Construction contracts, like all other agreements, are designed to allocate the risks related to the project between the parties. These problems range from the mundane to bigger issues like disagreements over payment. One of the largest risks is usually the possibility that someone might get hurt or that significant property damage could occur. Indemnification clauses appear in almost every construction contract to help define who will be responsible for the damages relating to these kinds of losses. What do these clauses really say though?
The differences between the concepts of holding harmless, defending and indemnifying
A typical indemnification clause will require that the contractor “defend, indemnify and hold the owner harmless” for such losses. Too often, contractors and their lawyers interpret this as short hand for an indemnity obligation; but keep in mind that the selected words are chosen for a reason. The contract would simply say “indemnify” if that was intended as the only obligation. Understanding the differences between the three concepts is important to properly analyze what risks you are assuming.
In indemnity clauses, the defense and hold harmless language are not throwaway words.
The terminology can seem like a difference without a distinction. The legal realities of each, however, are different. They create a series of obligations that can completely absolve one party of liability at the expense of another.
Indemnification creates the requirement for the party agreeing to indemnify to pay the injured party on behalf of the party protected by the clause for their damages. In practical terms, the contractor is agreeing to pay the injured party for any damages caused by the owner. This requires that the court make a determination that the injured party was, in fact, injured, and that the owner and/ or the contractor caused the injury. Making that determination often requires litigation in court and the use of lawyers.
Using the same parties and example, the obligation to defend the other party means the contractor is required to pay the attorneys’ fees and costs to defend the owner sued by the injured third party. Often the owner will tender the defense to the contractor at the start of a case to relieve itself of the obligation to pay lawyers to litigate the matter in court. This eliminates another large expenditure for the recipient of the benefits of the indemnity clause.
Finally, the hold harmless requirement necessitates that the party agreeing to do so—the contractor in our example—not hold the owner responsible for mistakes made in carrying out the contract. Stated differently, the contractor waives claims against the owner in cases where the owner causes damages to the contractor in the way the owner carries out its obligations in the contract. This eliminates the opportunity for the contractor to sue the owner for reimbursement of amounts paid to a third party based on the owner’s negligence.
When these three concepts appear in the indemnity clause, they effectively shift practically all the potential liability of the owner for personal injury and property damage (and other losses if the indemnity clause is broader) to the contractor. In addition to creating more risk for the contractor and potentially causing a disproportionate damages claim to the actual wrongful conduct of the contractor, it disincentivizes the owner from acting responsible. Owners become less concerned about overseeing safety or efforts by contractors to cut corners.
Consider a worksite accident where a pedestrian is walking down the sidewalk next to the project and is paralyzed after falling in an open and unmarked trench. If the contractor is required to “defend, indemnify and hold the owner harmless,” the contractor is responsible to pay for the lawyers of the owner and any damages without the possibility of recovering the owner’s proportional share of liability. If the obligation is to just indemnify, it requires an assignment of liability to the owner before anything is owed. Even then, the contractor is only responsible for the damages.
I have long believed that words matter. This issue is a perfect example of the axiom. In indemnity clauses, the defense and hold harmless language are not throwaway words. If you are going to have that risk shifted to you in a contract, be sure you are aware of the scope of what you are agreeing to do.
Josh Quinter is a commercial litigation attorney, with a focus on construction law. He is also a member of the board of directors and a department chair at his law firm, Offit Kurman. Active in a number of construction trade and business organizations, he presently serves as the president of the Mid-Atlantic Chapter of the Metal Building Contractors & Erectors Association (MBCEA), serves on the MBCEA national board and is the organization’s general counsel. Contact him at jquinter@offitkurman.com, or for more information, go to www.offitkurman.com/attorney/joshua-quinter.
