“I’m telling you, Who’s on First…”
- Bud Abbott
St. Louis is a multi-sport city, but we love our baseball most of all. Even Abbott and Costello recognized as much in their famous routine where they regaled our fine baseball town and fictional players with funny names. Lou Costello’s dogged inquiry into the lineage of the lineup reminds me of another historical figure who encouraged getting to the bottom of things with pertinacity. Of course this character is an Ancient Greek, Hermagoras of Temnos, an orator and rhetorician from the 1st Century BC. I am certain he and Aristotle yucked it up quite a bit just like ol’ Bud and Lou. Hermagoras is credited with developing the rhetorical method of dividing a topic into “seven circumstances” (who, what, when, where, why, in what way, by what means), inspiration for the “5W’s” (and 1H – “How”) used by journalists, educators, and dare I say construction professionals to ensure they cover all the bases of a topic. So then, in honor of Hermagoras, opening day and the “best comedy sketch of the 20th century,” I thought it appropriate to address the first of those questions as it applies to indemnity clauses in construction contracts: Who?
My time as a cub reporter for my high school newspaper, the Sartonian, taught me the journalistic maxim – start with who. But before I step up to the plate on that question, a little discussion about indemnity provisions is in order. In my experience as a construction lawyer negotiating hundreds of contracts, it seems almost 90% of my time is spent reviewing, editing and redrafting indemnity language. These are major risk shifting devices which have real impacts on potential liabilities. Because they are similar to “exculpatory” clauses, these provisions are strictly construed by courts, and should be drafted carefully, clearly and unambiguously to be enforceable. More and more often, custom indemnity provisions have become an onerous “catch all” which unfairly shifts responsibility for risk on to the downstream party. As a result, indemnity language needs to be examined, or you risk assuming un-covered-by-any-insurance-policy contractual liabilities or taking on more risk than you should.
Much will be discussed about indemnity provisions in a series of future articles on this topic, but first things first; when looking at these provisions, it is important to understand who they apply to and who benefits from them. Usually indemnity language starts with a couple of definitions. Who owes the indemnity obligation and who receives the benefit? The first question: who owes a duty of indemnity is answered by understanding just who is the “indemnitor.” The indemnitor is the person or organization that holds another harmless in a contract, and is the indemnifying party. The person held harmless by the indemnitor is referred to as the “indemnitee,” the party receiving the benefit of the clause, and the party being indemnified.
Very often the indemnitor is defined broadly to include a number of parties, including, of course the party signing the agreement, and also any of its officers, directors, managers, agents, employees, representatives, supervisors, successors, assigns, subconsultants, subcontractors, material suppliers, or anyone acting on their behalf related to the performance of the indemnifying party’s obligations under the agreement. It is important to consider all of the parties owing indemnity obligations, because without some way to contractually trace the obligation, you may fall short of meeting the intent of the contract. While your own employees could be covered under your liability policies, is everyone else? In other words, if you are required to indemnify another party, and also your subconsultants are as well, then your subconsultant agreement needs to include appropriate flow-through language specifically naming the indemnitee as someone they also owe an indemnity obligation to, in order to preserve your ability to enforce this obligation. Make sure your subcontracting parties’ agreements include appropriate language and include yourself as a party receiving indemnity along with the party you owe indemnity to.
Usually, the definition of who is the indemnitee draws the most attention. As a general principle, the only real party you should be negotiating to indemnify is the party you are entering into a contract with, your client. That is the only contractual relationship you have any control over, and rightfully should be at risk for. Good luck restricting your indemnity obligation to just that party, however. It is all too typical that the indemnitee will be very broadly and inclusively defined to name not only your client, but their clients, whether the owner, developer, or sometimes major tenant. The further up the chain this obligation goes, the more risk you are taking on. It is best to keep the circle of parties small, and not allow it to expand beyond the owner, if possible. Owing indemnity to a building’s owner’s tenants is too far out in left field, and you should rein that in. The same holds true for lenders and financial institutions. Try to avoid taking on indemnity to them.
Beyond upstream parties, some clients will also try to impose an indemnity obligation on you to their down-stream contracting parties, like their contractors, subcontractors, material suppliers and the like. Under no circumstances should you be taking on the responsibility to indemnify these parties. Too much can happen to cause claims on these entities and giving them an easy avenue to claim against you should be a non-starter.
The definitions will also often rattle off a list of non-specific entities, like the indemnitee’s “affiliates, parents and subsidiaries, and each of their officers, directors, members, managers, consultants, agents, representatives, attorneys, servants, employees, successors, and assigns,” etc. Many of these words are in and of themselves too broad. Who are they even supposed to refer to? If your client doesn’t know, why do you need to include them? Without more clarity, try to restrict this lineup to only those persons who are or could be employed by your client, and not anyone and everyone they could potentially contract with. That is too vague, and gives you no ability to control your contractual liabilities.
Scaling back who you owe indemnity to and understating the field of parties with rights is a good first step in getting to an indemnity agreement that is fair and enforceable. Next time, we will examine the “What” proposition expanding this conversation by looking into the various things parties seek indemnity for. Be prepared for some curve-balls.