Tuesday, September 20, 2011

Texas Legislature Passes Anti-Indemnification Law

Indemnification is a topic that has for years been a sore spot for subcontractors. In a nutshell, upstream parties, such as owners and general contractors, frequently require indemnification from downstream parties on a project, such as the mechanical contractors. While this does not sound so bad in principle, the reality has not been so rosy for downstream contractors.

For an indemnification agreement to be legally enforceable under Texas law, it needed to satisfy the “express negligence doctrine.” 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 (and be specifically stated within the four corners of the contract).

In other words, if a general contractor required a sub to indemnify it, the sub would have to indemnify the general contractor not just for the sub’s negligence, but also for the general contractor’s own negligence. This is a huge shifting of risk, but since owners and general contractors held the purse strings of a project, they usually were able to negotiate these heavy-handed indemnity provisions into their contracts.

One of the biggest complaints against these indemnity provisions was that they were a disproportionate shifting of risk. For instance, a subcontract may be worth $50,000, but by providing indemnification to the GC or owner on a large project for their own mistakes, the potential liability could easily be in the millions (example–GC’s negligence causes an accident that catastrophically injured or killed someone). For smaller subcontractors, that potential liability could easily have exceed the limits of their general liability insurance.

Subcontractor groups have been fighting against these indemnity provisions through the Texas legislature for years, with limited success. But things may have just drastically changed. This most recent legislative session brought the enactment of HB 2093. This bill, which creates what will become the new “Chapter 151" of the Texas Insurance Code, essentially voids any contract that requires the indemnitor to indemnify the indemnitee against the indemnitee’s own negligence.

Translating that into plain English, a general contractor should no longer be able to require the HVAC contractor to indemnify the GC for the GC’s own negligence. Even if it is in the contract, the provision would be unenforceable. Additionally, HB 2093 states that the parties to a contract cannot waive this anti-indemnity provision.

It will take some time for the nuances of this new law to be worked out, and it does not go into effect until January 1, 2012. All contractors--not just subs--would be wise to become familiar with this new law well in advance of its effective date and take head of it in negotiating future contracts.

Friday, January 7, 2011

Top 10 New Year’s Legal Resolutions for Everyone in Construction

Once again, I present my Top 10 New Year's Resolutions for everyone in the construction industry.

10. Take time to laugh a little.

9. Be consistent in your contract drafting to avoid fighting the same battles in litigation AND in arbitration.

8. Promptly report all potential losses and claims to your insurance company and specifically request defense and indemnity for you and any employee named in the claim or lawsuit. And document your reporting!

7. Beware of lien waivers!

6. Safety first on the job site. It avoids litigation, keeps OSHA away, maintains employee morale, and most importantly–it’s the right thing to do.

5. Know who you’re contracting with and make sure they are financially viable (or have a bonding or insurance company that is). This is so important I repeated it from last year’s list and moved it up.

4. Sometimes, the best decisions you make are the decisions to turn down business. A marginal, slow, or non-paying customer that brings headaches is sometimes worse than no customer at all.

3. Don’t put all your eggs in one basket. In other words, don’t rely solely on one large project, as problems with that project (including nonpayments) will put you at the upstream party’s mercy and drastically hurt your business.

2. Properly document your change orders and don’t just rely on unsigned letters or emails.

And once again, the #1 New Year’s legal resolution for 2011 for everyone in construction:

1. Read your contracts! Understand your contracts! Enforce your contracts!!!