Indemnity in Construction Contracts

The concept of indemnity is frequently encountered in construction contracts. It is defined in Black’s Law Dictionary as “to save harmless.” By indemnity, one party agrees to hold another person harmless for damage or loss sustained by a third party.

There are three variants of indemnifications that appear in construction contracts: limited form, intermediate form, and broad form. Under a limited form indemnity agreement, the indemnification is for losses exclusively caused by the negligence of the indemnifying party (indemnitor). Any negligence of the indemnified party (indemnitee) will bar a claim for indemnification. For example, an owner hires a roofer and obtains a limited form indemnity. If a worker is injured through the roofer’s negligence and the owner has no responsibility, the roofer holds the owner harmless from any claims.

With intermediate indemnity, the indemnitor agrees to indemnify against loss caused “in whole or in part” by indemnitor’s negligence. In this circumstance, even if the owner shares some fault, the roofer is still solely responsible for the worker’s claim.

With broad form indemnification, the indemnitor holds the indemnitee harmless from all liabilities, regardless of who is at fault. In this case, the roofer is responsible for the worker’s claims, even if the injury is caused solely by the owner’s negligence. Broad form indemnity has found disfavor in a number of jurisdictions given that an indemnitor with no fault could have significant liability. A number of states, including Ohio, have enacted anti-indemnity statutes that essentially prohibit indemnifying a party for the consequences of its own negligence. Courts in states without anti-indemnity statutes tend to strictly construe broad form indemnity clauses.

Parties need to be vigilant in reviewing boilerplate contract terms. This is almost always where indemnity clauses are placed. They can appear in purchase orders, equipment leases, and service agreements. They appear in all of the standard form construction contracts, such as the American Institute of Architects and the Consensus Docs. Particular attention should be given to the specific indemnity language to ascertain its scope. Courts have long held that indemnity provisions must be clear, specific, and unequivocal. If it is so written, and it contains a broad form indemnity that is not against public policy, it will be enforced.

In the construction industry, indemnity clauses can also be incorporated from one agreement into another through what is known as a “flow-down” clause, which causes the obligations of the contractor to flow-down to the subcontractor. If the subcontract specifically incorporates an indemnity obligation of the contractor, the subcontractor is agreeing to be bound by its terms. This could have far-reaching consequences as the subcontractor is agreeing to indemnify the contractor and perhaps others from the consequences of their negligence. For this reason, among others, subcontractors should always obtain a copy of the contractor’s prime contract with the owner prior to signing the subcontract.

Indemnity provisions are an essential risk allocation tool in contract negotiations. But their consequences can be onerous. Parties must carefully scrutinize indemnity clauses to be sure they know what risks they are bearing.