by Eric J. Miersma
When is the last time you read the fine print on your contracts? Many of you no doubt spend significant time going over the scope of work and payment terms. However, I am willing to bet that a lot of you do repeat work for the same owner or general contractor, recognize their standard form contract, and no longer read the fine print. Even if you do read it, you probably are just checking to make sure it is the same, or maybe make the same changes that you negotiated months or years ago on another project. If you are a small contractor, you might believe that you have no alternative but to accept whatever terms are in the general contractor’s form contract or lose the job to someone who will not attempt to negotiate the contract. If this describes you, then perhaps it is time to take another look at your contract.
A key component of any construction contract is the transfer of risk. The primary method of doing this is through the indemnity provision (insurance provisions are another). You have all seen the provision, probably tucked away between the warranty and attorney’s fees provisions. If you are the indemnitee (the one getting the money), you want the broadest possible indemnity agreement the law will allow. You want to be protected from every conceivable claim, regardless of whether the indemnitor (the one paying the money) is at fault or you were primarily at fault for the incident that gave rise to the claim. However, if you are the indemnitor, the last thing you want is to indemnify the general contractor for someone else’s mistake, especially if that mistake does not even arise out of your scope of work.
The law of contracts generally allows the parties to agree to whatever they want within certain limitations. For example, you cannot enforce a contract for illegal activity. Within those limitations, Courts will enforce whatever terms are agreed upon, no matter how one-sided those terms may be. In construction, some states have chosen to pass laws protecting contractors from overbearing indemnity agreements. For example, in California, Civil Code section 2782 prohibits indemnity agreements that purport to indemnify the promisee (typically the general contractor) from liability against claims arising from the promisee’s sole negligence. This means that the general contractor cannot require its subcontractor to pay for mistakes that are entirely the fault of the general contractor. However, it is possible, and fairly common, to draft an indemnity agreement that requires the subcontractor to indemnify the general contractor for the entire amount of a claim when the subcontractor is only 1% negligent and the general contractor is 99% negligent. These types of agreements are sometimes called Type I agreements and if this is in your contract, you may be paying for someone else’s mistake. I do not need to remind you what this type of exposure can do to your insurance premiums.
In an effort to provide some relief to subcontractors involved in new residential construction, the California legislature amended section 2782. The amendment essentially eliminates Type I indemnity agreements. For all residential construction contracts entered into after January 1, 2006, no subcontractor can be required to indemnify a builder, including for costs of defense, for claims that arise from the builder’s negligence, the negligence of other direct subcontractors, or the defective design provided by others. In legalese, this concept is called comparative fault. Thus, if your mistake gives rise to a claim against the builder, you may have to indemnify the builder, but only to the extent, or percentage, that your negligence caused the damage. In other words, if you and the builder are equally at fault for the condition that gave rise to the claim, you indemnify the builder for your 50% share, but not the builder’s 50%. Contrast that with the scenario under a Type I indemnity agreement where you might have to indemnify the builder for 100% of the claim, even if the builder were 50% at fault.
While this change in the law is good for subcontractors, it can take a while for the changes to show up in contracts. Because builders spent good money to draft a form contract for use on all their jobs, they are often reluctant to reevaluate or negotiate them. At large companies, the front line contract administrators are likely under orders not to modify the contract language. Alternatively, form contract indemnity provisions are sometimes poorly modified and, after years of recycling and amending the provisions, these modifications accumulate until the provision is legally unintelligible.
In the end, the contract you negotiate is a business decision. You decide whether the risk you undertake is worth it. However, do not hesitate to challenge an indemnity provision. If you do not understand it, get legal advice. Not all indemnity provisions are the same, and every state has different rules for limiting and interpreting indemnity provisions. Like most things in life, a little time spent at the beginning of a project can save a lot of time and money later. Find out what is legally allowable in your state and determine what level of risk you (and your insurance carrier) can live with. Then go and negotiate the best agreement you can.
