Indemnification provisions require one party to compensate for losses incurred by another. The purpose of an indemnification clause is to provide an agreed upon allocation of risks between the parties. Like any other contractual clause, it is important to draft with precision to avoid unintended consequences. In other words, to ensure that the party intended to bear a certain risk is the one held responsible if that risk materializes.

Indemnified Parties

The indemnitor is the party responsible for compensating for the loss and the indemnitee is the party who will benefit. When drafting the clause, be sure to define the indemnitee to include everyone intended to be protected.

Typically, in construction contracts, the indemnitor is the contractor and the indemnitee is the owner. But the indemnification provision should also protect related third parties that may suffer a loss as a result of the contractor’s conduct, such as the owner’s lender, project manager, agents, employees, consultants and affiliated companies.

Define the Loss

An indemnitor must broadly compensate an indemnitee for all losses specified in the indemnification provision. Certain losses often create disputes. Address them specifically when drafting:

• Attorneys’ Fees and Costs. Specify whether attorneys’ fees are recoverable. For costs, specify whether only court costs are recoverable or if included are expert and consultant fees, and other attorney costs, such as those associated with electronic discovery. Additionally, clarify whether such fees and costs are recoverable in the context of first-party claims, third-party claims or both; and
• Consequential Damages. Often, contracts have separate provisions addressing limitations on the recovery of consequential damages which can lead to ambiguity. Clarify how these provisions should interact. And parties often do not agree whether specific types of damages are “consequential.” Drafting damage limitation provisions defining specific types of damages that are not recoverable, rather than relying on the word “consequential” will help avoid later disputes
  
  

Define the Indemnified Conduct

Common indemnification provisions protect an indemnitee for breach of representation or warranty, breach of another contractual obligation, violation of law and third-party claims against the indemnitee. But carefully negotiate and draft the indemnification provision to address the types of claims for which allocation of risk is intended.

Depending on the agreement, some examples for crafting a specific indemnification provision include:

• "Carve-out” Provisions. Parties can agree to limit the obligations of the indemnitor in any number of ways. Some common examples include:
  • Contractor shall not be liable to indemnify owner for any damages, until owner has first suffered aggregate losses relating to such matters in excess of $X (or for individual losses in excess of $X).
  • Contractor shall indemnify owner from claims … but only to the extent caused by the intentional or negligent acts or omissions of the contractor.
  • Contractor shall indemnify owner from claims … provided that such claim is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the work itself).
  • Contractor shall indemnify Owner from claims… except to the extent that Losses result from the negligence, unlawful or wrongful acts of the Indemnified Parties.
• “Catch-All” Provisions. Any other breach of obligation or duty under this Agreement or under applicable law.
  Clearly define whose conduct is covered by the indemnity. Typically, in a construction contract, a contractor should indemnify the owner against the contractor’s conduct and the conduct of subcontractors, material or equipment suppliers, anyone employed by them, and anyone for whose acts they may be liable.

When drafting an indemnification provision for a construction contract, specifically consider mechanics’ liens. Typically, an owner expects a contractor to indemnify it against mechanics’ liens asserted by subcontractors and suppliers. Clearly state whether the contractor’s obligation to indemnify against liens applies when there is a dispute between owner and contractor and when contractor believes the lien claim to be valid.

Interaction with Other Law

Most jurisdictions recognize a common law right to indemnification. When drafting a contractual indemnification clause, specify whether contractual indemnification abrogates or supplements those rights. Similarly, specify whether the parties’ right to sue for contractual indemnification is in addition to or replaces the parties’ common law claims for breach of contract.

State laws may limit the enforceability of indemnification provisions. In addition to researching and understanding the laws applicable to the contract, preface any indemnification provision with the clause “to the fullest extent permitted by law” and include a provision that, “if the contract is to be enforced under the laws of a state that prohibits any part of the indemnity coverage provided for in the contract, the contractor shall provide the maximum indemnity coverage allowed by that state to each of the indemnitees.”