Bradley & Riley PC

July 2011 -- This legislative session saw Iowa join the majority of states in outlawing broad form indemnification provisions in (most) construction contracts. Generally speaking, broad form indemnification is a practice in which one party to a construction contract (typically one with more bargaining power) requires another party to indemnify, or hold harmless, the first party from liability, even for the first party's own negligence. Such provisions routinely appear in owner-general contractor agreements (where they protect the owner against the owner's own negligence) and general contractor-subcontractor agreements (where they protect the general contractor against the general contractor's own negligence).

A growing number of states have determined that broad form indemnification is contrary to public policy because, in allowing a party to escape liability for its own actions, it removes that party's incentive for responsibility and safety while unfairly allocating risk. In short, notwithstanding the sanctity of contract and the broad liberties that parties are afforded in negotiating contracts, courts and states have ultimately concluded that broad form indemnity should be severely limited or altogether prohibited because of the dangers created for both society at large in eliminating economic incentive for safe construction practices and the individual contracting party who may lack bargaining power or other resources to negotiate fair consideration for the risk assumed.

Senate File 396 limits broad form indemnification in most construction contracts by declaring such provisions void and unenforceable. By its terms, SF 396 applies to most typical types of construction contracts and contracting parties: owners and general contractors, owners and architects, general contractors and subcontractors, project managers and project managers. Notably, public contracts for highways, roads and streets are not subject to the new law.

Negotiating parties need to be mindful of the resulting shift in negotiating positions vis a vis risk allocation. Practically speaking, this means that lower-tier parties no longer will be forced to indemnify upper-tier parties for the upper-tier party's negligent acts or omissions. A simple example illustrates the difference between an unenforceable broad form indemnity provision and an acceptable indemnity provision. For example, prior to adoption of SF 396, a subcontractor may have been compelled to accept the following broad form indemnity provision in order to land a subcontract contract with a general contractor:

"Subcontractor shall defend, indemnify and save General Contractor harmless from all claims for injuries to, or death of, any and all persons, and for loss of or damage to property, regardless of how caused, that arise under or in connection with this Contract, even if directly or indirectly caused by or resulting from acts, errors or omissions by or of General Contractor."

Note the unlimited language: "regardless of how caused" and "even if directly or indirectly caused by or resulting from the acts, errors or omissions by or of General Contractor." Under the above provision, the General Contractor has shifted all liability for its own negligence to the Subcontractor. Under SF 396, this provision is void as a matter of law and is no longer enforceable.

 

By contrast, an acceptably narrow form indemnification provision is one that does not allocate the indemnitee's negligence to another party:

"Subcontractor Contractor shall defend, indemnify and save General Contractor harmless from all claims for injuries to, or death of, any and all persons, and for loss of damage to property, that arise under or in connection with this Contract, caused by or resulting from the acts, errors or omissions by or of Subcontractor."

The important distinction is found in the clause "caused by or resulting from the acts, errors or omissions by or of Subcontractor". Here, the General Contractor no longer shifts its own liability onto the Subcontractor, so the provision does not run afoul of SF 396. Instead, the Subcontractor now bears the burden of defending and indemnifying the General Contractor for claims arising from the Subcontractors acts, errors and omissions.

 

It should be noted that construction contracts often define a general contractor or a subcontractor to include all persons and companies with whom the general contractor or subcontractor contracts with or otherwise hires or employs. Thus, under the narrow form indemnification provision set forth above, a subcontractor could be liable for not only its own negligence, but the negligence of its own second tier subcontractor (i.e., "sub-subcontractor"). (However, even absent such express definition in the construction contract, however, common law principles of agency may still impose liability on a subcontractor for the negligence of its sub-subcontractor.) This is not prohibited under SF 396.

It should also be noted that indemnity provisions often provide that a contracting party, such as a prime contractor, will indemnify the other contracting party, such as the owner, for damage, injury or death, caused by or resulting from the acts, errors or omissions of any person or company other than the owner – e.g., the prime contractor and its subcontractors, as well as a construction manager, an architect, and any other prime contractor and its subs working on the project. Such a provision also is not prohibited under SF 396.

As these examples illustrate, SF 396 does not entirely level the playing field in construction contract negotiation, but it does eliminate the most egregious form of uneven risk allocation. Construction industry professionals are advised to review their form documents existing and pending (i.e., not yet executed) contracts to verify, and if necessary, revise to ensure, compliance with SF 396. Extreme caution must be used when considering indemnity provisions that require a contracting party to indemnify another for the acts, errors and omissions of everyone connected with the project – SF 396 does not eliminate the risk of such expansive liability wherein a contractor could effectively become an insurer for a project.

While SF 396 does not expressly address the question of its retroactive impact on existing contracts, parties to such contracts should consider it likely that any broad form indemnification provision is now retroactively unenforceable by force of law, while the remaining contract is preserved (a result that may be achieved by the presence of a savings clause in the contract). Until a lawsuit presents Iowa's courts with questions of contractual impracticability, legal frustration, or even constitutional concerns over SF 396's application to existing contracts, the issue will remain unsettled. Parties to existing contracts are advised to consult legal counsel with questions over their particular contracts. Where inclusion of broad form indemnity was a critical component of each party's give-and-take during the negotiation process, the parties must carefully consider the impact of SF 396 on the each parties' consideration metrics and whether renegotiation (if possible) is warranted.

Supporters of SF 396 consisted of a broad coalition of construction industry professionals, whose efforts overcame opposition by organizations lobbying on behalf of Iowa municipalities, as well as large commercial interests. After prior versions of broad form indemnification failed to make it out of committee in prior sessions, this year SF 396 passed both houses of the legislature overwhelmingly. The Senate approved the bill 47-1, the House 84-12. Governor Branstad signed SF 396 into law on April 7, 2011. It took effect on July 1, 2011.

Please contact Adam Tarr or one of our attorneys in the Construction Practice Group if you have questions.

Categories: Construction Law

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