- Posted by John P. Ahlers
- On August 27, 2013
A recent blog article, Top 10 Construction Contract Provisions – Indemnity, explores and discusses indemnity provisions in subcontracts. This article illustrates statutory (public policy) provisions which limit overreaching indemnity provisions.
Frequently, indemnity clauses provide parties with superior bargaining power with an opportunity to seek the broadest possible indemnity from lower-tier contractors and subcontractors. Many states, however, have enacted anti-indemnity statutes that void indemnity agreements if they go too far. The recent case of Engineering and Construction Innovations, Inc. v. L.H. Bolduc Co., Inc.[i] from the Minnesota Supreme Court illustrates how statutes prevent parties from taking advantage in contract negotiations.
The project involved the installation of an underground sewer pipeline. The general contractor, Frontier Pipeline, contracted with Engineering and Construction Innovations, Inc. (“ECI”) to install a lift station and force main access structures at specified locations along the pipeline. As part of its excavation requirements, ECI subcontracted with L.H. Bolduc Co., Inc. (“Bolduc”).
While performing the work at one of the cofferdam locations, Bolduc’s metal sheet piling drove through the sewer pipe. ECI repaired the sewer pipe at a cost of over $235,000 and sought compensation from Bolduc for negligence and contractual indemnification. The indemnity clause in the subcontract provided as follows:
[Bolduc] agrees to protect, indemnify, defend and hold harmless ECI and Owner to the fullest extent permitted by law and to the extent of insurance requirements below, from and against (a) all claims, causes of action, liabilities, obligations, demands, costs and expenses arising out of injury to any persons or damages to property caused or alleged to have been caused by any act or omission of [Bolduc].
The undisputed facts were that ECI had provided the template and survey designating where Bolduc was to drive the sheet piling. After a three-day trial, the jury found that Bolduc was not negligent in performing its work and not liable to indemnify ECI. The jury awarded ECI nothing for the damages.
ECI petitioned the trial court to override the jury’s verdict and rule that Bolduc should indemnify it. ECI argued that there was no requirement in the indemnity clause that the damages be caused by Bolduc’s negligence. Rather, the provision stated that the damages had to just arise from “any act or omission of Bolduc.” There was no dispute in this instance that Bolduc’s physical “act” in driving the sheeting caused the damage. ECI had told Bolduc where to drive the piles, but pointed out that there was no judicial determination that it had been negligent.
The trial court disagreed, finding that the indemnification clause was unenforceable under Minnesota’s anti-indemnity statute. Like most states, including Washington, Oregon, and Alaska, the Minnesota statute rendered unenforceable those indemnity provisions that require indemnification of a party whose wrongful conduct is to blame for the damage. In other words, irrespective of what is written in the contract, Party A to the contract cannot indemnify Party B for loses caused solely by the negligence of Party B.
ECI appealed the trial court decision to the Court of Appeals, which found that Bolduc was indeed obligated to indemnify ECI, even if it meant that Bolduc would be indemnifying ECI for ECI’s own negligence. Its rationale was that the language of the indemnity provision required Bolduc to indemnify ECI from and against all claims “arising out of … damages caused … or alleged to have been caused by any act or omission of [Bolduc].” The appellate court found that this language required Bolduc to indemnify ECI on the allegation that Bolduc’s work caused the harm. The appellate court ruled that the trial court erred in concluding the jury’s findings that Bolduc was not negligent somehow extinguished Bolduc’s indemnity obligations.
Bolduc then appealed to the Minnesota Supreme Court, arguing that it was not at fault for the damaged pipe and requiring it to indemnify ECI would contravene the explicit language of the state’s anti-indemnity statute. ECI took the position that although Bolduc may not have been determined to have been negligent, it nevertheless breached its contractual duties to perform the work properly by hitting the pipeline. The court was not persuaded by this argument, in part, because the jury determined that the damage was not attributable to Bolduc’s negligence. The court held that because ECI failed to present any evidence concerning how Bolduc breached the subcontract in performing its work, requiring Bolduc to indemnify ECI for damage that was not proved to be Bolduc’s fault would violate Minnesota’s anti-indemnity statute. Thus, the subcontractor prevailed.
For an example of the proper drafting of an indemnity clause in the state of Washington, see our blog article entitled Limitations on Defense and Indemnification Obligations.
Comment: The drafting of a proper indemnification clause is difficult even for experienced construction lawyers. Thus, questions with regard to applicability and proper drafting of an indemnification provision should be referred to legal counsel experienced in construction law. The outcome of this Minnesota case would likely be similar had the events occurred in Washington, Oregon, or Alaska, which have similar anti-indemnification statutes that protect contractors and subcontractors from overreaching that may occur in the negotiation and bargaining of a construction contract or subcontract.
[i] 825 N.W.2d 695 (Minn. 2013) (this case came to us via Michael C. Loulakis’ column “The Law” in the June 2013 Civil Engineering Magazine).