I’m back after a welcome change of offices from a Regus location to a separate and more customer-friendly local shared office space location. I thought I’d jump back into posting with a series of construction contract-related posts, the first of which relates to indemnification clauses.
An indemnification clause in a contract obligates one party (the Indemnitor) to take on liability (read pay for) any damages to another party (the Indemnitee) under certain circumstances. In a construction context, this type of arrangement can arise in a bonding context with a general indemnity obligation to the surety among other contexts outside of the four corners of any prime or subcontract. I will not be discussing those other contexts and will focus on the typical indemnity clause found in most if not all, construction contracts. These clauses most often state that the “downstream” party is to indemnify all of the upstream parties for any and all damages incurred by the indemnitees due to any action of the downstream party, its employees, subcontractors, sub-subcontractors, etc. The clauses are often not limited in scope and generally include attorney fee provisions and generally require indemnity for breaches of contract by their terms.
Because contract terms are key, the Virginia courts will enforce these clauses as written in most circumstances. The one major exception to this general rule is that the Virginia General Assembly has outlawed clauses such as this that require the indemnitor to indemnify the indemnitees for their own negligence or fault. For these reasons, along with the possibility of being forced to indemnify for uninsurable losses, I recommend the following limitations being made to any indemnification clause governing your obligation to indemnify (whether you are a General Contractor or Subcontractor).
- Be sure to attempt to remove any language requiring you to “defend” the indemnitees. While arguably you should be required to pay for damages that you caused to the indemnitees, being required to defend a claim that may or may not be valid is an upfront cost that you should not have to pay, particularly where the issue may not have been caused by you. A fallback is to be sure that you pick your attorney to defend if the upstream party won’t remove this “defend” language.
- Try and limit the indemnification to insurable losses like property damage or personal injury. Remember that you will be liable for a breach of contract regardless of the language of the indemnification provision.
- Assuming the contract has a separate attorney fees provision, you should try and remove the attorney fee provision from this clause. In my experience, the addition of such a fee provision in the indemnification provision is a back door for the upstream party to get their fees regardless of fault.
- If possible, limit your exposure to indemnify for the actions of those parties that you can “control” such as your direct subcontractors and employees. An easy way to do this is simply to change the long list of those for whom you are responsible to those “for whose actions you may be held liable.”
- Try and make any liability proportional to your fault in any damages. On most construction projects, any issue will have multiple causes and you should only indemnify for your portion of the fault, if any.
These are just some of the basics to be sure that where an indemnification clause exists in your construction contract (meaning in all of them), you are only indemnifying for your fault and, preferably, for insurable losses. There are always nuances to these and other clauses in construction contracts so be sure to consult with an experienced Virginia construction attorney when evaluating your risk.
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