In reviewing construction contracts for clients, I often spend a great deal of time looking at indemnification clauses. These clauses come in many different shapes and sizes. There are three unique concepts in “indemnification” clauses, however, that are lumped together and seen by the unsuspecting as the same thing. These clauses all seem to “quack” like an indemnification duck as a result; but indemnification ducks they all are not.
Common indemnification language includes language which requires the contractor or subcontractor, as the case may be, to “defend, indemnify, and hold harmless” the upstream entity with which it has contracted. In examining this phraseology, it is initially important to note the independent use of the word “indemnify”. The construction of the clause alone shows that the concept of indemnity is by definition different than holding someone harmless or defending someone.
Indemnification can be loosely defined as agreeing to pay for a loss suffered by another. This can be the case whether that other party caused the loss itself or it was caused by the party agreeing to provide indemnification. The implication is that money will change hands to cover damages should they occur.
Hold harmless provisions represent a contractual agreement that one party will not hold another party liable or responsible for a specifically defined risk. This is, effectively, similar to a waiver which is given from one party to another to refrain from taking action against that party if they contribute to a loss. It does not imply money changing hands.
Finally, the defense obligation is an agreement to take up the defense of another party if a claim, including a lawsuit, is brought against that other party. One could argue that this is an attorneys’ fee provision of sorts, as its most practical application is to require the party agreeing to provide a defense to hire a lawyer to defend the other party.
These concepts get lumped in together because they are undeniably linked. They are, however, fundamentally different on their most basic levels. Those who are negotiating contracts should understand that they are unique and separate ideas, and each concept impacts how liabilities and losses are handled should some risk eventually materialize into a reality. The three concepts can come in the same clause and be linked to the same trigger; or they can come in separate sections of an “indemnity clause” and be linked to different triggers.
When you are reviewing indemnity clauses, be aware that all three of these concepts are usually part of the agreement, understand how they interplay, and plan accordingly. If you have any questions on indemnity clauses or other types of construction contracts please email me or call me at |
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