In most construction contracts, there is nothing more tricky
than the indemnity clause. Indemnities don't come into play on
most projects (but when they do, it is because something has gone
badly wrong.) As a result, indemnity clauses often get short shrift
A blog is no place for a discussion of such a complex subject. Or
is it? Determining whether or not an indemnity clause is
problematic is the starting point.
With the intent of giving a complex subject a simple treatment,
this is my list of "red flag" issues that call for
(re)negotiation of an indemnity clause:
Indemnity for risks out of your control: This
is a basic principle. The indemnitor (the party with the burden of
the indemnity clause) should ask, am I taking on any risk under
this indemnity clause that I cannot control? The purpose of
indemnities is (or should be) to attach a particular risk to the
party best able to control that risk.
Indemnity for risks controlled by the other
party: This is worse. Unless you are in the insurance
business, you should not agree to indemnify the other contracting
party for something in their control.
Indemnity for losses resulting from the other
party's own negligence: This is the absolute worst.
(Fortunately, this is also a very rare animal. And the Canadian
courts say that they won't imply an obligation to indemnify the
other party for a loss caused by their negligence unless the
contract says so in the most clear and obvious language. I have
seen such express clauses, but not many.)
Indemnity for an uninsured (or uninsurable)
risk: This is another basic principle. The indemnitor
should always be asking, do I have insurance that protects me
against these risks covered by the indemnity clause?
Indemnity without limit: Is there no cap on
the indemnity obligation? Remember that insurance policies have
monetary caps; an indemnity without a cap is a sure sign that the
indemnitor are taking on an uninsured risk (i.e. in excess of
Indemnity disproportionate to the contract: Is
the indemintor taking on risk under the indemnity clause that is
far greater than the contract value? Would the indemnity clause put
the company at risk of bankruptcy if the unexpected comes to
Indemnity for consequential damages or economic
loss: Indemnity clauses broad enough to include
consequential damages or economic loss require very careful
consideration. By definition, such indemnity clauses expose the
indemnitor to liability that is broader than ordinary principles of
contract law or common law would allow. (Perhaps another day I will
elaborate; this is a topic that warrants an article of its'
Indemnity for negligence or breach of
contract: Now we are getting into clauses that are common,
but require caution. Indemnity clauses that cover negligence or
breach of contract expose the indemnitor to potential liability for
unforeseeable losses. But at least such obligations require the
indemnitee to prove that the indemnitor was negligent, or breached
the contract. If the indemnitor has to give such an indemnity, the
other "red flags" mentioned in this list become even more
important; e.g. If you must agree to indemnify the other party for
any loss resulting from your breach of contract, can you negotiate
a monetary cap, and/or an exclusion of consequential damages or
Indemnity for any loss "arising from or related
to" the work: Such broad indemnity obligations do not
depend on proof of negligence, or breach of contract – it may
be sufficient to trigger indemnity obligations if the loss is
(somehow) related to the work, even without negligence or breach of
contract. Therefore, such indemnities require even more caution
than indemnities for negligence or breach of contract. Once again,
however, such indemnity clauses may be fine – if they are
otherwise subject to some reasonable limitations in scope and
There are infinite permutations of project risks, indemnity
provisions, and insurance programs; an indemnity clause may be
unreasonable in once case but justifiable, even necessary, in
another case. Be sure to consider the indemnity clause in the
context of possible real world risks on the project (bodily injury,
damage to existing facilities, delay in completion, environmental
risk...) and the project insurance program. Just don't ignore
the indemnity clause or treat it as boilerplate. A bad indemnity
clause can be a very big problem, not only when that unexpected
loss occurs but also in the event of any contract dispute.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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