Indemnity agreements in construction contracts

The information provided is for basic educational purposes only. The following information is not intended to be legal advice, is not to be relied upon as legal advice, and is not a substitute for consulting a licensed attorney in your locale. Although Alabama is referenced, please consult the Alabama State Bar for the name of a licensed practicing attorney if you require legal advice in Alabama.

Why have indemnity agreements?

A principal may have little control over the conditions of a construction job site and yet be sued for damages along with a general contractor and its subcontractors. However, one way for a principal to protect itself is to provide that the culpable party bear the costs and expense for damages, including the costs of a verdict, settlement, or defense of the suit.

A contractual indemnity agreement is simply a way to shift risk to another by agreement. It is risk allocation and control. Indemnity can also be non-contractual, such as equitable, implied, or common law indemnity.

What is the common structure of an indemnity agreement?

Most indemnity agreements identify the party potentially owing indemnity, the indemnitor, and the party to whom indemnity is potentially owed, the indemnitee.

Next, the agreement describes the types of losses covered. One variation is whether the described losses include attorney's fees, while another provides a legal defense for the indemnitee.

And, the agreement typically has a triggering event, sometimes called a "nexus" between the claim and the subcontractor's presence on the job. Broad nexus terms are: "arise out of," "in connection with," or "occasioned by" or the nexus can be narrower requiring that the claim arise from the subcontractor's "acts or omissions" or "negligence."

A fourth element is the conduct of the indemnitee, for example, addressing whether indemnity is owed to a negligent principal or general contractor.

Lastly, the fifth element is the extent of indemnification owed. Is the indemnification all or nothing, or somewhere in between:

Are there anti-indemnity statutes?

Yes. The law in some states does not favor indemnity agreements and, as a result, modifies or limits a parties' obligations under an indemnity agreement. The underlying rationale being that some believe that a negligent party should not be able to completely shift all claims and damages made against it to another, non-negligent party. As a result, some statutes prohibit indemnity under such circumstances.

Alabama does not, at the time of this writing, have an anti-indemnity statute.

Does common law sometimes operate to modify indemnity agreements?

Yes. Separate and apart from legislation and the case law interpreting such legislation some courts require particular language be used in indemnity agreements in order for the indemnity provision be given effect. An example of a re-occurring issue addressed in these cases is whether a negligent party can receive indemnity from a non-negligent party.

At this time, Alabama does not require any special words or language be used, except that the parties' intent for such an agreement must be clearly evidenced from within their agreement. In that respect, Alabama enforces the intent of the agreement between the parties as evidenced by the indemnity agreement.

Are all indemnity agreements the same?

No. Indemnity agreements come in different forms and types. When a case is cited as precedent regarding an indemnity agreement, the evaluation should first include determining whether the jurisdiction has an anti-indemnity statute or special requirements concerning the language used in the provision.

What are different types of indemnity clauses?

All indemnity agreements are not all alike. There are provisions referred to as broad form, work related, intermediate, comparative negligence, as well as other types of provisions. Rather than discuss indemnity clauses as a singular concept, for example, as "trees," we will first briefly clarify the more common types of indemnity provisions.

These definitions are not mutually exclusive, in other words, some clauses may contain features of one or more of these definitions (just as some trees may be thrive in different climates or have leaves that turn yellow in the autumn and, yet those features alone, do not define the tree at issue).

Narrow form. A "narrow form" clause provides for indemnification for the harm caused by an indemnitor (usually due to negligence). This is a comparative fault clause which places liability on the indemnitor only for harm that the indemnitor caused and, as a result, requires a comparison of negligence.

Work related. A "work related" clause requires that the claim relate to the indemnitor's work. It does not require any wrongful conduct on the part of the indemnitor, such as negligence The court looks to whether the claim arose out of the subcontractor's work and not whether the subcontractor was negligent. Therefore, a sub's mere presence on the job site may invoke such a clause and for that reason some courts are hesitant to enforce a work related provision.

Broad form. A "broad form" clause requires that an indemnitor indemnify even though the damage was caused solely by the negligence of the indemnitee. Presumptively the reason it is not enforced is that it is considered to be inequitable to require a non-negligent subcontractor indemnify a solely negligent general contractor.

Intermediate form. An "intermediate form" requires total "all or nothing" indemnification even though the indemnitee contributed to the harm but was not the sole cause. As such, this clause places the entire responsibility on the indemnitor - though there may be several causes for the harm.

This definition does not address the type of various nexus or triggering events that may be used, if any by a drafter.

Mutual clause. A "mutual clause" assumes that both parties are an indemnitor and an indemnitee, applying the same standard to each party. Also, there can be a clause that provides express indemnity applying only to one party or using different standards to invoke indemnity.

Other types. Lastly, in some states, a clause can be general indemnification or a hold harmless clause, in contrast to a specific indemnification clause. A general clause does not specify any effect of the indemnitee's conduct as a factor in triggering the clause. A specific clause addresses the effect of the indemnitee's conduct, for example, that indemnity is owed even if the indemnitee is negligent.

Sweet on Construction Industry Contracts contains a sample American Institute of Architects (AIA) contract between an Owner and its Contractor, beginning on page 871 Appendix B § 3.18, and a provision between a Contractor and its Subcontractor, page 927, Appendix C § 4.6.

4.6 INDEMNIFICATION [AIA sample 4.6]

4.6.1 To the fullest extent permitted by law, the Subcontractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Subcontractor's Work under this Subcontract, 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 the Work itself), but only to the extent caused by the negligent acts or omissions of the Subcontractor, the Subcontractor's

Sub-subcontractors 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

According to Sweet, the AIA wanted to replace the previous all-or-nothing effect of its older 1976 indemnity clauses with a comparative indemnity. Comparative indemnity would require indemnification only to the extent that wrongful acts of the indemnitor have caused either claims against or losses to the indemnitee.

The AIA effectuated this change from an "all or nothing clause" on or about 1987 with [A401-1997 subparagraph 4.6.1 (Sweet at 932], the AIA's agreement between the contractor and the subcontractor.

"[T]he basic indemnification of subparagraph 3.18.1 states "but only to the extent caused in whole or in part" by negligence of the contractor" . . . . Sweet at 634 (emphasis in original).

Have any courts interpreted the "to the extent" language that is found within the AIA sample provision?

Yes. Several courts have examined the AIA indemnity agreement and the operative effect of the comparative "to the extent" language. Naturally, this comports with the plain meaning of the language used in the agreement itself.

As such, an appellate court held that: "The additional phrase, "to the extent caused," however, suggests a "comparative negligence" construction under which each party is accountable "to the extent" their negligence contributes to the injury." Braegelmann v. Horizon Development Company (Ct. of App. Minn 1985), 371 N.W.2d 644.

The extent of indemnity owed, if any, was unknown, uncertain, and comparative. Therefore, it could not be ascertained separate and apart from a trial or hearing by a fact finder.