You Are Indemnified…. Until You Are Not

William F. Bresee | Leech Tishman Fuscaldo & Lampl LLC | February 11, 2019

In the ordinary course of a construction project (or any commercial transactional arrangement, for that matter), something can go wrong. People can get injured; property can be damaged. For that reason, one of the significant risk allocation tools available to business people is indemnification. The concept is elegantly simple – you are an owner and engage me to provide you equipment or services. If there is a deficiency in my deliverable or service and, as a result of that deficiency (which could be negligent performance, a warranty breach, or similar), a third party is harmed by injury or economic loss and sues you, I step in and protect you against the impact of the claim made against you. The simplicity of the arrangement does not, however, mean that you do not have to read the language of indemnification provisions and of contract documents through the product or service supply chain. The ruling in Oliver Communications Group, Inc. v. Schneider Electric Buildings Americas, Inc., Case No, 07-17-00396-CV, Court of Appeals, Seventh District of Texas (November 2018) is instructive.

Schneider Electric Buildings Americas, Inc. (“Schneider”) contracted with the Delaware River Port Authority for installation of security cameras on the Benjamin Franklin Bridge; Schneider then subcontracted portions of the work to Oliver Communications Group, Inc. (“Oliver.”) A provision of the Bridge Contract allegedly obligated Schneider to indemnify Port Authority against certain claims. In the Subcontract, Oliver also agreed to indemnify Schneider against certain claims. An employee of Oliver, Patrick Burness, slipped and fell on steps at the job site. Burness sued the Port Authority, among others. The Port Authority demanded indemnification from Schneider, and, in turn, Schneider demanded indemnification from Oliver. Oliver refused, while Schneider did not. Burness settled his lawsuit, Schneider paid the settlement, and Schneider sued Oliver for indemnification upon the subcontract with Schneider. Both litigants filed motions for summary judgment. The trial court granted that of Schneider, denied Oliver’s, and awarded Schneider over $1.2 million against Oliver. Oliver appealed on the basis of the existence of an obligation to indemnify Schneider and the enforceability of the indemnity agreement, as well as whether it was obliged to also pay pre-judgment interest on attorney’s fees. Noting that Texas law strictly construes indemnity agreements against the indemnitor, the Texas Court of Appeals reversed the trial court and denied judgment for Schneider.

The subcontract entered into by Schneider and Oliver has Oliver agreeing “to indemnify, save and hold harmless the Contractor, Contractor’s agents and employees, and all parties indemnified by Contractor in Contractor’s Contract from and against all claims, damages, losses and expenses…. to the extent caused in whole or in part by any negligent act or omission of Subcontractor, … or anyone for whose acts Subcontractor may be liable” and further provides that “Subcontractor expressly so agrees, whether or not said liability, claim, demand, loss or expense arises in part from the negligence of Contractor or any party indemnified by Contractor in Contractor’s Contract.” The subcontract was to be interpreted and enforced according to Texas law (even though the work was done in Pennsylvania). It makes clear that Oliver was obliged to indemnify Schneider and anyone Schneider was obligated to indemnify. The appellate court easily found that “Contractor’s Contract” was the contract between the Port Authority and Schneider. It then found, however, that Schneider was not obligated to indemnify the Port Authority against the claim of Burness.

The contract between the Port Authority and Schneider was comprised of a Request for Proposal and a Purchase Order from the Port Authority. The Purchase Order was unsigned; contained only elementary terms, and contained no indemnity provision; although referring to a “Solicitation” and “Supplier’s Bid or Proposal” and “documents attached to this Purchase Order or incorporated by reference,” nothing was attached to or expressly incorporated into the Purchase Order. Only the Request for Proposal contained an indemnity provision; that requiring Schneider to indemnify the Port Authority against claims “arising out of or resulting from: (a) performance or non-performance of the Work; (b) breach of any of the Design/Builder’s obligations under the Contract Documents, or (c) acts or omissions of the Design/Builder, its contractors, consultants, suppliers, or anyone directly or indirectly employed by any of them or anyone for whose acts they may be responsible, regardless of whether or not such claim, demand, cause of action, damage, liability, loss, or expense is caused in part by a party indemnified hereunder.” However, although alluding to a “Solicitation,” none was attached or defined by the Purchase Order. Finding that Schneider failed to establish the necessary linkage between the “Solicitation” and the Request for Proposal through its summary judgment evidence, the appellate court found that there was no evidence that Schneider contractually agreed to indemnify the Port Authority and that Oliver’s obligation to indemnify Schneider was never triggered.

The appellate court found that Schneider’s summary judgment evidence failed for a more telling reason pertaining to the scope of Oliver’s duty. Oliver’s indemnity arose “…to the extent caused in whole or in part by any negligent act or omission of Subcontractor [Oliver], [Oliver’s] employees, agents, suppliers, subcontractors or anyone for whose acts subcontractor may be liable and [Oliver] expressly so agrees, whether or not said liability . . . arises in part from the negligence of Contractor [Schneider] or any party indemnified by [Schneider] in Contractor’s Contract.” The court noted that this language required (i) causation “in whole or in part” by Oliver or one of those under it for whose acts Oliver accepted liability, and (ii) a negligent act or omission by Oliver or someone in that group. Finding that the language excluded the sole negligence of Schneider or another indemnified party, the also court found the language required multiple causes, one of which had to a negligent act or omission by a party within the Oliver group. Finding that the record was without evidence of negligence of Oliver or those under it (including Burness), the court found that Schneider’s summary judgment motion would have nonetheless failed on that point.

Whether the obligation to indemnify is in place through the contractual chain, and whether the specific requirements of an indemnity provision are to be triggered are key to being comforted that the intended allocation of risks between and among contracting parties is in place and enforceable. The review should be accomplished upon contracting as well as at the time a claim for indemnity arises.

Bailout for an Improperly Drafted Indemnification Provision

David Adelstein | Florida Construction Legal Updates | December 22, 2018

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact.  In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect). 

This opinion arose from a construction defect case, CB Contractxors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on thecontractual indemnification provision in the subcontracts.  Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06.  The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06.  (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.) 

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail.   But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.  

This case leads to a couple of very important takeaways:

  • Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06.  Have a construction attorney review the indemnification provision.  Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed.  That is not good practice.
  • Include a severability provision in your contract. Always.  Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed.