LEGAL MATTERS
– to cover losses suffered by another party. In most agreements, the
intention of the parties can be captured by dispensing with the old
terminology and simply using “indemnify.”
The daunting aspect of indemnification clauses are that, in most
cases, they will require one party to indemnify the other party for
losses suffered by a claim from a third party. To give an example of
this, assume you are a subcontractor providing earth moving servic-es
and you agree to indemnify the general contractor against claims
related to the fill you are providing for a road project. After the road
is built, subsidence becomes evident and the general contractor is
sued by the owner. Per the indemnity clause, you would be obligated
to cover the general contractor’s costs in defending against this law-suit
and you would be responsible for the general contractor’s dam-ages
if they were found liable to the owner.
PROUDLY MADE IN CANADA
When I receive a construction contract from a client for review,
often the agreement will be a standard form contract and will con-tain
a unilateral indemnification clause. This means that only one
party is required to indemnify the other – generally, the party pro-viding
the standard form contract is the beneficiary of the indemni-fication
clause. In such situations it may be difficult to persuade the
party opposite to dispense with the indemnification clause in its en-tirety,
however there may be some scope to provide for a mutual in-demnification
clause. So to follow our example above, if a mutual
indemnification clause was in place and the earth mover subcontrac-tor
was sued by the owner instead of the general contractor, the gen-eral
contractor would be obligated to cover the subcontractor’s costs
in defending against the lawsuit and the damages, if awarded against
the subcontractor. Of importance to note is that a mutual indemni-fication
clause will not mitigate the risk of
having to indemnify but rather just require
all parties to indemnify each other in the
event of a third-party claim. In some situ-ations,
particularly for lower risk and low-er
value projects, it makes sense for both
parties to agree not to include an indemni-fication
clause and each party must cover
losses for third-party claims on their own.
The complexity of indemnification pro-visions
range from simple three-sentence
paragraphs to complex 25-plus page, stand-alone
agreements. Each project and the role
of that party in it will inform whether an in-demnification
clause is required and, if so,
the complexity of such a clause. In our ex-ample
of the earth moving subcontractor,
given the location closer to the base of the
construction pyramid in a large road proj-ect,
the earth moving subcontractor prob-ably
wants to avoid being bound to any
indemnification provisions and pass the
risk up the pyramid to those who have more
resources to respond to third-party claims.
If the earth moving contractor is a small
business, there is an argument that they do
not have the resources to indemnify, even if
the provision were put in place.
The indemnification clause in a con-struction
contract is not something to be
feared, but rather can be an important tool
in properly allocating risk in a construc-tion
project between the parties.
Chad Eggerman is a construction lawyer
who practices in the areas of corporate
and commercial law, procurement,
environmental, aboriginal and dispute
resolution with Miller Thomson LLP. He
looks forward to continuing to work together
with clients to build new infrastructure in
Saskatchewan. Feel free to contact him about
this article or other construction questions
at ceggerman@millerthomson.com.
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