Carefully Drafted Indemnification Clauses Provide Significant Protections To Construction Contract Parties

Virtually every construction contract and subcontract has an indemnification clause and many contain more than one. Despite the ubiquitous nature of such clauses, parties to construction contracts seldom are attentive to them during contract drafting and negotiation. Only when disputes arise do the parties begin to scrutinize the indemnification provisions in their contracts. Unfortunately, at that juncture, it is often too late and a party either will not realize the benefit of indemnification they assumed existed or they will have to engage in costly litigation over the scope and coverage of the indemnification provision. The potential for such outcomes can be avoided by careful drafting of the indemnification provision so as to ensure the clause provides the protection intended and complies with applicable law.

Contractual indemnification provisions (also known as hold harmless agreements) address transfer of risk of loss, usually with respect to claims asserted by third parties, from one party to the contract to another. By agreeing to an indemnification provision, the indemnitor (the party providing the indemnification) voluntarily assumes an obligation that would otherwise rest with the indemnitee (the party receiving the indemnification). A typical indemnification clause defines the nature of the claims that are subject to indemnification, the parties’ respective responsibilities for such claims and the scope of the indemnification obligation. Indemnification clauses can provide significant protections to the indemnitee by obligating the indemnitor to be monetarily responsible for claims asserted against the indemnitee, including the costs and attorneys’ fees incurred by the indemnitee in defending against the claims in any legal proceeding. Further, if sufficiently worded, an indemnification clause can enable an indemnitee to extricate itself early on from a litigation where the claims asserted against it fall within the ambit of the indemnification obligations. Thus, it is critical that parties to a construction contract understand the scope of any indemnification clauses in their contracts and how such clauses will be construed by the governing law.