Limit your liability

Indemnification provisions in contract documents can prove detrimental to you

Indemnification provisions are ubiquitous in construction contracts and provide legal and financial protection to one party while transferring risk and liability to another party. One sentence in a multipage contract can drastically affect your potential liability. When you sign a contract with an indemnification provision, you are agreeing to accept liability and reimburse or make payments to the parties named in the contract whom you have agreed to indemnify.

Terms

First, let's define the terms. The indemnitor is the party who has the obligation to indemnify another party. The indemnitee will receive the benefit of the indemnification obligation. In a typical construction subcontract, the general contractor is the indemnitee and the subcontractor is the indemnitor. General contractors invariably include indemnification provisions in their subcontract forms. Building owners who use their own contract forms often include indemnification provisions. Standard construction contract documents, such as the construction contracts promulgated by The American Institute of Architects (AIA), also include indemnification provisions.

Other than perhaps contract amount and scope of work, the indemnification provision is the most critical term in a construction contract. An indemnification provision that applies to claims, losses or damages that are the indemnitor's fault are reasonable and justified. A broad indemnification provision that seeks to transfer all contractual risk and liability from the indemnitor to the indemnitee poses an enormous liability risk to the indemnitor and should be deleted or modified before contract execution. The party seeking indemnification typically has superior bargaining power.

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