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Overview of Indemnity Clauses

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Overview of Indemnity Clauses Fall 2011 ATTORNEYS AT LAW www.eckertseamans.com l [email protected] Construction Law Dual shop operations require careful planning and implementation In This Issue… As construction contractors seek to replenish universally abhorred by unions, there is Page 1 their backlog in a struggling economy, many nothing improper about it when done correctly. Dual shop operations require are looking into forming separate union and However, lawful double-breasting requires careful planning & non-union companies to perform the same type careful attention to detail. Mistakes are common implementation of work in the same geographic area. This and a failure to properly establish and maintain An overview of indemnity practice is known as “double-breasting.” There a legitimate double-breasting operation can clauses are a number of advantages to the practice of prove to be extremely costly. double-breasting, so long as it is done correctly. Page 3 If the double-breasted operation is not properly Litigation history of a Double-breasting allows the contractor established, with the dual shops kept completely contractor as a factor in maximum flexibility to bid larger union projects, legally separate, the National Labor Relations public procurement while competing for non-union jobs free from Board will treat the union and non-union Page 4 collective bargaining restrictions. Although this companies as one entity and, accordingly, Be mindful of who you hire: practice of maintaining “dual shops” is continued on page 3 New GAO decision underscores potential conflict of interest problems with retaining former federal An overview of indemnity clauses agency employees When contractors and subcontractors review and “Non-Indemnifying Parties” or Page 5 construction contracts, they usually focus on the “Indemnitees” and “Indemnitors” is a clause To owners and general clauses most near and dear: (1) Price: How entitled “Indemnity.” Many contractors and contractors: Before much do I get paid?; (2) Payment: When do I subcontractors, by the time they get to that termination, review the bond get paid and is my payment dependent on the term, will either not read it or start to read it next party up the food chain getting paid (a and then stop halfway through. This is a Waivers of consequential damages “pay if paid” or “pay when paid” clause)?; and mistake, but a mistake that is only realized if an (3) Scope: What is my contractual scope of accident or claim arises. It is at that time that Page 6 work and which of the specification sections this clause can have substantial, unintended United States Supreme Court and drawings are in my scope? consequences, such as putting the company Emphatically Affirms Federal at risk for a claim when the company bears Policy Favoring Arbitration Almost always tucked near the end of the no responsibility other than the fact that the Construction Law Group News contract, replete with long run-on sentences and work related to the accident was in its scope. defined terms such as “Indemnifying Parties” continued on page 2 PITTSBURGH, PA • BOSTON, MA • CHARLESTON, WV • HARRISBURG, PA • PHILADELPHIA, PA RICHMOND, VA • SOUTHPOINTE, PA • WASHINGTON, DC • WHITE PLAINS, NY • WILMINGTON, DE An overview of indemnity clauses “ (continued) Indemnity is defined as the obligation resting on one What should a prudent contractor do? First party to make good a loss or damage another party and foremost, it should read the Indemnity has incurred. The scope of indemnity obligations clause and attempt to understand the runs the gamut from claims for personal injury and exposure and risk it would be agreeing to accept if it signs the contract. If the property damage to claims for money damages… contractor has any doubt or concerns, it should consult its counsel or, at a minimum, With that in mind, the three general Types of the indemnitee, either active or passive, its insurance broker. A competent insurance of indemnity clauses are: would bar indemnification from the broker should be experienced in indemnity indemnitor regardless of whether the clauses and should know, at a minimum, if Type 1 Indemnity Clause indemnitor may also have been a cause the risk posed by the indemnity clause is “ of the indemnitee’s liability. covered by the insurance required to be A Type 1 indemnity clause provides provided under the contract. “expressly and unequivocally” that the indemnitor will indemnify the indemnitee Once the Type of indemnity clause is determined, some principles to apply are as Here are some practical pointers for for, among other things, the “negligence follows. Avoid Type 1 clauses, if at all contractors and subcontractors to consider of the indemnitee,” and the indemnitee is possible. Type 1 clauses put your company when making that initial determination if indemnified whether its liability arises from at great risk to be responsible for damages they need assistance in analyzing the clause