In a construction contract, an indemnity clause is an agreement between the parties regarding responsibility for losses or damages in connection with the construction project. The indemnity clause provides one of the parties with protection against damages and sometimes exempts them from being held liable for their own actions.
An indemnity clause generally states that the contractor will indemnify the owner and hold them harmless for any losses, claims, demands, or lawsuits arising from defects in the contractor’s performance. Property owners are protected against many types of losses associated with the specific contractor (i.e., an architect or designer).
In some construction contracts, the contractor is indemnified. The owner releases the contractor from liability. For example, an indemnity clause for limitation of liability for contractors will deal with secondary issues such as attorney’s fees or court costs.
Indemnification Clause: What Does One Look Like?
The indemnification provisions in construction contracts vary widely, but they are classified into three categories: “broad form,” “narrow form,” and “intermediate form.” In the broad form indemnity category, the Indemnitor agrees to be liable for all damages suffered by the indemnitee, regardless of whether the indemnitee’s own negligence caused the damages. In a narrow form indemnity provision, on the other hand, the Indemnitor agrees to be only liable for losses or damage it actually caused.
Intermediate indemnity clauses are somewhere in the middle, such as when the Indemnitor isn’t obliged to indemnify solely for a party’s negligence, but is required to indemnify for all damages it contributed to, even if it contributed in a minor way.
Here are some examples of broad form, narrow form, and intermediate form indemnification clauses:
- Broad Form Indemnity Provision: The subcontractor shall defend, indemnify, and hold harmless the Contractor from any claims, damages, and losses resulting from the performance of this contract.
- Narrow Form Indemnity Provision: The Subcontractor shall indemnify the Owner for damages resulting from the performance of the Work, but only to the extent caused by the Subcontractor’s negligent acts, errors, or omissions.
- Intermediate Form Indemnity Provision: The Contractor will indemnify and hold harmless the Owner for any damages, losses, or claims resulting from the Contractor’s negligence, error, omission, or failure to perform.
The interpretation and enforceability of the sample provisions listed are determined by the law of the jurisdiction controlling the construction contract.
Indemnification Clauses in Construction Contracts: When Are They Enforceable?
A majority of states have enacted anti-indemnity laws that restrict, modify, or prohibit certain types of indemnification provisions in construction contracts. Nevertheless, rules relating to the enforceability of indemnification clauses vary widely from state to state and depending on the type of contract.
Here is an example of how anti-indemnity statutes differ from state to state: Colorado’s statute and Idaho’s statute. An Indemnitor in a construction contract can’t be held liable for damages caused by the indemnitee or by the indemnitee’s agents under Colorado’s narrow form of anti-indemnity law.
Furthermore, if the Indemnitor is partially liable for damages, the Indemnitor is only liable for the percentage of fault attributed to it or to its agents or subcontractors. The Colorado anti-indemnity statute applies to a variety of construction contracts, including public and private projects and contracts to design, plan, or oversee construction projects, though there are a few express exceptions, including railroad properties and water and sanitation districts.
The Idaho intermediate form anti-indemnification statute, in contrast, prohibits only agreements to indemnify the indemnitee against damages arising from damage caused or resulting from the indemnitee’s sole negligence or that of its agents or employees. Under the Idaho anti-indemnity statute, an Indemnitor’s obligation to pay damages where several parties contributed to the damages is not apportioned based on how much they contributed.
An indemnitee may be required to pay all damages even if the Indemnitor only caused a small percentage of the damages.
A small minority of states lack anti-indemnity statutes altogether, including Alabama, Maine, North Dakota, and Vermont. Broad form indemnity clauses may be permitted in states without a judge-created law.
Are Indemnity Clauses Legal?
As long as they do not violate any liability requirements, indemnity clauses are generally enforced. State laws, however, sometimes consider indemnity clauses unfavorable, especially clauses that limit contractor liability. Contractors have a general duty of care to the property owner. Some states reject indemnity clauses for contractors, though they can sometimes be accepted with limitations.
Indemnity clauses that do not limit the contractor’s liability for negligence or wrongdoing are more likely to be upheld by a court. As indemnity clauses are subject to contract law, the parties are free to negotiate according to their individual circumstances. However, indemnity clauses must conform to liability laws.
Can an Indemnity Clause be Disputed?
A clause of indemnity can be a powerful legal tool because it gives up the right to sue for the reasons stated in the clause. Indemnity clauses should therefore be used carefully and entered into with a full understanding of their legal effects.
However, indemnity clauses must meet certain requirements to be legally valid. They cannot be formed through deceit, fraud, coercion, or threats. The indemnity clause needs to be understood by both parties. Neither party should be misled by terms that might seem vague or ambiguous.
Therefore, an indemnity clause is usually contested on the grounds that it didn’t meet the legal requirements for contract agreements. Therefore, an indemnity clause should be formally agreed upon in a written document rather than verbally. Also, a lawyer may be consulted for help with reviewing the document before signing the agreement.
What Are the Remedies for an Improper Indemnity Clause?
Fraud or duress may invalidate an indemnity clause (the use of force or threat of force to obtain an agreement). The indemnity clause may not be enforceable in court if it is difficult to identify in the contract or if it contains misleading language.
A common remedy for indemnity clause disputes is where a court allows the parties to rewrite the clause to reflect their original intentions. Eventually, a judge may strike down a clause in whole or in part if it is unreasonable or if the parties’ intentions cannot be determined from it.
The party will not be held liable if the indemnity clause is found to be invalid. Instead, liability will be determined by statute or case law. The contractor may once again be sued if the previous clause is invalidated.
Do I Need an Attorney for Construction Contract Indemnity Clauses?
Indemnity clauses are sometimes necessary for construction contracts. Construction projects cannot proceed without clear instructions regarding liability. However, an indemnity clause must be drafted in a way both parties can understand. If you will need an indemnity clause, it is highly recommended that you consult a contract attorney. Your contract lawyers will be able to draft and review the clause for you and can also provide advice in case a lawsuit arises.
There are no uniform rules governing indemnification clauses across the U.S., so the law can differ significantly from state to state. Therefore, contractors and subcontractors performing work in different jurisdictions should review and understand the anti-indemnity statutes of each state where they are performing work. This can be made easier by obtaining the help of a contract lawyer.