The End of Indemnity (in Construction Contracts)?

Since it is legislative season in Austin, the Texas Construction Law Blogger is going to continue the discussion of the Legislature’s recent activities. One of the most significant pieces of legislation to the construction industry is SB 555 (and its identical companion in the Texas House of Representatives, HB 818). In a nutshell, these bills would essentially eliminate indemnity and additional insured provisions in construction contracts.

The bills provide that a provision in a construction contract is void and unenforceable if it requires one party (the "indemnitor") to indemnify or defend another party (the "indemnitee") against a claim to the extent that the claim is caused by the negligence or fault of the indemnitee. An "additional insured" provision would also be void to the extent it requires insurance for this same scenario (the indemnitee’s own negligence).

If passed, this legislation would basically eliminate indemnity clauses in construction contracts. It would mean that I can’t require you to indemnify me for my own mess-up (or you can’t make me indemnify you for your own blunders). At first glance, this may not sound like much–but it would actually be an enormous change in insurance and indemnity law.

To understand the potential impact of this legislation, a brief primer on indemnity law is needed. Because indemnity provisions seek to shift the risk of one party’s future negligence to another party, Texas law imposes a fair notice requirement before it enforces such agreements. There are two parts to this "fair notice." The first is a conspicuousness requirement–something must appear on the face of the contract to attract the attention of a reasonable person to the indemnity clause when he looks at it (such as larger type, all caps, bold font, contrasting colors, etc.).

The second part of the fair notice, and the part that is affected by SB555, is the "express negligence" doctrine or test. Under the express negligence doctrine, an intent to indemnify one of the parties from the consequences of its own negligence must be specifically stated within the four corners of the document. In other words, if you want to be indemnified by another party, the indemnity clause must explicitly state that the indemnity extends to cover your own negligence in order for it to be enforceable (in most cases).

The following is an example of an indemnity provision that did NOT satisfy the express negligence test. (See Gilbane Bldg. Co. v. Keystone Structural Concrete, Ltd., 263 S.W.3d 291 (Tex.App.–Houston [1st Dist.] 2007))

Contractor agrees to indemnify and hold harmless the Owner, the Architect/Engineer, and all of their agents and employees from and against claims, damages, losses and expenses, including but not limited to attorney’s fees, arising out of or resulting from the performance or failure in performance of Contractor’s work under this Agreement provided that any such claim, damage, loss, or expense (1) is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property including the loss of use resulting therefrom, (2) is caused, in whole or in part, by any negligent act or omission of Contractor or anyone directly or indirectly employed by Contractor, or anyone for whose acts Contractor may be liable, regardless of whether caused in part by a party indemnified hereunder.

To satisfy the express negligence test and be an enforceable indemnity clause, the language should sound more like this (Note: this is simply boilerplate; each contract should have an indemnity clause specially tailored for that document.)

Contractor agrees to hold harmless and indemnify Owner for all claims, damages, and causes of action arising out of the work. It is expressly understood that the contractor’s agreement to indemnify Owner is intended to indemnify and hold harmless Owner for Owner’s own liability and negligence, including, but not limited to, their comparative, proportionate and/or joint liability and/or negligence, including liability for gross negligence and strict liability, whether that liability and/or negligence is the sole or concurring cause for the assertion of any such claims, demands and/or causes of action.

This is the type of language that is needed to make an indemnity clause valid and enforceable. However, that same language would also cause it to be unenforceable under the new legislation proposed in S.B. 555. So at the end of the day, this bill could bring about the end of indemnity provisions in construction contracts.

How you feel about this legislation probably depends on the nature of your business. Upstream parties who tend to receive the indemnification are probably against it; downstream parties who usually provide the indemnification are probably more in favor of it.

Either way, this legislation, if passed, would represent a tremendous change in contract law as it applies to the construction industry because it would virtually eliminate the long-standing practice of risk-shifting. Because of its impact on insurance coverage, it could also have an impact on project pricing.

The bill is currently in committee and was considered in a public hearing. Be sure to check back on this blog for updates on its status.