One of the simplest ways to define a
written contract is that it is a risk shifting device. When you think about it,
everything beyond the terms of the consideration to be exchanged between the
parties, which is essentially all that is required to form an enforceable
contract, are more or less risk shifting provisions. For
example, with respect to construction contracts, beyond the scope of work a
contractor promises to complete, and the amount of money the owner promises to pay the
contractor for the completed scope of work (the exchange of consideration), all
other terms can pretty much be characterized as risk shifting terms. Payment
timing terms, insurance terms, warranties and exculpatory clauses, such as no
damages for delay clauses, are among the most common examples of these risk
shifters, all of which shift not only the risk but also its associated costs,
both known and unknown, from one party to the other.
One of the most sweeping and
powerful risk shifting devices found in construction contracts is known as
indemnity, also commonly referred to in construction parlance as an
indemnification clause. These indemnification clauses are included in the
various form contracts utilized in the construction industry including the AIA
family of documents as well as the Consensus Docs® for example. They
are also often seen in contract documents created by owners or contractors and
their counsel.
So what is indemnification? Various dictionaries define the term to mean
to reimburse or compensate one for a loss, injury or expense.
In the context of a construction
project, an indemnification clause is an owner-contractor contract, which
generally obligates the indemnitor/contractor to pay the indemnitee/owner for
any damages or legal liability incurred by the indemnitee/owner as a result of
claims brought by third parties (for example an action brought by a
subcontractor or a personal injury claim brought by a visitor to the Project.)
Indemnification clauses can be
limited or extremely broad in defining the scope of a contractor or
subcontractor’s indemnification obligations. The most broad indemnification
clauses would even have the indemnitor obligated to indemnify the indemnitee
for the indemnitee’s own negligence.
Contractors should have their attorney and their insurance agent review
indemnification clauses. The attorney
can explain the legal ramifications of agreeing to the provision and assist in
negotiating a narrower or less onerous revision to the indemnification clause –
and, the insurance agent can
advise the contractor of coverage issues and gaps resulting from an overly
broad indemnity provision.
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Please contact the author of this
article, Thomas O. Williams, should you have any questions about your rights
and obligations with respect to indemnification by calling (717) 763-1383 or
via email at TWIlliams@ReagerAdlerPC.com.