Indemnity Issues in Construction Contracts

Siegfried Rivera
May 25, 2010

Construction contracts in Florida frequently have indemnity clauses, which are aimed at shifting liability to the wrongdoing party. In the construction setting, a job-site injury could involve a number of potential defendants, including the contractor, subcontractors, engineer, architect, owner, laborers and suppliers. Construction law attorneys at our firm work closely with our clients on indemnity claims by examining the acts or omissions of the parties and the extent to which they gave rise to liability.

Under Florida’s common law, indemnification is allowed only where the party against whom indemnity is sought bears the entire fault for the loss. A two-prong test must be satisfied to prevail on a common law indemnity claim. “First, the indemnitee must be faultless and its liability must be solely vicarious for the wrongdoing of another. Second, in order for the faultless party to shift liability to the other, the indemnitor must be at fault. ”

In addition to common law indemnity, there can be express contractual indemnity provisions. Contractual indemnity provisions are not concerned with vicarious, derivative or technical liability, but with “the express terms of the agreement to indemnify.” In an illustrative case, an engineering firm sought indemnification from the general contractor. The sub-subcontractor’s employee received an electrical shock from a crane that was too close to a power line, resulting in permanent brain damage. His guardian sued the engineering firm as well as the general contractor, subcontractor and other parties. The engineer eventually settled the lawsuit for $3.55 million and filed a complaint against the contractor for indemnity.

The contractor argued that the engineer had no right to indemnity under the indemnity clause in their contract because the engineer had been sued for its own negligence, and not the contractor’s negligence. The contractor’s position was that unless the engineer had been sued on a theory of vicarious liability for the contractor’s negligence, both common law and contractual indemnity were not available to the engineer.

The court disagreed. It stated that the indemnity provision “clearly expresses the parties’ intent that the engineer may be indemnified by the contractor even if the engineer is sued for its own wrongful conduct.” The court observed that the intent of the parties “was to indemnify [the engineer] for any claim arising out of the negligence of [the contractor] even if [the engineer] was also negligent.” Thus, the engineer could seek indemnity from the contractor even if some of the fault could be attributed to the engineer. The court concluded that if all or part of the settlement was based on potential liability for negligence that was unrelated to design, then the engineer would be entitled to indemnity for the monies paid to the sub-subcontractor’s employee.

In accordance with section 725.06, Florida Statutes (2009), any contract in connection with the construction, alteration, repair or demolition of a building, structure or appliance wherein any party promises to indemnify the other party for liability for damages “caused in whole or in part by any act, omission or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” Pursuant to the statute, the monetary limitation on the extent of the indemnification “by any party in privity of contract with such owner shall not be less than $1 million per occurrence, unless otherwise agreed by the parties.”

The statute further specifies that “such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent that the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.”

The full implications of the recent changes to this statute have not yet been tested. The statute states that a construction contract which allows one party to indemnify the other for the other party’s own negligence is unenforceable, unless it contains the monetary limitation and other requirements. Common law indemnity requires that the indemnitee be entirely without fault in order to receive indemnification from the indemnitor. Thus, “there is the potential, under the new statutory language, for the argument that partial or contributory negligence on the part of the indemnitee may prevent any recovery .”

Indemnity provisions in construction contracts should be carefully drafted to incorporate the requirements of section 725.06, Florida Statutes. Considerations include:

(1) whether the contract clearly expresses an intent to indemnify a party against its own negligence,
(2) whether there are particular claims for which the indemnitor must reimburse the indemnitee;
(3) whether there is a monetary limitation on the extent of the indemnification and whether the other statutory requirements are met;
(4) the risks that are being indemnified, such as bodily injury, property damage, economic loss, and attorneys’ fees; and (5) whether there is a duty to defend if the other party is partially at fault.

A poorly worded indemnity provision could lead to the loss of protection or a costly claim. It is imperative for businesses in the construction industry in Florida to work with experienced construction law attorneys for the drafting of any indemnity clause.