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Kent Holland
ConstructionRisk, LLC

On a condominium project, where an indemnification clause on its face made a subcontractor responsible for indemnifying the prime contractor for damages caused “in whole or in part” by the subcontractor, it was held that the state’s anti-indemnity statute made the clause unenforceable. The court declined to apply the saving language that introduced the contract clause with, “To the fullest extent permitted by law,” to “blue line” the clause to pare it down to what would have been allowed under state law. Only indemnity language requiring the sub to indemnify others for property damage and bodily injury claims to the extent caused by the indemnitor, would be enforceable under the state law. Here, since the prime contractor’s pleadings asserted negligence on the part of multiple subcontractors (and there was even evidence that the prime itself was partly at fault), the court held there was no subcontractor duty to indemnify the prime.

Lesson learned: Write indemnity clauses to clearly state they are only for damages to the extent arising out of third party claims for bodily injury and property damage, AND state that the indemnity only applies to damages “TO THE EXTENT CAUSED” by the indemnitor.” New Bern Riverfront Development v. Weaver Cooke Construction, LLC, 515 U.S. Bankruptcy Court, Raleigh Division (2015).

The court’s analysis is governed by North Carolina state law, and in particular N.C. Gen.Stat. § 22B–1, which provides:

“Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify and hold harmless the promisee, the promisee’s independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee’s independent contractors, agents, employees or indemnitees against liability for damages resulting from the sole negligence of the promisor, its agents or employees.”

N.C. Gen.Stat. § 22B–1 (emphasis added).

The contractual indemnification language at issue is set out in Article 16 of Weaver Cooke’s subcontract (“the Subcontract”) with Lee Window & Door Co. (as assigned to and performed by Stock Supply), as follows:

“Article 16 Indemnification

16.1 Subcontractor shall be responsible to Contractor for the acts and omissions of Subcontractor’s employees, sub-subcontractors and their agents and employees, and other persons performing portions of Subcontractor’s Work under a contract with Subcontractor.

16.2 To the fullest extent permitted by law, Subcontractor shall indemnify and hold harmless Contractor, its agents and employees from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from Subcontractor’s performance of Subcontractor’s Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than Subcontractor’s Work itself) including loss of use resulting therefrom, if caused in whole or in part by the negligent acts or omissions of Subcontractor, a subsubcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity, which would otherwise exist as to a party or person described in this Article.”

In its motion for summary judgment, the subcontractor asked the court to dismiss the prime contractor claim against it on the basis that the indemnity clause was void and unenforceable because it required the Sub to indemnity the Prime “regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.” The clause also required the Sub to indemnify the Prime for damages caused “in part” by the Sub’s negligence. That left open the question of whether the clause ‘might require defendant to indemnify plaintiff from plaintiff’s own negligence’ [which] is deemed void.”

“It is readily apparent,” concluded the court, that the language of the indemnity article violates the state anti-indemnity statute. In response to the apparent violation of the state statute, the Prime argued that the court should apply the “self-limiting” language of the contract article that stated it was only to be applied “to the fullest extent permitted by law.” That limitation, together with the court’s ability to “blue-pencil the provision as necessary, could bring the provision into full compliance with the law, argued the Prime.

The court agreed that the “self-limiting” language can be effective in many instances, but found that it didn’t help the Prime here. This is because the court said that upon revision by the court, the Sub would be required (per state statute) to indemnify the Prime only for damages caused “wholly” buy the Sub or its agents and employees. In this particular case, the court found that there was no evidence that the Sub solely and wholly caused the Prime’s damages, and that the Prime didn’t even contend that in its pleadings which contained allegations and Counts against numerous other parties that it alleged were partly to blame for the damages.

Lessons Learned: When revising the indemnity articles of the many contracts and subcontracts that our firm reviews for clients, we apply a few rules of thumb, including:

  1. If the clause does not already limit indemnity to property damage and bodily injury claims, then amend it so that it either states that specifically, or in the alternative, state that indemnity applies only to liabilities and damages arising out of third party claims against the Indemnitees. It needs to be clear that indemnity does not apply to an indemnitor’s first party claims against the Indemnitee for economic losses or breach of contract claims that did not harm anyone other than the indemnitte.
  2. Amend language that state that the Indemnitor will indemnify the indemittee for damages “arising out or related to” the indemnitor’s performance to limit the indemnity to damages “to the extent caused by” the indemnitor.
  3. If it is a professional services contract, point two (2) above needs to be further revised to state that the indemnification is owed only for liabilities and damages arising out of third party claims to the extent caused by the “negligent” acts, errors or omissions” of the indemnitor.
  4. Always introduce the indemnity clause with language such as, “To the fullest extent permitted by law….” But don’t place too much reliance on the self-limiting language that is typically included in the indemnity clause that states it only applies “to the fullest extent permitted by law.” It might have worked to save the clause in this case but for the fact that the court found, based on the allegations and facts presented, there was just nothing left to save.

Additional comment: In an effort to get around the state statute that addressed the limitations on indemnification for third party claims arising out of bodily injury and property damage, the Prime contractor argued that separate provisions in the contract made the Sub responsible for all acts and omissions of the Sub and any of its employees. The Prime argued this was intended to require indemnification for purely economic losses and was not limited to property damage and bodily injury.

The language in question from contract article 16.1 stated, “Subcontractor shall be responsible to Contractor for the acts and omissions of Subcontractor’s employees, subcontractors and their agents and employees, and other persons performing portions of Subcontractor’s Work under a contract with Subcontractor.” In rejecting the Prime contractor’s argument, the court stated, “a party acknowledging that it is ‘responsible to’ another party, is under no stretch of that language or this court’s imagination, sufficient in and of itself to require indemnification….”

I am pleased with the final aspect of the court decision explaining that when a party accepts responsibility for the actions of those for whom it is legally responsible, it is not creating some new contractual theory of liability such as an indemnification obligation. Some clients ask me if we need to modify language, such as that found in Article 16.1 quoted above, to state that responsibility is accepted only if the party is “negligent.” I don’t believe that is necessary in the context of this article because as this holds, the article basically is merely stating that the Subcontractor is accepting the duties that would be imposed on it by common law even in the absence of contract language.

 

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 17, No. 6 (September 2015).

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