Precautions in Signing Indemnity Agreements

When I am asked by clients to review construction contracts, I am most frequently questioned about indemnity provisions. I think these provisions are among the most important in contracts, yet my experience tells me they are often the source of confusion.

Generally, indemnity is an obligation one party (the "indemnitor") assumes to protect, defend and/or compensate another party (the "indemnitee") for loss or damage suffered by the indemnitee. There are two basic types of indemnity: express indemnity which is based on a written agreement, and implied indemnity which is not in writing but which arises out of a contractual relationship between parties.

Most construction contracts contain indemnity provisions. Typically, the general contractor will agree to indemnify the owner, and often the architect too, from liability and damage caused by the acts or omissions of the general contractor, its subcontractors and anyone for whose acts the general contractor may be legally responsible. The general contractor, in turn, will require in its subcontract agreement that the subcontractor indemnify the owner and the general contractor from liability and damage caused by the acts or omissions of the subcontractor, its subcontractors and suppliers and anyone else for whose acts the subcontractor may be liable.
There are several issues that I often see in reviewing indemnity agreements that can be problematic:

(1) The scope of indemnity is very broad. Standard construction industry contract forms, such as those issued by the American Institute of Architects, provide for indemnity for tort-type damages such as bodily injury, property damage or wrongful death caused by the negligence of the of the indemnitor. Many times, however, a construction contract will require the indemnitor to indemnify for any and all losses of every kind and nature, arising out the indemnitor's work or presence on the project, without regard to negligence, breach of contract, or fault of any kind on the part of the indemnitor. In agreeing to such clauses, contractors expose themselves to liability for a broad array of potential claims and damages. The only prohibition under Virginia law is that a party cannot agree to indemnify an indemnitee for the indemnitee's sole negligence.

(2) The contractor fails to obtain the same degree of indemnity from its subcontractors as it is required to provide to the party it contracted with. Ideally, a contractor obligated to provide indemnity to an owner or general contractor should obtain at least the same level of indemnity from its subcontractors. In this manner, all parties in the contractual chain are assuming similar indemnity obligations. In practice, however, this often does not happen. A general contractor agreeing to a broad form of indemnity to its owner may not have the same indemnity rights from its subcontractor who signs a narrower indemnity agreement.

(3) There are no mutual indemnity obligations. Very often a contract will provide for indemnity from one of the parties to the other, but not vice-versa.

(4) The contract does not contain any indemnity agreement. Where there is no written agreement for indemnity, the right of indemnity may be implied in Virginia, but only in certain circumstances not typically present in construction claims. Parties to a construction contract should never omit indemnity provisions.

While construction contracts often are the result of negotiation, just as often a contractor is asked to sign an agreement as written or be denied the work. Contractors should be aware of the importance of indemnity provisions and seek clarification from their attorneys and insurance professionals if necessary.