Battling Back Against Indemnification Clauses

Construction industry agreements have traditionally included broadly written indemnification clauses. Everyone has seen them. If anything goes wrong, if any liability is incurred, Party A will be indemnified and held harmless by Party B to the maximum extent permitted by law. Party A will be fully reimbursed, including attorney fees.

While it is easy to pass these clauses off as a bunch of “legal boilerplate,” that would be a mistake. Indemnification clauses can have devastating liability consequences. And they are frequently imposed by a party in a superior bargaining position. They are presented as part of the “standard” terms and conditions. Take it or leave it.

As a result of this problem, a number of state legislatures have enacted statutes limiting the enforceability of indemnification clauses in construction industry contracts. One state is Florida. Contracts “between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman, or any combination thereof … shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract.”

Recently, an equipment supplier, which had not included a monetary limitation in the indemnification clause on the back side of its work order, argued that the Florida statute was intended to protect only project owners in their agreements with the listed parties. A court rejected that contention. The statute applies to agreements between or among “any combination thereof.” The supplier’s indemnification clause was unenforceable.

What is your opinion of indemnification clauses? Are they a legitimate means of allocating risk within a construction contract? Or are they disproportionate to the commercial realities of the transaction, imposed by parties with superior financial leverage? In the face of legislative and judicial limitations on enforceability, are you seeing clauses that are more narrowly and reasonably drafted? I welcome your comments.

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Comments

[John Earnest]

TLC is a small casework company. We have installed relatively small amounts of casework ($20K) and have been asked to provide $10 M insurance and sign contracts that ask for huge damages. Take it or leave it clauses really force us into a corner. Love to see the Arizona law that requies subs to be paid in 30 days go national. JE

[Joseph A. Cornacchia, AIA]

C.A.P. is a design/build company in NYC. More and more our construction affiliate is being asked to sign indemnification clauses as a requirement to work. Sometimes these clauses include language that would have us indemnify the owner/manager even if they contributed to the negligence.

Whenever possible, we remove that language from the indemnification and limit the extent of the indemnification to the amount covered by insurance.

[W Byerley]

A.I. is a heavy civil construction company. Whenever possible, we limit our exposure under indemnity clauses to insured claims only ie: bodily injury/property damage claims that arise out of our work. If additional insured coverage is required we negotiate the extent of negligence to exclude the sole negligence of the indemnitees.

[hi vis]

The Florida law makes a lot of sense. What's even better is for each part to pay, according to the extent of their own negligence. I've seen contracts "imposed" by large GC's on small (sometimes very small) subs, where the sub has to totally indemnify the large GC against any claim, unless the GC is shown to be SOLELY negligent- which is going to be almost never. Often the sub is not sophisticated enough to pick up on this subtle, but crucial language.

[Robert]

Be a small sub we have come into a lot of contracts that have this very language, with no real way of going around this. We are required to carry insurance that is way above our abilities at times. Alot of times the GC takes control of the mater knowing well that we are not afford an opportunity to be exempt.

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[hi vis vests]

With competition being so fierce these days, small subs don't really have enough leverage to force changes to unfair indemnification language.

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