Construction contracts: Are you STILL reading your contractual indemnification provisions?

If you are not actively reading indemnification provisions in every contract you are asked to sign, then you are leaving your company open to unnecessary risk.  In 2013, the Minnesota legislature passed a bill into law which confirmed that indemnification provisions in construction contracts, which require a contractor to indemnify an owner for damages arising out of an owner’s own negligence, are illegal and unenforceable.  Minn. Stat. § 337.02. The new law further provided that it is also illegal for an owner to require a contractor to purchase insurance that is intended to indemnify an owner for damages arising out of an owner’s own negligence. Minn. Stat. § 337.02. 

This law, known as the Anti-Indemnification Statute (“Statute”), has been in place for over six years. The purpose of the Statute is to ensure that each party is responsible for damages arising out of their actions; and that no party is required to pay for damages arising out of actions of another party over whom they have no control. It’s a fairness standard – you should only be held responsible for damages that you caused or that you had the power to prevent. 

Many parties have revised their proposed contract language to comply with the Statute’s requirements.  However, MANY parties – including owners and contractors – have adopted “creative” language that appears to comply with the Statute but which, in reality, would still require a contractor or sub-contractor to pay for damages arising out of another party’s own fault.  All contractors must be aware of this creative, yet illegal, language. 

Contractors cannot assume that the proposed contract language complies with the Statute.  Rather, all contractors must carefully read every contract to ensure that the indemnification provisions comply with the Statute and the basic fairness standard.  For example, contractors should look for “wiggle words” that could lead to situations which violate the Statute.  Examples of “wiggle words” may include:

• “Directly or indirectly arising from or resulting from the performance of this Agreement;”
• “Without limits and without regard to the cause or causes thereof;”
• “Regardless of whether such damages arise out of sole, joint or concurrent, active or passive, negligence of the indemnitee.

Each of these examples could easily lead to situation where the contractor is required to indemnify the owner for damages which are concurrently caused by contractor and owner.  This is unacceptable.  Instead, the “wiggle words” should be deleted, and replaced with language that only requires a contractor to indemnity other parties to the extent the damages were directly and solely caused by that contractor. This is fair. 

We recommend that every contractor read every contract to ensure that they are not accepting an unnecessary risk.  When in doubt, seek help to read, understand and negotiate the best contractual terms possible.