Nobody likes being blamed for somebody else’s mistake. Worse still is shouldering the financial burden on account of another’s wrongdoing.
Yet that’s precisely the position many contractors and subs find themselves in as the result of the presence of an indemnity clauses in their construction contracts.
To my way of thinking, it is fundamentally unfair to shift the entire risk of one’s own negligence to another party. As my Twitter feed has revealed over the last week or so, the state legislatures in Missouri and Minnesota are in the process of wrestling with that unfairness:
The good news for North Carolina contractors is that the Tar Heel State has a statute on the books preventing one party from shifting the entire risk of its own negligence to another.
Our so-called anti-indemnity statute can be found at N.C. Gen. Stat. § 22B-1, and I’ve reproduced it in full below (click the image for a larger version):
A good example of how the statute works can be found in Miller Brewing Co. v. Morgan Mech. Contractors, Inc., 90 N.C. App. 310, 368 S.E.2d 438 (1988). The owner in that case hired a contractor to install a new conveyor system in its plant. An employee of the contractor slipped on some ice while walking out of, but still on, the owner’s premises. The employee sued the owner, arguing it was negligent in venting steam from the plant onto an outside area, causing ice to form on the walkway where the employee was injured. The owner sought to rely on an indemnity provision in its purchase order with the contractor to escape liability for the employee’s claim. The contractor fought back, citing the anti-indemnity statute. Ruling that the conveyor was an “appliance,” as that term appears in the anti-indemnity statute, the N.C. Court of Appeals affirmed the trial court’s determination that the indemnity provision was void as a matter of public policy under N.C. Gen. Stat. § 22B-1.
The analysis is not always so straightforward, however. Savvy owners and contractors typically start their indemnity clauses with “To the maximum extent permitted by law,” language that has been held to save an otherwise void indemnity clause. Vecellio & Grogan, Inc. v. Piedmont Drilling & Blasting, Inc., 183 N.C. App. 66, 644 S.E.2d 16 (2007). When such language is included in an indemnity provision, our courts are likely to sever the unenforceable part of the indemnity clause from the enforceable portion, so that an indemnitor retains a duty to indemnify an innocent indemnitee on account of the indemnitor’s negligent acts.
Here’s another potentially prickly situation I saw recently in a prime contract. The owner included language in its indemnity provision purporting to require the contractor to defend it in any action asserted by a third party alleging joint responsibility between the owner and the contractor for the third party’s injury. The provision would require the owner to reimburse the contractor a share of the attorneys’ fees it incurred based on the percentage of liability ultimately assigned to the owner. That reimbursement clause, however, would only be triggered upon a final determination on the merits, and since the vast majority of civil actions settle, odds are the owner’s duty to reimburse would never come into play. Is the indemnity provision enforceable under our anti-indemnity statute? It’s an open question.
The uncertainty leads to this point: be careful during the contracting process. Focus on how much liability the other party wants you to assume on its behalf. And seek to modify proposed terms you think unfairly allocate the risk of the other party’s negligence.
What do you think? How far should the legislature’s in Missouri and Minnesota go in barring indemnity provisions in construction contracts? Do you think such provisions should be enforced, at least to a point?
The Friday Forum microphone is all yours.