local law. Many construction businesses keep an attorney on retainer to help quickly review contracts and, when necessary, negotiate changes that protect them from overly broad indemnification provisions and other problematic clauses.
Applying Anti-Indemnity to Your Situation
Even with thorough contract review, as the laws continue to change due to new legislative statutes or court rulings, the way anti-indemnity would be applied to a specific situation continues to evolve. Another set of common clauses found in contracts to address this problem allow the courts to modify the contract to fit within the law while still keeping the goal of the agreement intact. Courts can, for example, cut out a clause that would be considered illegal without voiding the entire agreement. Another option allows courts to modify a clause, such as an indemnification clause, to comply with the local rules so that the party the contract anticipated providing indemnification still does so to the extent allowed.
Anti-indemnity provisions are just one example of how construction law varies by state and jurisdiction. It’s important for a growing business, especially one considering different types of projects or working over a broad geographic area, to have a clear process in place for contract review as well as tracking the information and timing necessary to protect mechanics lien or bond claim rights.
With over 30 years of experience and the ability to provide help in all 50 states, National Lien & Bond provides numerous options to support construction professionals and meet their legal needs. If you’re interested in learning more, reach out to schedule one of our lien seminars where we talk with your management team about the challenges your specific business is likely to face and the best ways to mitigate the risks. We believe that a little attention and preparation on the front end can make your business run smoothly.
This blog is for educational purposes only and not intended for legal advice.