Contracts 101: Indemnity Clause

When reviewing legal documents, indemnity clauses often are enmeshed within a host of other “standard” contract provisions, which a contracting party often accepts as written. Based upon how the language is drafted, however, the risk to a party could be significant. This is particularly important when insurance would not cover an indemnified claim.

Typical indemnity clauses often provide a standard that is broad enough that a party not only assumes responsibility for its own wrongdoing, but also that of third parties—including, sometimes, the indemnified parties themselves. Language often encompasses a party providing an indemnification for anything “arising from”, “related to”, or “resulting from” the contract or project work. On the surface, this language can seem benign; however, it opens the door to any type of claim that could be tied to the contract.

We recently counseled a client who was bidding on a large five-prime construction project for which our client would be performing only the electrical component. The project documents included a form of contract to which our client would be bound as written, unless express carve-outs were specifically noted in the bid submission. The indemnification provision in the form of agreement provided that the contractor would be responsible for indemnifying the developer for any and all claims and damages that arose from, were related to, or associated with the project work. Despite being seemingly standard indemnification language as the provision was written, our client would be assuming all responsibility for any claim that may relate to the entire construction project, even if caused by a third party or the developer itself.

Imagine, for example, a third party delivered wet concrete mix to the project site and negligently unloaded it into an area that resulted in a large power surge. This surge critically injured one of our client’s employees as well as the developer’s foreman and two men laying steel, and caused significant damage to the site’s entire electrical grid. Under the clause, our client would have been responsible for all of the damage and injuries per the contract terms, despite having no fault whatsoever.

An ideal indemnity clause contains a comparative negligence standard, whereby a party is responsible for only its own fault, failure, or negligence in proportion to the extent and degree thereof. In this instance, we counseled our client to submit a conditional bid, whereby all indemnification and liability provisions would be based upon this standard.

SMART TIP: Care should always be taken when reviewing contracts to ensure that seemingly standard language does not open the door to significantly greater risk than a party should be assuming.