October 02, 2018

Interpreting Indemnity Provisions in Construction Contracts

Liability in the construction process is usually determined and allocated by contract. It is quite common for construction contracts to contain indemnity provisions requiring one party to defend and reimburse the other against various expenses or losses. When contracts include express indemnity provisions, they will likely receive more attention, and be the subject of more negotiations between counsel, than any other provisions. Yet, if pressed to state what it means to “indemnify” or “hold harmless,” many are at a loss.

The concepts most often associated with indemnification are reimbursement and restitution. Reimbursement is a right arising under the common law in the nature of recoupment, entitling a party to recover from the primary wrongdoer its losses and expenses occasioned by the harm created by the wrongdoer. Restitution is grounded on the concept that, where one person is unjustly enriched at the expense of a second, that person is responsible for indemnifying the second person to the extent of the benefit conferred. In other words, the measure of recovery under reimbursement is the reasonable expense and loss incurred by the indemnitee, whereas the measure of recovery under restitution is the unjust benefit conferred on the indemnitor.

When viewed as a remedy to secure restitution or reimbursement, indemnity presents few interpretive problems to the courts. However, indemnity agreements that undermine or conflict with the equitable underpinnings of indemnity create tension courts are left to address. For example, a provision that grants an owner indemnity from a contractor for a loss occasioned from the owner’s very own negligent acts is difficult to square with the principles of restitution and reimbursement. But there is nothing in contract law or theory that precludes such agreements where the parties have freely consented to them. This tension has given rise to judicial frameworks for indemnity that are characterized by broad categories of divergent interpretations and enforcement.

Strict Construction

A common judicial approach to interpreting indemnity language is to invoke a heightened standard of review. Indemnity agreements must be “clear and unequivocal” to be enforced. This strict construction standard can also be expressed in the negative, such as “general, broad, and all-inclusive language is not sufficient to permit indemnity.”

In short, to be enforceable in a strict construction jurisdiction, indemnity agreements must be sufficiently detailed. For example, in American Stores Properties, Inc. v. Spotts, Stevens & McCoy, Inc., 648 F. Supp. 2d 700 (E.D. Pa. 2009), the United States District Court for the Eastern District of Pennsylvania refused to enforce an indemnity provision that did not (1) explicitly name the subject party as being within the scope of the indemnity provision in the contract, and (2) set forth an intention to relieve that subject party for its own breaches of contract or its own negligence.

And as a general rule, as one may expect under the strict construction application, courts will not look to extrinsic evidence to interpret the parties’ intentions outside the four corners of the contract. The inquiry ends upon the finding of an ambiguity in the indemnity clause — i.e., the indemnity provision was not “clear and unequivocal.”

Stricter Than Strict Construction: Express Negligence Approach

Texas is an example of a jurisdiction that has found the strict construction test to be wanting. The Texas Supreme Court has adopted an express negligence approach after observing:

“[T]he scriveners of indemnity agreements have devised novel ways of writing provisions which fail to expressly state the true intent of those provisions. The intent of scriveners is to indemnify the indemnitee for its negligence, yet be just ambiguous enough to conceal that intent from the indemnitor. The result has been a plethora of law suits to construe those ambiguous contracts. We hold the better policy is to cut through the ambiguity of those provisions and adopt the express negligence doctrine.” Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex. 1987).

The express negligence test requires the indemnity provision to spell out specifically that the parties’ intention is to indemnify the indemnitee for its own negligence. With regard to parol evidence, the essence of the express negligence test is that the intent to indemnify another’s negligence must be expressly stated “within the four corners of the contract.” In other words, the parties’ intention with respect to indemnity is not to be gleaned by reviewing extrinsic evidence. Either the agreement expressly states it, or no such indemnity is afforded.

Liberal or Fair Construction Rule

The contract interpretation approach that treats indemnity clauses no differently from any other contractual language has, at times, been described as the “fair construction” or “liberal” method. This interpretive approach is characterized by a lack of bias against the use of general language — and a tendency to read the language objectively rather than in the indemnitor’s favor.

Courts employing the liberal approach often enforce indemnity provisions even though the language does not specifically state that the indemnitee is entitled to recover for its own negligence. Courts faced with deciding whether to require one contracting party to indemnify the other for the other’s own negligence simply inquire whether the contract language, fairly construed, evidences such an intent. If it does, then courts uphold the provision and require indemnification, even to the extent the indemnitee is 100 percent at fault.

The liberal approach is also characterized by a willingness to go beyond the four corners of the contract to determine the parties’ intent in instances where the language is ambiguous. This is in contrast to the approach of simply holding that the purported indemnitee is not entitled to relief because indemnity language is ambiguous. Some of the circumstances beyond the language of the contract that courts have looked to determine the meaning and scope of an indemnity provision include: (1) the existence of insurance covering the indemnity obligation, (2) other contractual provisions, (3) the sophistication of the parties and (4) the purpose of the parties’ contract.

Therefore, as shown above, the interpretation of contractual indemnity provisions can vary from jurisdiction to jurisdiction. And such interpretations can be wildly divergent and often result in contradictory interpretations and enforcement. Expert counseling and contract drafting is required to ensure you are covered in the unfortunate event that an incident arises on your next project.

This article summarizes content from Bruner & O'Connor on Construction Law. For more information on this topic, or for additional citations, see Sections 10.11 to 10.17 in Chapter 10: Indemnity and Contribution.

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