What Are the Benefits of Drafting An Indemnification Clause In A Construction Contract?

May contractors limit their responsibility for paying another party’s legal fees in situations where that other party’s fault precipitates the cause of action? Recent court decisions suggest that, if the contractor has a narrow indemnification clause in his contract, courts might be less likely to find him liable in situations where the contractor was not at fault.

In a recent case considered by the Appellate Division of the Second Department of the Supreme Court of New York, a plaintiff was allegedly injured when his motorcycle struck a pothole in a Brooklyn street. Sand v. City of New York, 2011 NY Slip Op 3226, 2 (N.Y. App. Div. 2d Dep’t 2011). The plaintiff brought suit against the City of New York. The City had issued a permit to Verizon New York Inc. (“Verizon”) to open the roadway at that location. Accordingly, it commenced a third-party action for indemnification against Verizon. That company then commenced a fourth-party action for contractual indemnification against S. DiFazio and Sons Construction, Inc. (“DiFazio”), the construction company that had performed the work for Verizon under the permit.     

DiFazio claimed that it was not required to pay Verizon’s legal fees or any other costs of defending the action because it was not at fault. However, the Court determined that the agreement did not include any writing that would make DiFazio’s obligation contingent on fault. The Court held that “[p]ursuant to the contract between DiFazio and Verizon, DiFazio agreed to defend and indemnify Verizon for all claims arising out of DiFazio’s ‘actual or alleged acts or omissions.’ The plain and unambiguous terms of the contract do not condition DiFazio’s obligation for attorneys’ fees and costs on a finding of fault.” Id. at 2.    

The Sand Court might have decided differently if the indemnification provision were limited to a more specific and narrow variety of claims. For example, in a recent Second Department case, the Court held the contractor was not liable because the indemnification clause was narrowly tailored. Farrell v. City of New York¸ 2011 NY Slip Op 2839, 1 (N.Y. App. Div. 2d Dep’t 2011). That case stemmed from a 2002 incident on the Gowanus Expressway where a piece of road debris allegedly went through a windshield and struck the plaintiff driver in the face, rendering her unconscious. At the time, defendants Grace Industries, Inc. and Grace Industries Inc./El Sol Contracting & Construction Inc., J.V. (the “defendants”) were performing re-decking and structural steel replacement work on the expressway pursuant to a contract with the State of New York. The plaintiff sought to recover damages for personal injuries. Importantly, the indemnification clause was a narrow one. As the Court observed, “[T]heir contract with the State was limited and did not entirely displace the State’s duty to maintain the roadway.” Id.

The defendants submitted a motion for summary judgment, which was granted by the lower court and affirmed by the Appellate Division.      

The Farrell Court held that a party who enters into a contract to render services may be said to have assumed a duty of care (and thus be potentially liable in tort to third persons) only where:

1) the contracting party, in failing to exercise reasonable care in the performance of its duties, launches a force or instrument of harm,

2) the plaintiff detrimentally relies on the continued performance of the contracting party’s duties, or

3) the contracting party has entirely displaced the other party’s duty to maintain the premises safely.

Church v. Callanan Indus., 99 N.Y.2d 104 (N.Y. 2002).

However, the Farrell Court determined that, although the contract between the defendants and the State included an indemnity clause, it did not entirely remove the State’s duty to maintain a safe roadway. In other words, it had not “entirely displaced the other party’s duty to maintain the premises safely.” Additionally, the defendants demonstrated that they did not cause the debris to be on the roadway; they did not know how long it had been there; and that they did not have a duty to remove non-construction roadway debris. Hence, they would not have to pay the State’s legal fees and costs of defending the suit.

These two decisions demonstrate the consequences of having a broad versus narrow construction contract indemnification clause. The second decision also indicates the benefits a construction company may enjoy by including a narrow indemnification clause in its contracts because it might enable a company to avoid the obligation of paying for another party’s attorneys’ fees in situations where they are not at fault.

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