Indemnification is a term often thrown about in construction litigation, and you will see it in most standard form construction contracts. But what actually is it, and how useful is it to have when it comes to litigation in the construction context?
Indemnification is a means to shift the risk to some other party, regardless of who is at fault, such that one party, the indemnitor, is required to pay for the damages and costs incurred by another party, the indemnitee. You will often see indemnification clauses in contracts between project owners and general contractors, general contractors and subcontractors, and even owners and subcontractors via flow-down provisions in subcontracts.
There are three main types of indemnity, any one of which can provide indemnification.
Express indemnity, also sometimes called express contractual indemnity or simply contractual indemnity, is an indemnity clause that is specifically set out in a written contract. Based upon general contract principles, express indemnity is the most common type of indemnity. For example, a contract between a general contractor and a subcontractor may include an express indemnification provision whereby the subcontractor agrees to hold harmless the general contractor for all claims arising out of the contract, regardless of who is at fault.
There are three main types of express indemnity clauses: broad form, intermediate form, and limited form.
Broad Form Express Indemnity Clauses
Broad form express indemnity clauses require the indemnitor to hold the indemnitee harmless for all liability, even if the indemnitee is solely at fault. For example, a contract between a general contractor and a subcontractor may state that the subcontractor “shall indemnify the general contractor for claims arising out of the contract, whether caused in whole or in part by the negligence of the general contractor. It is specifically understood that this indemnity shall be interpreted as indemnifying the general contractor from its own sole and/or partial negligence.” Note that most states, including North Carolina, have statutes prohibiting this type of express indemnity clause.
Intermediate Form Express Indemnity Clauses
Intermediate form express indemnity clauses require the indemnitor to indemnify the indemnitee unless the indemnitee is solely at fault. In other words, if the indemnitor is 1% liable and the indemnitee is 99% liable, the indemnitor is still required to cover the entire loss. An example of an intermediate form express indemnity provision may state that the subcontractor “shall indemnify the general contractor for claims arising out of the contract, whether caused in whole or in part by the negligence of the general contractor. This clause is not intended to indemnify the general contractor for claims, damages, etc. caused by the sole negligence of the general contractor.” Approximately 50% of states, including North Carolina, statutorily prohibit the use of this type of express indemnity clause.
Limited Form Express Indemnity Clauses
Limited form express indemnity clauses require the indemnitor to indemnify the indemnitee, but only to the extent of the indemnitor’s own negligence. For example, a contract between a general contractor and a subcontractor may state that the subcontractor “shall indemnify the general contractor for claims arising out of the contract, but only to the extent caused in whole or in part by the negligent acts or omissions of the subcontractor.” Importantly, limited form express indemnity clauses are the most likely of the three types of express indemnity clauses to be enforceable, and most states, including North Carolina, allow them.
Practice Pointer: Because not all express indemnity clauses are legally enforceable, one way to ensure your client’s express indemnity clause is likely to be enforceable is to make sure it is a limited form indemnity clause.
Even if a written construction contract between two parties does not include an express indemnity provision, one party may still be entitled to indemnification if there is indemnity implied-in-fact, also known as a contract implied-in-fact. Indemnity implied-in-fact stems from the existence of a binding contract (although it lacks an express indemnity clause) that necessarily implies the right to indemnification based upon the contracting parties’ relationship, the circumstances of their conduct, and their intent to create an indemnitor/indemnitee relationship.
For example, in McDonald v. Scarboro, the North Carolina Court of Appeals found there was indemnity implied-in-fact when, after Defendant Scarboro breached his contract with Plaintiff McDonald to begin working for co-Defendant McCrary, Scarboro testified that McCrary had verbally agreed to provide an attorney if McDonald sued Scarboro for breaching his contract. 370 S.E.2d 680, 91 N.C. App. 13 (N.C. Ct. App. 1988). Additionally, Scarboro was an employee of McCrary, and the establishment of the indemnification relationship was “at the essence of their intent to formulate their contractual master-servant relationship.” Kaleel Builders, Inc. v. Ashby, 587 S.E.2d 470, 474, 161 N.C. App. 34, 39 (N.C. Ct. App. 2003); 370 S.E.2d 680, 91 N.C. App. 13.
Practice Pointer: In reality, indemnity implied-in-fact is rarely pled or pursued in construction litigation. More often, indemnity is pursued based upon an express contractual provision or indemnity implied-in-law. So if you are assisting a client with contract drafting, make sure to discuss and include an express indemnity clause in the contract if the client so desires.
The third type of indemnity, called indemnity implied-in-law, arises from equitable concepts. For indemnity implied-in-law to exist, there must be an underlying injury sounding in tort, such as negligence; it cannot be based upon a breach of contractual obligations. In North Carolina, Courts have declined to recognize claims in tort where there was an underlying contract that governed the rights and duties of the parties. See, e.g., 587 S.E.2d 470, 474, 161 N.C. App. 34; Frye Regional Medical Center, Inc. v. Hostetter & Keach, Inc., 753 S.E.2d 741, 231 N.C. App. 170 (N.C. Ct. App. 2013) (unpublished disposition); Crescent Univ. City Venture, LLC v. AP Atlantic, Inc., 2019 WL 3765313 (N.C. Sup. Ct. Aug. 8, 2019) (unpublished). Thus, generally, indemnity implied-in-law is not available when there is an express written contract.
For there to be indemnity implied-in-law, the indemnitee must have imputed or derivative liability for the tortious conduct for which indemnity is sought. If a Court determines there to be indemnity implied-in-law, a passive tortfeasor will be required to pay the judgment owed by an active tortfeasor, to the injured party.
Practice Pointer: Usually claims for indemnity implied-in-law are brought by means of a third-party Complaint. Thus, if you are representing a client in construction litigation, make sure to evaluate the facts to determine if your client may be able to assert a claim for indemnity implied-in-law against any other parties.