Monday, October 6, 2008

Indemnity Agreements: What you see (and say) isn’t always what you get

During construction contract negotiations, indemnity agreements tend to be viewed one of two ways. One approach is that they are a critical component that serves to protect the indemnitee and limit liability related to the contract. The other approach is, "eeh, whatever."

The attitudes towards indemnity agreements change drastically on the back end, though. I can tell you that, as an attorney, the first thing I look at when analyzing a construction dispute is the contract that governs the relationship between the parties. And within the contract, I go straight to the indemnity agreement (if there is one) to see if someone else is going to be financially responsible for my client’s liability, including any settlement or judgment.

Like so many other items, indemnity agreements are deal points to be negotiated. However, I personally believe that if you can receive indemnity protection without having to give up too much in return, it is a good idea to ask for it because it can serve as an effective limitation of your liability. In some instances, it may even be worth giving up quite a bit to receive that protection.

Indemnity clauses are a little tricky, though, and if you don’t word yours properly, it can be worthless. A simple, yet important, general rule of contract law is that contracts should be interpreted consistent with a plain reading of the text. In other words, a contract says what it means and means what it says. Indemnity clauses are an exception to this general rule. What may look like a valid, clear indemnity provision may not satisfy the requirements imposed by Texas law.

Texas (among many other states) has adopted the "express negligence doctrine." See Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705 (Tex. 1987). The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. Under the doctrine of express negligence, the intent of the parties must be specifically stated within the four corners of the contract.

"Great," you say, "but what does that actually mean?" In a nutshell, it means that to be covered by an indemnity agreement, that provision must explicitly state that it includes indemnification for the indemnitee’s own negligence.

Let me illustrate by showing you what not to do. In Ethyl, the owner was sued by an employee of a contractor for injuries related to the owner’s and the contractor’s negligence. The owner sought indemnity from the contractor pursuant to the following provision in their contract:

Contractor shall indemnify and hold Owner harmless against any loss or damage to persons or property as a result of operations growing out of the performance of this contract and caused by the negligence or carelessness of Contractor, Contractor’s employees, Subcontractors, and agents or licensees.
The Texas Supreme Court ruled that this provision did not provide indemnity to the owner for the owner’s own negligence. Because the injured employee asserted negligence against both the owner and the contractor, and the indemnity provision did not provide indemnity to the owner for its own negligence, the owner was not entitled to indemnity from the contractor. The Court stated that "indemnitees seeking indemnity for the consequences of their own negligence which proximately causes injury jointly and concurrently with the indemnitor’s negligence must also meet the express negligence test."

So how do you create a valid indemnity agreement? First, I would recommend working with an attorney on your specific contract, as the difference between a valid and invalid indemnity clause could be thousands, and even millions of dollars. Second, be sure your contract can pass the express negligence test. Include explicit wording that the indemnity extends to cover the negligence of indemnitee. This language may be a harder sell in contract negotiations, but without it, your indemnity agreement may be unenforceable.

1 comment:

Hi Vis said...

Wouldn't it just be better if each party was responsible for their own negligence? Hi Vis