Business Contracts - Indemnification Clauses

March 27, 2018

By: Barry Dorans

Do the words in the general terms of a business contract really have any practical impact? The answer is definitely yes!

Once the parties enter into a business relationship, whether it is for construction, leasing or the sale of items and have agreed to the specific terms on pricing, at least one of the parties then submits their “standard” agreement and asks the other side to sign it or attaches it to an invoice. Sometimes that prompts a discussion about the terms and other times the terms are just accepted. However, the actual words used can be of critical importance.

In a recent case, an owner hired a contractor to construct a bridge. The contractor hired a subcontractor to inspect the work as it was being performed and to notify the contractor if the work failed to conform with the plans.

The contractor then started to construct the bridge. In a prior job, the same contractor had a problem in building a bridge when it had not put enough concrete between the steel supports and the road. As a result, while on this job, the contractor decided to use thinner pieces of steel which would allow for more concrete. The inspector told a foreman of the contractor that this change did not conform to the plans, but the contractor went ahead and constructed the bridge anyway. After the bridge was finished, the owner inspected the bridge, found it was not constructed according to plans and required that it be completely removed and replaced at a cost of over $3,000,000.

Even though the contractor was clearly at fault for deviating from the plans, he sued the subcontractor under the indemnification provision and another provision of the terms which required the subcontractor to be responsible for any costs to correct or restore any loss or damage to the work.

In the ideal world, when a claim arises, there would only be one party at fault and the indemnification clause would be fairly simple to interpret. However, as this case demonstrates, the actual world is much more complex. Here, the contractor intentionally deviated from the plans. However, the contractor sued claiming the subcontractor failed to send written notice to its corporate office, and if such notice had been sent, the deviation from the plans would have been caught. The contract contained a provision that required the subcontractor to be responsible for the costs of repairing the work, but contained a handwritten phrase which stated “except if due to the contractor’s negligence”. The Court reviewed the contract and certain stipulations and concluded that since the contractor had intentionally deviated from the plans, the indemnification clause did not apply and the contractor could not require the subcontractor to pay the costs to restore the bridge. Further, the subcontractor was allowed to recover for its unpaid invoices of $150,000.

If the subcontractor had signed a broad form indemnification, then the subcontractor could have been responsible for the entire cost to remove and replace the bridge. In this case, however, the subcontractor was smart enough to insert a clause that excepted out from the indemnification any negligence of the contractor. Often in negotiations, there is quite a bit of discussion as to exactly what should be included or excluded from an indemnification clause. This case is a great example of how the exact wording of the clause can be critical in determining who bore the costs of the defective work. Accordingly, it is very important anytime you enter into a significant contract to have your attorney carefully examine any indemnifications or warranties to make sure that you are not going to be required to pay for someone else’s mistake or international deviation from a contract. Simply signing the standard terms could end up being extremely costly.