Drafter Beware – Indemnification Clauses Are Not Always Enforceable

by | Mar 31, 2010 | Contracts, Defective Work, Litigation & Arbitration

A standard clause in many construction related contracts often requires one of the parties to indemnify and hold the other harmless. This means that if something goes wrong and there is a claim or a lawsuit, one of the parties to the contract will need to be responsible – even if the claim or lawsuit is made against the other party to the contract! Persons who draft such contracts should be forewarned though that there may be statutory requirements that could render the clause void and unenforceable absent certain restrictive language.

For example, one statute in Florida invalidates any indemnification clause unless the contract contains a monetary limitation that “bears a reasonable commercial relationship” to the contract and “is part of the project specifications or bid documents, if any.” If these monetary limitations are not met, the indemnification clause will be useless and have no legal effect.

The statute also holds that the indemnification may not indemnify for acts, omissions or defaults of anybody other than the indemnitor (the one providing the benefit), its contractors, subcontracts and agents or the indemnitee (the one receiving the benefit), its directors, officers, agents or employees. As to contract language that indemnifies for acts, omissions or defaults of the person actually benefiting from the clause, such clauses may not indemnify for their own gross negligence or intentionally wrongful acts.

When are Indemnification Clauses Permitted

Regarding construction contracts with public agencies, indemnification clauses are permitted only to indemnify a party from wrongful acts of the indemnifying party in performance of the contract (as opposed to wrongful acts of other persons). Otherwise, such indemnification clauses are deemed void as against public policy.

To some extent, the cases that interpret the statute serve to limit its scope. These cases generally rule that either the person seeking indemnification did not fall within the class of those types of parties covered by the statute, or that the type of contract under which a party seeks indemnification was not covered under the statute. In each of these cases, the indemnification language in the contract at issue did not contain the required restrictive language.

Indemnification Clauses Are Not Always Enforceable

When an individual plaintiff was injured due to an alleged elevator malfunction and sued the owner who in turn sued an insurance company for indemnification, the court ruled that the statute restricting application of indemnification clauses did not apply because the contract at issue was a service contract, as opposed to a construction-related contract.

In another case, the court held that when an engineering firm was a third party beneficiary (i.e., receiving a benefit in a contract between two other parties) it could sue for indemnification even if the contract did not otherwise comply with statutory requirements. The third-party beneficiary was not bound by the limitations in the statute.

A third case held that the statute would not apply if the party seeking indemnification was not looking to be indemnified for its own active negligence. These interpretations reinforce that parties to construction contracts must be careful to comply when seeking indemnification for another’s wrongdoing. A contractor must have clauses it can enforce, and be sure that all statutory requirements are met. The indemnification must contain a monetary limitation that bears a reasonable commercial relationship to the contract.

Applicable statutes contain limitations as to the types of parties, acts, and omissions that may be subject to indemnification clauses. For example, a statute that has undergone several revisions over the years may contain language that is confusing at first glance.

Always take care to review such clauses with an attorney knowledgeable in this area of the law. Otherwise, a contractor may suffer a painful lesson when faced with claims or litigation for which it thought it was protected under an indemnification clause.

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