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Indemnification: Addressing the Contract Language Details

By:  J. Kent Holland, Jr.

Indemnification clauses in contracts are described by some courts as being Type I, Type II or Type III.  Others categorize the clauses as “Broad Form,” “Intermediate Form” and “Narrow Form” as explained in this paper that was presented by Kent Holland at the last American Bar Association (ABA) Forum on the Construction Industry Conference that was held in Scottsdale, AZ in the Autumn of 2006.  These different designations are both informative but they don’t necessarily track with each other and it is important to review actual court opinions to understand the significance of the categories.  For a copy of the complete 27 page paper, you may download it as a pdf file from the ConstructionRisk.com website.

A recent decision by the Court of Appeal of the State of California in the case of McCrary Construction Company v. Metal Deck Specialists, Inc. McCrary Construction Co. v. Metal Deck Specialists, Inc., 133 Cal. App. 4th 1528 (2005) is quite helpful in understanding some of the more practical aspects of indemnification provisions and how the language may affect the outcome of litigation concerning indemnification obligations.

McCrary describes the different types of indemnification provisions.  Type I indemnity is described by the court as providing “expressly and unequivocally that the Indemnitor is to indemnify the Indemnitee for, among other things, the negligence of the Indemnitee, and the Indemnitee is indemnified whether its liability arises from its sole or concurrent negligence.”  (McCrary Construction, quoting MacDonald & Kruse, Inc. v. San Jose Steel Co. (1972) 29 Cal.App.3d 413.)  The court calls the next level indemnity “Type II indemnity,” which it describes as being where “the Indemnitee would be indemnified for his or her own passive negligence but not for active negligence.”  Typical examples of such Type II clauses, says the court,  include those that indemnify the Indemnitee for the Indemnitee’s liability “howsoever same may be caused” or “regardless of responsibility for negligence” or “which might arise in connection with the agreed work” or “caused by or happening in connection with the equipment or the condition, maintenance, possession, operation or use thereof.”  (McCrary Construction, quoting MacDonald & Kruse, at p. 419.)

Finally, Type III indemnity “is that which provides that the Indemnitor is to indemnify the Indemnitee for the Indemnitee’s liabilities caused by the Indemnitor, but which does not provide that the Indemnitor is to indemnify the Indemnitee for the Indemnitee’s liabilities that were caused other than by the Indemnitor.” (McCrary Construction, quoting MacDonald & Kruse, at p. 420.) An example suggested by the Court of a Type III clause is a promise to hold Indemnitee harmless “from any … liability … in any way caused by [Indemnitor].”

The McCrary court also quoted from a California Supreme Court in the case of  Rossmoor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622 (1975), for the proposition that “If an indemnity clause does not address itself to the issue of an indemnitee’s negligence, it is referred to as a ‘general’ indemnity clause. [citations omitted].  While such clauses may be construed to provide indemnity for a loss resulting in part from an indemnitee’s passive negligence, they will not be interpreted to provide indemnity if an indemnitee has been actively negligent.”  The court further stated that provisions purporting to hold an owner harmless “in any suit at law” or “from all claims for damages to persons” or “from any cause whatsoever,” without expressly mentioning an indemnitee’s negligence are deemed to be “general” clauses.

These examples of general indemnity clauses described by the Rossmoor court included provisions of what were classified as type II and type III clauses.  Thus, following the Rossmoor decision, the McCrary court states that “an indemnity provision that does not refer to the issue of the indemnitee’s negligence will be considered to be a general indemnity clause under which the indemnitee is not entitled to indemnity for its active negligence, unless the circumstances of the case and language of the contract evince a different intent by the parties.”

Turning to the facts of this particular case, the indemnity provision in Metal Deck’s subcontract with McCrary provided:

Subcontractor agrees to indemnify Contractor against, and save him harmless from, any and all claims, suits or liability for injuries to property, injuries to persons, including death, and from any other claims, suits or liability on account of, or related to, any act or omission, or alleged act or omission of the Subcontractor, or any of his officers, agents, employees or servants.  Subcontractor shall be liable to Contractor for all expenses, including court costs and attorney’s fees incurred by Contractor in connection with any such claims, suits or liability, and/or in connection with any claim by Contractor against Subcontractor arising out of the provisions of this article.

