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An indemnity clause in an easement agreement required the indemnitor (contractor) to pay the Indemnitees (adjoining property owner) first party attorneys fees that were incurred in suing the contractor for property damages. This was a “Crane Swing, Tie Back and Swing Scaffold Easement Agreement” permitting the contractor an easement during construction for the property adjoining a high rise tower it was constructing. During excavation, certain damages occurred to the foundation and structure of the neighboring buildings. Pursuant to the indemnity article, the contractor was obligated to defend and indemnify (including attorneys’ fees) the property owner from “all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs expenses, fees, and liabilities … arising out of … breach of any terms of this Agreement.”

Although indemnity is generally for third party claims and the losses resulting from such third party claims, the court found the clause in this instance also applied to first party claims for the owner’s own losses and damages, and this included the right of the property owner to recover its attorneys fees.

Lesson Learned: Decisions like this one demonstrate why it is important to carefully craft indemnification clauses so that they apply only to third party claims and the losses arising out of those claims. In its final analysis, the court parsed the actual words and phrases and punctuation of the indemnification clause to find that although the words “defend and hold harmless” refer to third-party claims, this did not serve as a limitation on the breadth of what was covered by the promise also included in the clause, i.e., “Indemnification.”

Pay close attention to this! The court explains, “Each item in a string of items, separated by the disjunctive ‘or,’ is given independent meaning.” Therefore, Article 19’s reference ‘defend and hold harmless’ language does not limit ‘indemnity’ to third party claims.”

Read my more extensive comment in the full article, below, and consider the example clause in which I set forth one approach I use for clarifying that the only damages that are being indemnified are those arising out of third party claims.

Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, 454 Md. 475, 164 A. 3d 978, (Maryland 2017).

The full text of the indemnity article provided the following:

Indemnity. Bainbridge hereby indemnifies, and agrees to defend and hold harmless White Flint … from any and all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs, expenses, fees, and liabilities (including reasonable attorney’s fees, disbursements, and litigation costs) arising from or in connection with Bainbridge’s breach of any terms of this Agreement or injuries to persons or property resulting from the Work, or the activities of Bainbridge or its employees, agents, contractors, or affiliates conducted on or about the White Flint Property, including without limitation, for any rent loss directly attributable to any damage to the White Flint Property caused by the construction of the Project, however Bainbridge shall not be liable for matters resulting from the negligence or intentional misconduct of White Flint, its agents, employees, or contractors. The indemnification obligations set forth herein shall survive the termination of this Agreement indefinitely.”

During construction of the apartment tower next door, the neighboring White Flint property owner (Indemnitee) detected damage and notified Bainbridge (the Construction Manager) who in turn notified its general contractor (Turner). Turner stopped the excavation and braced the White Flint’s buildings to prevent further damage.

White Flint declared Bainbridge to be in breach of its contract, and then terminated the contractor and filed suit for declaratory judgment to enforce the indemnification obligations under the contract, which it claimed survived the contract termination. The trial judge granted summary judgment finding that Bainbridge’s obligations survived the termination; and that it materially breached the agreement, it owed continuing duties to White Flint, and must pay White Flint’s attorneys fees.

With regard to the attorneys fees, it was not necessary for the indemnity provision to expressly state that it applied to “first party claims,” in order for the court to find that it contained a first-party attorneys fee shifting to the contractor. Instead, the court looked at the overall “language and structure” of the article to conclude that the damages, losses and attorneys fees were not limited to those arising out of third party claims. “The inclusion of the words ‘attorneys fees’ together with a reference to damages ‘arising out of … breach’ constituted an express provision authorizing first-party fee shifting….” (Court of Special Appeals decision).

The Court of Appeals affirmed this decision and further explained that the indemnification article ties payment of attorneys fees to an action for “breach” of the contract; and “it confirms the intent of the parties to cover first-party counsel fees by referring to ‘rent loss.’ A first party loss arising from a breach of the Agreement.”

Lesson Learned: In its final analysis, the court parsed the actual words and phrases and punctuation of the indemnification clause to find that although the words “defend and hold harmless” refer to third-party claims, this did not serve as a limitation on the breadth of what was covered by the promise also included in the clause, i.e., “Indemnification.” Pay close attention to this! The court explains, “Each item in a string of items, separated by the disjunctive ‘or,’ is given independent meaning.” Therefore, Article 19’s reference ‘defend and hold harmless’ language does not limit ‘indemnity’ to third party claims.”

What to do to clarify indemnity clauses so they apply only to damages from third party claims. I have been revising the indemnity articles to expressly state that the obligations only apply to “third party tort claims.” The typical clause mixes together terms like “claim,” “action,” and “proceeding” that require a defense with terms such as “damages,” “losses,” “judgments,” and “expenses,” that logically required only indemnification. In order to make clear that the indemnity will not be for first-party losses such as economic losses that the Indemnitte has in the absence of a third party claim against it, consider revising the order of the words in the article by moving all words requiring a duty to defend to the beginning of the phrase, followed then by words that require only indemnification. Then be sure to state that the only damages to be indemnified are those that arise out of third party claims.

The example clause below is from a contract I reviewed and revised. As originally written, it didn’t limit the indemnity to third party claims. Please note that I am not suggesting this example as being ideal. I just worked with the language that had been provided in the owner’s contract form and attempted to make the fewest revisions possible to that language so that it could be acceptable.

Note that in this clause we did not delete the duty to defend. But we limited it to general liability claims only. We did this by adding a phrase to the end stating, “The duty to defend shall not apply to professional liability claims.”

Indemnity Right.  Consultant shall indemnify, hold harmless and defend (with counsel acceptable to Owner), Owner, its successors, assigns and affiliates, and its respective officers, directors, controlling persons (if any), employees, and shareholders (the “Owner Indemnitees”) from, against and in respect of any and all third-party tort claims, suits, actions, and proceedings, and the judgments, damages, settlements, liabilities, damages, and legal and other expenses (including reasonable legal fees and expenses of attorneys) arising out of such third party claims to the extent caused by the negligent acts, errors or omissions of Consultant in the performance of its services hereunder. The duty to defend shall not extend to professional liability claims.

 

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. 19, No. 10 (Nov 2017).

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