Friday, August 3, 2012

What is Contractual Indemnity and Why is it Important for General Contractors?

By Amanda Anderson
What is Contractual Indemnity and Why is it Important for General Contractors
What is Indemnification?
     Indemnification allows one party, such as a general contractor or lessor, to shift payments or liability to another party, such as a subcontractor or lessee. Indemnification can arise from a multitude of factual situations. A more formal legal definition of indemnity is a form of restitution that involves the shifting of the entire loss from one who has paid it to another who would be unjustly enriched at the expense of another. The specifics depend on the facts of your project, the law of the applicable state, and the contract you signed.
     A claim for indemnification is usually filed before a party has actually paid or suffered the loss in question. Thus, where a general contractor is facing a claim that potentially arises from the fault of a subcontractor, the general contractor may raise its indemnification claim against the subcontractor in the same lawsuit. 
Contractual Indemnification
     Contractual indemnification involves indemnity based on the agreement of the parties. In Florida, construction contracts with contractual indemnity provisions are limited by Fla. Stat. §725.06. Typically, contractual indemnification involves a party agreeing to indemnify and hold a party harmless against a list of possible harms.  The indemnity obligation can also include a defense obligation as well.are disallowed.

Contractual indemnity is important because the General Contractor bears the ultimate responsibility for the workmanship and quality of the finished project. Substandard workmanship, or work which falls short of building code requirements, can expose the General Contractor to liability for property damage occurring well after the structure has been completed. A General Contractor using all subcontractors to perform the work under its contract with the Owner/Developer can insulate itself from legal and financial destruction through the use of an indemnification provision in its contract with its subcontractors.
Actual Cases in Florida Involving Contractual Indemnification

The Defense Obligation in Contractual Indemnity
In Metropolitan Dade County v. Florida Aviation Fueling Co., Inc., 578 So. 2d 296 (Fla. 3d DCA 1991), the District Court considered whether an indemnitor had the duty to defend when the complaint filed against the indemnitee alleged more than one theory of liability, one which was covered by the indemnification clause and another which is not. The court held that when a complaint contains a covered claim and a claim which is not covered by the indemnity agreement, then the duty to defend extends to the entire lawsuit.  General contractors should strive to have all three in their contracts with subcontractors. However, general contractors should be wary of entering into contracts with owners or developers when they insist on having all three.  It is important to note that indemnification clauses wherein the general contractor seeks to have the subcontractor indemnify him for purely his own negligence

Is the Duty to Pay Defense Costs and Attorneys’ Fees Severable from the Duty to Indemnify?

     In Barton-Marlow Co. v. Grunau Co., 835 So. 2d 1164 (Fla. 2d DCA 2002), the District Court answered this very question. There, the trial court had determined that the indemnity provision was void and unenforceable under §725.06, Florida Statutes, because it did not contain a monetary limit on the subcontractor’s liability and no special consideration was given by the subcontractor for the indemnity provision. In voiding the indemnity provision, the court determined that the defense obligation was severable from the indemnity obligation and thus still enforceable. The trial court ultimately apportioned the defense obligation based the proportion of each subcontractors’ contribution to the overall settlement.  On appeal, Barton-Marlow, the general contractor, argued that it was entitled to recover all of its defense costs and attorneys’ fees because the duty to defend was severable from the duty to indemnify. On the other hand, the subcontractors argued that the duty to defend is part and parcel of the duty to indemnify, and the duty to defend arises only out of the unenforceable indemnity provision, and the general contractor cannot enforce one portion of an otherwise unenforceable provision. The District Court ultimately held that the “duty to defend” is not severable from the remainder of the indemnity provision.

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