A laborer on the project fell through a hole in the roof at the construction site.  Metal deck was responsible for having cut the hole.  Metal Deck left the hole uncovered when it left the work site and an employee of another subcontractor covered the hole at the request of the prime contractor, McCrary.  In covering the hole with plywood, this other subcontractor failed to secure the plywood.

The trial court found that Metal Deck was negligent in not covering the hole and apportioned part of the damages to Metal Deck and part of the damages to McCrary for its action of assuming responsibility for covering the hole.   Metal Deck argued that the Prime was not entitled to indemnity under the agreement because the Prime was actively negligent with respect to the accident.  The trial court rejected the argument because the indemnity clause didn’t state that the Prime’s active negligence would have any effect on the Metal Deck’s indemnity obligations.   The court found the Prime’s conduct didn’t preclude indemnification because “indemnity should be afforded under any circumstances where to do so furthers the manifest intent of the parties to the contract and where the loss sustained would not have occurred without the indemnitor’s  negligence.” McCrary, quoting Morton Thiokol, Inc. v. Metal Building Alteration Co., (1987) 193 Cal.Appl.3d 1025, 1029.   The court awarded McCrary judgment against Metal Deck in the amount of $688,832.

On appeal, Metal Deck argued that it owed no indemnity to the Prime under the parties’ contract for several reasons.  First, it argued that the issue should be determined in accordance with principles of comparative negligence and second, it argued that even under an all-or-nothing approach to indemnity, the Prime should receive nothing because the Prime had been actively negligent.    The appellate court agreed with Metal Deck and held that that “The language of the indemnity clause did not purport to require indemnity from Metal Deck for this [negligent] conduct by McCrary, and there is nothing otherwise to suggest that the intent of the parties was to provide indemnity under these circumstances.  Accordingly, we find no reason to depart from the general rule that an actively negligent Indemnitee cannot recover under a general indemnity contract.”

Applying these principles to the application of the indemnity provision in the contract between Metal Deck and the prime contractor, McCrary, the court stated that the Prime would not be entitled to indemnity at all because the indemnity provision is Type III indemnity calling for indemnity for liabilities “on account of, or related to, any act or omission” of the subcontractor.  Since the clause did not address itself to the issue of the Indemnitee’s negligence, it is a “general” indemnity clause, and as explained by the court could not be interpreted to provide indemnity if an Indemnitee has been actively negligent.

The appellate court acknowledged that the trial court would have the discretion to permit indemnification in some cases of active negligence by the Indemnitee, but it found that in this particular case, the intent of the parties did not contemplate indemnification where, as here, the actions of the prime contractor were not only actively negligent, but where those actions also directly led to the condition of the roof.

This case demonstrates that the decision on how a court will apply the indemnification provisions of a contract ultimately comes down to a determination of the intent of the parties, as evidenced from the language of the contract.   Clear and concise language in the indemnification clause of a contract should expressly state the parties’ intent with such clarity that it is unnecessary to argue in court over the meaning and applicability of the clause.

The next section of this paper presents examples of indemnification clauses found in various contracts and explains issues and disputes that might arise in interpreting and applying the clauses.  To read this section, please go to the pdf version of this paper that you will find BY CLICKING HERE.  http://www.constructionrisk.com/newsletter/pdfPapers/ABAIndemnificationPaper.pdf.

To review a pdf set of the the PowerPoint slides that were presented with this paper at the ABA Scottsdale conference, click HERE: http://www.constructionrisk.com/newsletter/pdfPapers/ABA Indemnification PwrPoint.pdf.

About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice.  He is principal of ConstructionRisk, LLC, providing construction risk management services including change order and claim preparation, analysis and defense, contract preparation, review and negotiation, insurance consulting and risk management, and other services.  Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 9, No. 2.  All articles published in this newsletter are available at www.ConstructionRisk.com.  This article is the first section of a 27 page paper written and presented by Kent Holland at the last American Bar Association (ABA) Forum on the Construction Industry Conference that was held in Scottsdale , AZ.