July 6, 2016 – We are always told the United States is the land of the free; they project an image that is often anti-government intervention and, by extension, anti-legislation, and yet they have legislation that prohibits a specific contractual term that you, as a contractor, sign up for each and every week. I’m talking about indemnity clauses.
In their simplest forms, they are part of an agreement to which you, as a contractor, are bound to indemnify the owner (and often the project consultants and even the financing entity) from a certain set of risks. Indemnifying essentially means you will protect the entities whom you have agreed to protect. Some insurance contracts have your insurer acting as your indemnity for certain specified risks. Ultimately, they are in nearly every construction contract you sign.
A problem often arises with the unequal allocation of these risks in the form of indemnity clauses whereby you, as a contractor, agree to indemnify the general contractor, owner and potentially the consultants from any and all risks associated with your performance of the contract. That can mean that you have agreed to fully indemnify (fully protect) those entities identified from any risk associated with the performance of your contract.
So what does this have to do with the U.S.? Almost all of the 50 American states have some form of “Anti-Indemnity” legislation applicable to construction contracts limiting the use of indemnity clauses.
In Michigan, for example, the Anti-Indemnity Statute prohibits construction contracts from requiring one party (the indemnitor) to indemnify another party (the indemnitee) for damages arising out of bodily injury to persons or damage to property where those damages are caused by—or resulting from—the sole negligence of the indemnitee.
These types of clauses are declared void (unenforceable) as they go against public policy.
Minnesota’s Anti-Indemnity Statute has been around since 1984 and, with it, nearly all forms of indemnity are prohibited in construction contracts. But there are some very narrow exceptions; for example, the statute permits certain indemnity provisions so long as the “promisor agrees to provide specific insurance coverage for the benefit of others”. In other words, your indemnity will only be extended to the insurance you have for covering that specific risk.
In the apparent bastion of freedom called Texas (which one assumes would include the freedom to contract), the Anti-Indemnity Statute prohibits indemnification of claims arising out of the indemnitor’s (contractor’s) work if the damage is caused “by the sole, joint, concurrent, contributing or comparative negligence or fault of the indemnitee (owner, consultant, etc.)”.
In other words, a construction contract can no longer contain an indemnification clause that requires a contractor to indemnify, defend or hold harmless another party for a claim due to that party’s own negligence (whether solely or in part, i.e. contributory negligence).
The statute also impacts additional insureds by providing that an indemnitor cannot be required to purchase additional insured coverage when it would be prohibited when examined in light of the indemnification agreement. The provisions of the statute cannot be waived, and any provision in a contract is void to the extent that it requires one party to indemnify another for claims arising out of the fault of the indemnitee.
One must ask: why do Americans have such extensive Anti-Indemnity Legislation? Obviously, they believe there is some need to protect contractors from being exposed to heavy-handed indemnity clauses.
And if American legislatures have laws limiting indemnity clauses, then why do contractors here in Canada sign up for them so readily? Perhaps we need to start reading the indemnity clauses in our construction contracts to better understand what it is we are truly signing up for.
Dan Leduc is a partner in the law firm Norton Rose Fulbright Canada LLP and practices almost exclusively in construction law. He is frequently called upon to advise and represent owners, engineers, subcontractors, suppliers and builders in such front-end services as contract review, tender issues and general construction matters, as well as in litigation and arbitration. Dan can be reached at 613-867-7171 or firstname.lastname@example.org .
* This article also appears in the July 2016 edition of Electrical Business Magazine. Check out our ARCHIVE page for back issues.
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