Download Legal: Why Your Contract Should Contain an Indemnification Clause

Legal
Why Your Contract Should Contain an
Indemnification Clause
by Bryant H. Byrnes
S
ay a GC signs a contract to build a fence for a
Indemnification is necessary because in today’s world
homeowner. After the job is done, the homeowner
people don’t restrict themselves to suing the responsible
hits the fence with his car but does not repair the dam-
party — they sue anyone who could possibly pay.
age. A couple of weeks later the fence falls on a neigh-
The attorney for the neighbor who was injured by the
bor who is walking down the sidewalk. Who is liable for
falling fence will tell him to sue not only the home-
the neighbor’s injury?
owner but also the contractor, the sub who painted the
Most people would say the homeowner is liable —
fence, and maybe even the lumberyard that supplied
but that doesn’t mean the contractor can’t be drawn
material for it. That way, if the homeowner can’t pay or
into an expensive legal battle. If he built the fence prop-
the court says he is not liable, those other people may
erly, his level of exposure will depend on whether the
be able to pay.
construction contract contains an indemnity clause
and what the clause says.
Owner Indemnifies Contractor
So how might an indemnification clause help the con-
What Is Indemnification?
tractor who is being sued for something caused by the
An indemnification clause (also called a hold-harmless
negligence of the homeowner?
clause) allocates risk between the parties to a contract.
The contracts I prepare for clients often contain the
Its purpose is to clearly state which party is responsible
following provision: “Owner shall defend, indemnify,
for which risk. If one party (the indemnitor) causes a
and hold harmless the Contractor, and its subcontrac-
problem and another party (the indemnitee) gets
tors, from and against any and all claims, demands,
drawn into it, the first party agrees to be responsible for
causes of action, damages, liabilities, losses, and
the problem on behalf of both.
expenses arising from the project and/or the contract
In construction contracts, the contractor typically
indemnifies the customer for the contractor’s defective
to the extent caused by the fault of Owner or its consultants, design professionals, or agents.”
work. In subcontracts, it is common for the subcon-
If the contractor who built the fence has this provision
tractor to indemnify the contractor for the subcontrac-
in the contract and is named in a lawsuit by the injured
tor’s defective work. Contracts can also be written so
neighbor, he can “tender” the defense of the lawsuit to
that the customer indemnifies the contractor for prob-
the homeowner. The homeowner (or his insurer) must
lems caused by the customer.
then handle the lawsuit on behalf of both, pay for the
Dan Drabek
JUNE 2007 I JLC I 1
Legal
l Indemnification
er, but not any engineering or design
details, the terms of your insurance pol-
Tendering a defense puts the indemn-
professional, consultant, or other agent
icy could be voided, and when trouble
itor (in this case the homeowner) on
of Owner, from and against all liability to
comes you’ll be on your own. So work
notice that he is contractually obligated
any third party for bodily injury, death, or
with a good insurance agent who spe-
to pay the attorney fees and any dam-
tangible property damage caused by the
cializes in construction; get him to
ages that the indemnitee (in this case the
negligent acts or omissions of the
review the indemnification parts of your
contractor) is forced to pay as a result of
Contractor.”
contract documents to make sure they
attorney, and pay all damages.
the lawsuit.
This clause shields the homeowner
comply with the terms of the policy.
from being sued for problems caused by
Sub Indemnifies Contractor
the negligence of the contractor. It spe-
In Every Single Contract
A second example involves a subcon-
cifically excludes problems that result
Every construction contract should con-
tract between a general contractor and a
from faulty design work by the owner’s
tain provisions for indemnification. If
roofing subcontractor. The sub makes
architect or engineer.
indemnification is not addressed and
a mistake installing the roof, the roof
someone decides to sue, innocent par-
leaks, and the owner sues the roofing
ties may be dragged into a fight they
sub and the general contractor.
Who pays the legal fees and any damages that result from this lawsuit? The
subcontractor does, if the subcontract
contains an indemnity clause in which
the sub agrees to indemnify the contractor. In that case the contractor makes a
tender to the sub, and the sub is obligated
to handle the lawsuit on behalf of both
and pay all damages and attorney fees.
Here’s an example of such an indemnity clause: “Subcontractor shall defend,
In today’s world,
shouldn’t be part of. Even if they avoid
people don’t restrict
legal fees. But if these innocent parties
themselves to suing
paying damages, they may still face large
have been indemnified, then the person
who indemnified them will have to pay
the responsible
the lawyer and judgment or settlement.
party — they sue
tual agreement, many states will “imply”
anyone who could
possibly pay.
indemnify, and hold harmless the Con-
In the absence of an express contracindemnity — meaning that it’s a statutory right parties can sue to enforce.
However, it’s still better to have an
indemnification provision in the contract because an explicit contractual
tractor from and against any and all
requirement is usually easier to enforce
claims, demands, causes of action, dam-
Insurance Issues
ages, liabilities, losses, and expenses aris-
If you are sued or someone who you
ing from the project and/or the contract
indemnified tenders his defense to you
Consult With an Attorney
to the extent caused by the fault of Sub-
because he is being sued, your insur-
Indemnification is a slippery concept,
contractor or its consultants, design pro-
ance company may pay the legal fees
and not every attorney understands how
fessionals or agents.”
and any damages levied. But don’t
it works in construction contracts. But
than a right implied by statute.
assume that it will. Your insurance policy
legal fees being what they are, you can-
Contractor Indemnifies
Homeowner
may contain fine print requiring you to
not afford not to address indemnifica-
obtain certain assurances from the other
tion in your contracts.
Sometimes innocent homeowners get
people involved in the project.
It pays to get this right, which is why I
drawn into lawsuits that result from
Your insurance company may expect
strongly advise contractors to have their
something that happened on their prop-
you to get your subs and clients to carry
contracts reviewed by a lawyer who spe-
erty during construction — something
a certain type and amount of insurance.
cializes in construction law and is famil-
they may have had nothing to do with. To
It may also expect your contract to con-
iar with the laws in his particular state.
protect the homeowner, many contracts
tain certain indemnification provisions
include the following language (or some-
whereby the homeowner and subs
Bryant H. Byrnes is an attorney in
thing similar): “Contractor shall defend,
indemnify you.
Oakland, Calif., who specializes in con-
indemnify, and hold harmless the Own-
If you neglect to take care of these
struction law.
JUNE 2007 I JLC I 2