by Tymon Berger
Indemnity provisions are one of the primary and most easily recognized tools used in allocating risks in a construction contract. When used properly these clauses improve efficiency by allocating risks to the parties best able to control or bear them.
Fortunately for public and private construction projects in Washington for years now Washington has had legislation that seeks to avoid inefficient risk allocation. Under the state’s anti-indemnification statute (RCW 4.24.115) a party to a construction contract cannot be required to indemnify the other party for the other party’s own negligence whether sole negligence or concurrent. The law declares that any contract provision requiring otherwise is against public policy and void.
But a decision from our state supreme court last week raises a caution flag for the construction industry. In that case (Snohomish County Pub. Trans. Benefit Area Corp. v. Firstgroup America Inc.) a chain-reaction accident involving Community Transit buses on I-5 ended in 42 claims being indemnified by a transit operator who despite being surrounded by a storm of fault was itself fault free. The fault free operator nevertheless remained obligated to indemnify Community Transit who admitted to being negligent for purposes of the Court’s decision.
In the Community Transit case First Transit had an operating agreement with Community Transit requiring First Transit to indemnify Community Transit against all losses except those arising solely from Community Transit’s own negligence. First Transit happened to be operating a bus that got caught between an oncoming car that had just been rear-ended and a Community Transit-operated bus following behind First Transit’s bus. By virtue of being in the wrong place at the wrong time the oncoming car hit First Transit’s bus instead of the bus operated by Community Transit. The Community Transit bus then rear-ended First Transit’s bus leaving First Transit to deal with its own losses in addition to the other 42 claims tendered to it.
It is not hard to imagine similar bad luck in construction. For instance a mason is building a wall when a driver careens into it toppling the brick wall onto owner-furnished equipment. The mason did nothing to cause the car to lose control and the car would have caused the same damage to the owner’s equipment (if not more) had the brick wall not stood between the two. Regardless the mason could find itself being the indemnitor of the driver despite having no control over the driver no fault of its own and being the least efficient party for bearing such risk.
According to the Court in Community Transit because the parties’ indemnity agreement required indemnification for everything but Community Transit’s sole negligence the Court reasoned that the parties had ‘clearly and unequivocally’ shown an intent to indemnify Community Transit from other types of losses including losses only partially caused by Community Transit’s negligence and losses caused by third parties such as the other drivers. Further because First Transit’s indemnity obligation arose from First Transit performing its work under the contract it did not matter to the Court that First Transit had not been negligent.
Thanks to the anti-indemnification statute mentioned earlier the impact of the Community Transit decision on construction contracts is largely muted. This is true even for construction contracts adopting indemnity provisions to the full limits allowed by Washington’s anti-indemnity statute. Nevertheless contractors and their legal counsel are not entirely out of the Community Transit woods.
One feature that neither the anti-indemnification statute nor many standard subcontract forms (such as the AGC of Washington’s standard subcontract) have is an exclusion from indemnification where the indemnitor has not acted negligently or where the loss is caused by negligent third parties. This becomes a problem under the Community Transit decision’s inference that broad losses left unaddressed by specific exclusions to the contract’s indemnity obligations may shift liability for these losses to the indemnitor. In construction contracts and under the statute because indemnity clauses are typically broad with specific exclusions for the indemnitee’s own negligence (whether sole or concurrent) a court could interpret the Community Transit decision as impliedly requiring indemnification for all other losses including those arising from third parties or despite the contractor acting reasonably.
Construction contract indemnity provisions are often broad in covering losses related to the indemnitor’s work. If owner and prime contractor (or prime contractor and subcontractor) do not take the additional step of expressly allocating the risk of losses from negligent third parties or clarifying that the prime or sub must be negligent in order to trigger the contractor’s indemnity obligations the Community Transit decision undermines the contract’s effectiveness in saving the contractor from risks it has no control over and cannot efficiently bear. Consequently the Community Transit decision gives reason to revisit the indemnification clauses at the center of your construction contracts and decide if more specificity is appropriate to ensure the most efficient risk management possible.
Tymon Berger is an attorney in Ashbaugh Beal’s Construction Law Group. He is a member of AGCs Legal Affairs Committee and Future Leadership Forum.