|
Home Page >
Timothy R. Hughes' Articles >
Masonry
Magazine
Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.
Masonry contracting firms often act as
subcontractors on projects. As such, you have probably faced the situation
of a general contractor insisting that you sign its standard terms and
conditions or risk losing a specific project. Standard terms and
conditions often include contractual indemnification provisions. As
demonstrated below, such provisions can actually create risk far in excess
of that anticipated by the subcontractor.
This article first examines the definition
of indemnification. The concept of indemnification immediately raises the
need to contrast "equitable" or "implied" indemnity claims from
"contractual indemnity" claims that are our current focus. After our terms
are defined, we will analyze two actual reported cases that demonstrate
why indemnification clauses can be extremely harmful to your business.
What is Indemnification?
In
layperson's terms, indemnification involves a claim to shift payments or
liability. Indemnification can arise from a multitude of factual
situations. A more formal legal definition of indemnity is a form of
restitution that involves the shifting of the entire loss from one who has
paid it to another who would be unjustly enriched at the expense of
another. The specifics depend on the facts of your project, the law of the
applicable state, and the contract you signed.
A claim for indemnification may usually be
filed before a party has actually paid or suffered the loss in question.
Thus, where a general contractor is facing a claim that potentially arises
from the fault of a subcontractor, the general contractor may raise its
indemnification claim against the subcontractor in the same lawsuit.
Equitable or Implied Indemnity
Equitable or implied indemnity involves a claim where the law implies a
right of indemnification. Such a claim is often called "equitable"
indemnification because the claim arises from the equitable considerations
of the case.
The threat of a claim for equitable or
implied indemnification is governed by the applicable state's law. While
the focus of this article is on contractual indemnification clauses, a
responsible and prudent subcontractor needs to know and understand the
applicable state law regarding implied indemnification. Your contract may
provide for one scope of risk, but the applicable state law may in fact
create an entire sub-category of implied indemnification risk that needs
to be considered in pricing your work.
Contractual Indemnification
In
contrast to indemnification implied by law, contractual indemnification
involves indemnity based on the agreement of the parties. These terms
typically involve a party agreeing to indemnify, defend, and hold a party
harmless against a list of possible harms. The scope of the indemnity is
triggered based upon a pre-determined threshold. The definition of the
scope of harms and the style of the threshold define exactly how much risk
the subcontractor assumes.
Again in layperson's terms, a subcontractor
can easily bite off more than they can chew in terms of indemnification
risk. The examples below are actual reported cases where contractors faced
extremely broad liability as a result of the contract they signed.
Actual Cases Involving Contractual
Indemnification
The "Area" of the Work is Enough to Trigger
Indemnification
One
recent
Pennsylvania case shows how broad
indemnification provisions can be very dangerous for a subcontractor. In
the case of
Bernotas v. Super Fresh Food Markets, Inc.,
816 A.2d 225 (Pa. Super. 2002), the appellate court found a subcontractor
liable for contractual indemnification simply based on the location where
an accident occurred.
A patron at a grocery store slipped and fell
while construction work was being performed at the store. She sued the
store, the general contractor, and an electrical subcontractor. She
claimed that her fall was caused by a hole in the flooring and a
protruding pipe while she was distracted by a display case.
The store claimed indemnification from the
general contractor. The general contractor had signed a contract including
indemnification against all damages for personal injuries "caused by ...
or occurring in connection with the work." The contract excluded
indemnification for liability caused solely by the store.
The general contractor in turn claimed
indemnification from the electrical subcontractor. The subcontract
included a provision by which the subcontractor agreed to be bound by all
terms of the owner/general contractor agreement. The subcontract further
contained an indemnification provision that required the subcontractor to
indemnify the general contractor against damages arising at the location
of the work.
The appellate court in this case found that
the store was not entirely negligent, and thus was entitled to
indemnification from the general contractor. The appellate court further
found that both the incorporated indemnification provision and the
subcontract indemnification provision applied to the subcontractor. The
appellate court found that the indemnification clause was broad in nature
and not limited to the actual work of the subcontractor, but rather to the
location of the work. Thus, even though the demolition (and thus
the hole) was created by the general contractor, and the pipe referred to
above was not being worked on by the electrical subcontractor, the
subcontractor was nevertheless liable for indemnification. The fact that
the injury occurred in "the precise area" where the work was being
performed was enough to trigger liability.
No Proof of Negligence Required to Trigger
Indemnification
In
another similar case, an appellate court in
New York found a subcontractor liable for
contractual indemnification without any proof that the subcontractor was
actually negligent.
Keena v. Gucci Shops,
Inc., 300 A.2d 82, 751 N.Y.S.2d 188
(Sup. Ct. App. Div., 2002). A worker filed suit against a site owner for
personal injuries suffered when a plank he was walking on gave way. The
site owner sued the subcontractor for contractual indemnification.
The appellate court found that the
subcontractor had agreed to indemnify the owner against all claims
"arising in whole or in part" from the subcontractor's "acts, omissions,
breach or default" in connection with "any work" performed under the
subcontract. The site owner was found
liable to the worker based on
New York's labor laws which require protection of workers. The
appellate court further found that the contractual indemnification did not
require proof of negligence for the site owner to recover its damages from
the subcontractor.
Conclusion
As a
masonry subcontractor, you are likely aware that you are responsible for
your work. You are also likely aware that you may face liability for not
only repair costs or delay damages associated with your work, but also
personal injury or property damages that flow from your company's or
employee's negligence. The reality is that contractual indemnification
provisions can actually expand your potential risk far beyond these
original reasonable assumptions.
The number of cases dealing with specific
contractual indemnification clauses and their resulting impact are legion.
The two cases, and hosts of others, demonstrate that contractual
indemnification provisions can create liability far beyond even a
subcontractor's actual negligence. Some states even permit contractual
indemnity to apply and operate to protect a party against their own
negligence. Thus, in the right (or wrong as the case may be) state, and
with the specific required language, your company may actually be on the
hook to indemnify an owner or a general contractor for damages and
problems which flow entirely from that party's negligence or
responsibility. Further, a subcontractor needs to be cognizant of not only
their subcontract, but also the owner/general contractor agreement when
those terms are incorporated by reference into the subcontract.
These potential risks mandate that a prudent
subcontractor understand the indemnification laws applicable to their
specific situation. The risks justify a close analysis of any proposed
indemnification clause contained in each contract. Finally, the potential
threat of these clauses actually converts a typical general contractor's
statement of "take it or leave it" during contract negotiations into an
important question that must be closely considered to be answered
properly.
Timothy R. Hughes, Esq.,
is the principal of the Northern Virginia law firm of Hughes & Associates,
P.L.L.C. He specializes in construction litigation, corporate and business
related representation, and complex civil litigation. He may be reached at
tim@hughesnassociates.com.
http://www.masonrymagazine.com/6-03/legal.html
Printed with permission
from
Masonry Magazine June 2003
Top of page
Timothy R. Hughes' Articles | Home Page |
Contact Us
|