its active or concurrent negligence. Stated if anything occurs, even if it has no or, if they cannot negotiate the clause, more simply, one party will indemnify responsibility. Under a Type 1 clause, your whether they should even sign the contract. another party regardless of whether the party being indemnified was itself actively company could find itself indemnifying a party that caused the damage, even though Indemnity is defined as the obligation responsible for the damage. This means your company was not at fault. Type 2 resting on one party to make good a loss that the party that caused the injury is clauses are more palatable but, if at all or damage another party has incurred. potentially being indemnified by a party possible, do your best to negotiate to achieve The scope of indemnity obligations runs that had no role in the injury. a Type 3 clause. Under a Type 3 clause, if the the gamut from claims for personal injury indemnitee bears any responsibility for the and property damage to claims for money Type 2 Indemnity Clause loss, there is generally no indemnity. damages (consequential, incidental and A Type 2 clause requires the indemnitor other types of damages) from any to indemnify the indemnitee for his or her If this does not seem complicated enough, conceivable event or breach of contract. passive negligence, but not for active it is also important to know that a number negligence. Examples of Type 2 clauses of states have “anti-indemnity” statutes The various form contracts—AIA, EJCDC are: a clause providing for indemnity for which outlaw Type 1 clauses. Crafty and Consensus DOCS—all contain different the indemnitee’s liability “howsoever same attorneys will try to circumvent these indemnity clauses, and the types of may be caused” or “regardless of statutes by way of terms that attempt to clauses, and their breadth and scope vary responsibility for negligence” or “arising eliminate these statutory protections by widely depending on the craftiness of the from the use of the premises, facilities or compelling the contractor or subcontractor drafters and the perceived leverage of the services of [the indemnitee]” or “which to agree to waive them or by providing party offering the contract. might arise in connection with the agreed that another state’s laws (a state without work” or “from any and all claims for such “anti-indemnity” statutes) applies. Many courts have generally categorized damages to any person or property by Depending on the state and its “anti- indemnity clauses by one of three Types: reason of the use of said leased property.” indemnity” statute, these terms may “Type 1”; “Type 2”; and “Type 3.” In a Type 2 clause, an indemnitee will be or may not be enforceable. For purposes of this overview, this indemnified only if it was at most a passive categorization is useful in providing a cause of the damage, but will not be A final thought is to be sure that the primer to contractors and subcontractors indemnified if it was an active cause of the insurance coverage provided in the about indemnity clauses. damage. Thus, unlike a Type 1 clause, if insurance certificate corresponds with the the indemnified party did not directly cause indemnity you have agreed to provide. So there is no misunderstanding at the the damage, it will be indemnified. Many a contractor, when an accident outset, an “indemnitor” is the party that occurs, has found its carrier denying is agreeing to indemnify another party Type 3 Indemnity Clause insurance coverage, or reserving its rights and the “indemnitee” is the party that is This type of indemnity clause requires the to deny insurance coverage, because the getting the benefit of the indemnity. Also indemnitor to indemnify the indemnitee for policy did not cover an onerous indemnity “active negligence” refers to an event or the indemnitee’s liabilities caused by the clause. In the case of a catastrophic occurrence that caused the damage in indemnitor, but does not require that the accident, this can put the company at risk. which the indemnitee was directly involved indemnitor indemnify the indemnitee for or played some role. “Passive negligence” the indemnitee’s liabilities that were caused Scott D. Cessar is where the indemnitee did not play a role other than by the indemnitor. Under a Construction Law Group and/or was not a cause of the damage. Type 3 clause, any negligence on the part 2 CONSTRUCTION LAW REPORT Litigation history of a contractor as a factor in public procurement Construction projects can be fertile grounds for disputes and litigation. This raises the “ issue of whether to hire a contractor with a history of filing lawsuits. In the private sector, an owner can simply decline to hire A contractor should carefully consider whether such a contractor. However, public owners a dispute with a public owner is worth litigation, are usually obligated by competitive bidding laws to hire the “lowest responsible especially if there is a chance of more work with bidder.” Thus, their ability to bypass a the same owner.
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