Construction Contracts - Indemnity Provision
Public Policy Limitations on Indemnity for Sole or Partial Negligence
Stephen J. Kelleher
July 7, 2014
Contractors often develop standard contracts for use on a variety of projects, tailored most often to the demands and particular needs of the owner and the project involved. Often these standard contracts include indemnification provisions that require the subcontractor to indemnify the general contractor for a variety of claims. Depending on the claims themselves and the state law that governs interpretation and enforcement of the contract, these indemnification clauses may or may not be enforceable in cases where the claims arise from the negligence, gross negligence or willful misconduct of the general contractor. In preparation for beginning a new project and reviewing subcontracts to be used on that job, it is advisable for contractors to review their standard subcontracts and seek advice as to whether the indemnity provisions therein might run into problems of enforcement in the chance of a claim involving negligence.
Some states, by statute, have prohibited indemnity clauses that seek to permit a party to the contract to be indemnified when the party is wholly or in part liable. Currently, twenty-six states bar provisions that would indemnify a contractor for its sole or partial fault. An additional seventeen states will not enforce indemnity provisions that provide for indemnity for a contractor’s sole negligence or fault.
Many states bar enforcement of indemnity provisions that would indemnify a contractor for its own sole negligence. California, for example, voids such clauses because it would “increase the risk of accidents by removing the general contractor’s incentive to undertake accident-prevention measures involving its own negligence to avoid a risk of harm to third parties.”National Union Fire Ins. Co. v. Nationwide Ins. Co., 69 Cal. App. 4th 709 (Jan. 28, 1999). In National Union Fire Insurance, an employee of a plumbing subcontractor slipped and fell during an inspection of a high-rise construction project. The subcontract contained an indemnity clause that indemnified the general contractor with the exception for losses caused solely by the contractor’s negligence. The court ruled that such a clause would run contrary to public policy because of the disincentive to take accident prevention measures even though it ruled that the general contractor was solely negligent so that the subcontractor would not have been required to indemnify the general contractor. Although there is a strong public policy for contractors to perform safely and to undertake accident-prevention measures, factors other than indemnity protection may influence a contractor’s safety policy; for instance, insurance costs, past performance ratings, and reputation.
Some states bar indemnity provisions that would allow a party to be indemnified for their own gross negligence. A contract provision was struck down by a Massachusetts court in CSX Transportation, Inc. v. Massachusetts Bay Transportation Authority, 679 F.Supp.2d 213, where a contractor sought to be indemnified for its own gross negligence. After a wrongful death suit was brought against CSX, and CSX invoked the indemnification provision, the court ruled that public policy prohibited the enforcement of the contract’s indemnity provision. Specifically, the court ruled that the public had an interest in deterring and punishing those who commit gross negligence. That is, by permitting someone who acts with gross negligence to be indemnified is considered, by courts or state legislatures, to be “let off the hook.” Only by making the grossly negligent contractor shoulder the burden of its gross negligence when it happens will contractors be deterred and/or punished for that gross negligence. While the Massachusetts court did not discuss in detail either of these public policies, deterrence against gross negligence does not necessarily require that indemnity provisions go unenforced. Deterrence of grossly negligent actions can be accomplished through market forces. If a contracting party agrees to indemnify another for acts including gross negligence, the risk of that obligation should be assessed and added to the contract price. On the other hand, the public policy of punishment cannot be served by allowing one party to indemnify against another’s gross negligence.
In the states that permit enforcement of indemnity provisions for sole or partial negligence, the states often qualify when those provisions will be enforced. Most of these states require that the contract language be clear and unequivocal. In a recent case from Nevada, Reyburn Lawn & Landscape Designers, Inc. v. Plaster Development Co., Inc., 255 P.3d 268 (Nev. 2011), a construction subcontract included an indemnity clause that required the subcontractor to indemnify the general contract for all claims except when the general contractor was found solely negligent. Although the Supreme Court of Nevada recognized the freedom of parties to contract as they see fit, it found that an indemnity provision for sole negligence requires “an express or explicit reference to the indemnitee’s own negligence.” The policy behind requiring express references to the indemnity for the indemnitee’s negligence is designed to protect the indemnifying party. These states will not enforce an ambiguous indemnity provision or one that is silent on the subject.
Navigating the enforceability of subcontract clauses on a state by state basis is no easy feat. As can be seen, states do not uniformly enforce indemnity provisions that cover a contractor’s sole or partial negligence. The policies behind the decision not to enforce such provisions are not well spelled out but generally rely upon a desire to incentivize contractors to take accident prevention measures or to deter bad conduct, such as gross negligence or misconduct. Whether or not these goals are furthered by not enforcing such provisions, contractors should take time to review their standard subcontracts and to seek guidance as to whether their standard indemnity language will be enforced by the state whose law is going to apply to disputes or claims on a given project.
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SOURCE: www.lexology.com