Why You Should Read Indemnity Provisions in Contract Negotiations

In the typical construction contract, the least understood provisions are often those that require the contractor to indemnify the owner for losses or damages arising under the contract. Indemnity provisions are a powerful risk-shifting tool that often go overlooked during contract negotiations. These provisions are complicated by the fact that even minor word changes can have a dramatic effect on the obligation assumed by the contractor. By examining a relatively simple indemnity provision like the one below, involved parties can identify what each part of the provision means and the risk assumed under the provision. 

Breaking Down the Language of Indemnity

To the fullest extent permitted by law the Contractor shall indemnify, defend and hold harmless the Owner, Architect, Architect’s consultants and agents and employees of any of them from and against any claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work whether caused in whole or in part by the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable. 

Starting with the opening clause, notice that the provision is applicable “to the fullest extent permitted by law.” This language is relatively innocuous, and is generally included to save the provision from being thrown out if it is unenforceable. This typically happens because a jurisdiction’s anti-indemnity statute places a limit on the extent that one party may agree to indemnify another. Often, this limitation will prohibit one party from indemnifying another party for the first party’s sole negligence. The language will tell the court to enforce the provision to the fullest extent the law allows, rather than throwing it out. 

Who Is Protected & What It Really Means

Moving on to the next clause, the contractor is required to “indemnify, defend and hold harmless” the “owner, architect, architect’s consultants and agents and employees of any of them.” First, consider what it means to indemnify, defend and hold someone harmless. Indemnify means that you will compensate someone for a loss. 

Defend is somewhat self-explanatory, but, as used here, is a somewhat nuanced term. In general, it means that if one of the indemnified parties is sued, you (the indemnifying party) will provide a legal defense for the claim by retaining attorneys and defending the claim in court or by another dispute resolution procedure. It can be argued that, without the word “defend,” you do not have an obligation to provide for the defense of the claim. However, some jurisdictions will hold that a duty to defend is implied by the indemnity obligation or a defense may be required by statute. 

“Hold harmless” is a similar term to indemnify and means to relieve someone from liability for a loss. Essentially, what all of this means is that the party with the indemnity obligation will assume full responsibility for some loss or damage, even before an adjudication of fault has been made. You might then ask to whom you owe this obligation. 

Under the provision above, you owe this obligation to “the owner, architect, architect’s consultants and agents and employees of any of them.” For example, if a pedestrian walking by the jobsite tripped and fell on a piece of construction debris, he or she might sue the owner. The owner would then ask the contractor, under the provision above, to indemnify, defend and hold it harmless. 

When Liability Attaches & How Broad It Can Be

The contractor’s obligation to indemnify the owner usually is not the problem; the contractor has a contract with the owner, after all. The architect is also identifiable and a likely party to be sued in the event an injury occurs on the jobsite. However, the architect’s consultants and the agents of any of these parties can make it very difficult for the contractor to determine just who it is obligated to indemnify. It may be necessary, then, to place some limitations on to whom the contractor owes this obligation. Having determined the obligation under this provision and to whom it is owed, the question then becomes: when does the obligation arise? 

Under the provision above, it arises when there are”any claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the work.” While this language is broad, the problem doesn’t arise with the”any claims, damages, losses and expenses, including but not limited to attorneys’ fees” language, although perhaps attorneys’ fees should be reasonable. This language clarifies that the responsibility to indemnify and hold harmless really does mean that the indemnified party will be made whole. 

The language is broad because it applies to any claims”arising out of or resulting from performance of the work.” This language opens the door for any number of claims because it does not require a causal link to the contractor’s negligence or its operations at the site. What if the project violates a third party’s air rights or infringes on an adjacent property owner’s rights in some way? These claims may be completely out of the contractor’s control, but could become an obligation that the contractor is responsible for under the indemnity provision. 

Furthermore, indemnity provisions are generally intended to protect the indemnified parties from third party claims, for example, claims by individuals or entities other than the indemnified parties. By stating that the provision is applicable to “any claims,” the provision could arguably apply to claims the indemnified party has against the contractor. As just one example, this could make the contractor liable to the owner for attorney’s fees it would not be responsible for under the owner’s typical contractual remedies. 

The last section of the provision, “whether caused in whole or in part by the contractor, a subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable,” goes even further to illustrate the extent of the indemnity obligation. The three words “or in part” add a wrinkle to the provision that has the potential of making the contractor liable to the owner for far more than its share of the damage. Typically, this language would mean that if the contractor caused the loss in any way, even if the loss is mostly or entirely the owner’s fault, the contractor is still responsible to indemnify the owner for the entirety of the loss. 

Note that your state may have enacted an anti-indemnity statute that may nullify a contractual obligation to indemnify another party for the other party’s negligence. 

As this example illustrates, indemnity provisions can pack a lot of liability into very few words, and the addition or omission of a few words can dramatically change the provision’s impact. As such, it is vital for contractors to always review an indemnity provision with their legal and insurance counsel, who can advise them on what the provision means, whether it violates any applicable statutes and whether they have adequate insurance in place to cover the obligation.