Understanding Indemnification Clauses
Construction projects involve a variety of risks for everyone involved, including the owner or developer, contractors, and subcontractors. For this reason, construction contracts typically contain indemnification clauses to shift risks from one party to another. Unfortunately, many people do not pay enough attention to indemnity or “hold harmless” clauses in their contracts and end up being held liable for something that is out of their control.
Indemnification clauses are one of the most contentious provisions in construction contracts and for a good reason. Every party to a construction contract should understand the meaning and potential consequences of indemnification before signing the contract.
Our construction law attorneys at Miguel A. Brizuela, P.A. can review your specific contract and explain the legal effects of its various provisions, including indemnity clauses. Our law firm also assists clients in drafting and negotiating indemnification clauses. We serve clients in Miami, Florida, as well as West Palm Beach, Fort Lauderdale, and other parts of Southern Florida.
Indemnity Clauses in Construction Law
The construction industry in the United States is one of the major driving forces of economic growth. According to The Construction Association, the industry has more than 7.8 million employees across the country. However, most construction projects would not be possible without contracts and risk-mitigating provisions, such as indemnification clauses, in them.
Indemnification clauses—also known as indemnity or hold harmless clauses—are provisions in a construction contract regarding the parties’ responsibilities for losses or damages during the duration of the construction project. Indemnity clauses are commonly found in construction contracts between property owners and contractors as well as contractors and subcontractors.
These clauses specify that one party—known as the indemnifying party (indemnitor)—will compensate the other party—known as the indemnified party (indemnitee)—for any damages and losses that arise from a particular event. Indemnity clauses are used to allocate risk and responsibility between the contractual parties and hold one party harmless for the losses of another.
Types of Indemnification Clauses
In terms of their scope, indemnification clauses are classified into three types:
Broad. Broad indemnification clauses require the indemnifying party to indemnify and hold harmless the indemnified party for all damages and losses resulting from their performance under the contract.
Narrow. Narrow indemnification clauses require the indemnifying party to indemnify the indemnified party for damages and losses resulting from their performance but only when such damages/losses result from the indemnifying party’s negligence, errors, or omissions.
Intermediate. Intermediate indemnification clauses require the indemnifying party to indemnify the indemnified party for all damages and losses except when the latter is 100% responsible for the damage/loss.
When an indemnification clause is part of a contract between the owner and the contractor as well as a contract between the contractor and the subcontractor, the contractor would still be liable to the owner when a subcontractor fails to perform its contractual obligations. In that scenario, the subcontractor would indemnify the contractor and also reimburse the contractor for the damages it has incurred due to its obligation to indemnify the owner.
Why Indemnity Clauses Are Important
Indemnification clauses are a critical part of any construction contract because they offer the following:
Risk transfer. This clause transfers the risk of loss from one party to another within the contractual relationship, allowing the parties to maintain a stable and predictable business relationship.
Protection. When a contract contains an indemnity clause, it protects the indemnified party in the event of damage or loss as the indemnifying party assumes the obligation to protect the indemnified party from any financial harm resulting from covered events.
Clarity and peace of mind. When the clause unambiguously outlines the responsibilities of each contractual party in the event of losses or damages, it can substantially reduce the possibility of disputes and litigation. This can also provide each party with peace of mind, which can positively impact their business relationship.
Liability limitation. Using an indemnity clause in a contract can limit the liability of the indemnified party and also reduce their financial exposure when a covered event occurs.
While indemnification clauses are important in any construction contract, drafting one without the help of an experienced attorney can be a difficult and risky endeavor. To be enforceable and effective, an indemnity clause must contain precise language and provide clarity as any inconsistencies could potentially lead to litigation.
Drafting and Enforcing an Indemnity Clause in Florida
While Florida courts tend to look unfavorably upon contractual provisions that seek to indemnify another party for their own negligent or unjust acts, indemnity clauses are still enforceable under state law. Indemnification clauses must meet certain criteria to be deemed enforceable in Florida. In order to enforce an indemnify clause seeking to hold the indemnifying party liable for any damages incurred by the indemnified party, the clause must:
Contain financial restrictions on the size and scope of the indemnification with a rational commercial association to the contract between the parties; and
Be a part of the contract specifications or bid documents.
If these two requirements are not met, the indemnification clause is likely to become void and be deemed unenforceable. Given the technical nature of such provisions and the strict enforcement requirements, you might want to consider contacting an attorney for assistance when drafting an indemnity clause in your construction contract.
Thoughtful Legal Counsel From Miguel A. Brizuela, P.A.
If you are about to sign a construction contract, our skilled construction law attorneys at Miguel A. Brizuela, P.A. can help you explain its provisions, including the indemnification clause if it has one, so you know what you are agreeing to. We also assist parties in drafting and negotiating indemnity clauses in construction contracts throughout Southern Florida. Contact our office today to request a free consultation and get the legal guidance you can trust.