The 5W1H of Indemnity Clauses – Part Two – (H – Act 1 of 3)

And ready-witted Prometheus he bound with inextricable bonds, cruel chains, and drove a shaft through his middle, and set on him a long-winged eagle, which used to eat his immortal liver… So it is not possible to deceive or go beyond the will of Zeus…

Hesiod’s Theogony, par. 519, 614-615 (circa 800 BCE)

 

I dream of woodland valleys, and pathways that I know, And answer, O-sce-o-la dear, I’m coming back to you.

The Hills of Osceola, Edmund Wilkes Jr. (1939)

With summer upon us, I often look back with fondness to my youth for the activity I was most assuredly preparing for right at this moment: Boy Scout Summer Camp. For me, that meant a hot old-school bus ride to Osceola, Missouri, where I would spend 10 days, yes, consecutive days, sleeping in a tent, covered in mosquitoes and ticks, eating dining hall food, snakes. My parents insisted; it was as if they were getting back at me for all the trouble I caused as a wayward youth. Don’t get me wrong, it was incredible fun, (and I will for sure spin more tales of my adventures), mostly thanks to exploring in the woods, merit badges you couldn’t earn at home, and campfires. And for those we had, well, an Ancient Greek mythological figure to thank…

You see, Ancient Greece was a rough and tumble place sometimes. Best not anger the wrong deity. But, there were some of them looking out for us little people. One of those types was Prometheus, who risked all and defied the Olympian gods by stealing their fire and gifting it to humanity. For his troubles, he was chained for eternity to a stony precipice where his liver was eaten out daily by a huge bird, then grew back for another round. (Honestly, I think that was what they were serving in the summer camp chow hall).

I mention these old tales because, in a way, they symbolize the concept of indemnity. “Do me harm? Well, by golly, you are gonna pay!” Frankly, there were days when the temperature was over 100, on a 10 mile hike, an aluminum canteen around my neck, wearing the most uncomfortable “hiking boots” JC Penny ever sold, that I would have much preferred Prometheus’ fate. I can imagine my parents giggling about it as I type this.

In our first article in this series, we examined the “who” of ever present indemnity provisions in construction contracts. While “what” might logically be the next element to unravel, I am already skipping right to the ending add on H, addressing the “how” – albeit in three parts. In this first part, we take a look at the operative language which dictates, how, exactly the design professional will be forced to do the deed.

Most indemnity provisions in construction contracts read a little like this, in the beginning:

“To the fullest extent permitted by law, the Indemnitor shall indemnify, defend, and hold harmless the Indemnitee…” (If you read my first piece, we explored who these two defined terms were).

The phrases “indemnify,” “defend” and “hold harmless,” within contracts between design professionals and their clients hold significant meaning, which must be understood in order to make sense of all of the other language surrounding it. These seemingly innocuous words may, in fact, carry far-reaching implications, and a thorough understanding of them is paramount to managing your risk.

First, let’s break down these terms:

1. Indemnify obliges one party to compensate another for any loss, damage, or liability incurred. As a simple example, this phrase would typically require the design professional to pay back their client for any harms they caused.
2. Defend requires one party to provide legal defense for the other party should a claim or legal action arise. This language would require the design professional to accept a “tender” of any claim by their client, and to pay for or provide a lawyer to respond to any allegations or suit.
3. Hold Harmless ensures that one party won’t seek to recover losses from another party under specified circumstances. Simply, this would prevent the design professional from seeking any recovery as against their client for the enumerated harms set out in the clause.

Typically, a design professional’s duty is to provide “professional services,” in the way of expertise, skill and competency. However, inclusion of an indemnification clause may unexpectedly shift liabilities onto the design professional which may exceed this scope and value of the contract, the coverages of their professional liability insurance policy, and could create an unfair reallocation of risk and reward. In Acts 2 and 3 of this exploration of How, we will examine how onerous clauses may even require the design professional to indemnify the client for losses or damages they themselves cause!

HOW can design professionals manage these risks? Here are a few pointers:

1. Understand the Scope: Ensure you understand the full extent of your obligations under any contractual indemnification clause.
2. Negotiate Equitable Terms: Don’t accept indemnification clauses blindly. Consider negotiating to limit your obligations to the extent of your professional negligence or to the extent of insurance coverage.
3. Seek Insurance Coverage Review: Consult with your insurance broker to ensure that your professional liability insurance covers the obligations you’re assuming under the contract. Also, ensure your coverage is adequate to protect against potential claims.
4. Flow Down Through Your Subconsultant Contracts: If you’re engaging subconsultants, ensure their contracts mirror your own contractual obligations with “flow down” provisions. If not, you may inadvertently assume liability for their actions without recourse.
5. Seek Legal Counsel: Retain a knowledgeable attorney who specializes in construction contracts. They can help you understand, negotiate, and navigate these complex issues.

In conclusion, “indemnify,” “defend” and “hold harmless,” are not just boilerplate words; they form a crucial part of your contract that could have significant implications. As a design professional, your goal should be to balance the desire to satisfy your client’s needs with the necessity to protect your business interests. This balance requires vigilance, understanding, negotiation skills, and legal expertise to craft a contract that allows for project success while maintaining an equitable distribution of risk.

So, just like I had to be able to identify poisonous fauna and critters while I earned the Orienteering Merit Badge, so too should the careful design professional be able to pick out pain points in their contracts, or else, well, being chained to a rock forever don’t sound too bad…