THE INDEMNIFICATION LIMITATION IN SECTION 725.06 DOES NOT APPLY TO UTILITY / HORIZONTAL-TYPE PROJECTS

shutterstock_486800107One of the most important provisions in construction contracts is the indemnification provision.  Appreciating contractual indemnification obligations are critical and certainly should not be overlooked.  Ever!

 

Florida Statute s. 725.06 (written about here and here) contains a limitation on contractual indemnification provisions for personal injury or property damage in construction contracts.   There should always be an indemnification provision in a construction contract that addresses property damage or personal injury.  Always!

 

Section 725.06 pertains to agreements in connection with “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith…” If the contract requires the indemnitor (party giving the indemnification) to indemnify the indemnitee (party receiving the indemnification) for the indemnitee’s own negligence, the indemnification provision is unenforceable unless it contains a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.”   It is important to read the statute when preparing and dealing with a contractual indemnification provision.

 

A common defense from an indemnitor in a case dealing with contractual indemnification on a construction project is that the provision is unenforceable because it does not comport with s. 725.06.  

 

In a recent case, Blok Builders, LLC v. Katryniok, 43 Fla. L. Weekly D253b (Fla. 4th DCA 2018), the indemnitor argued the indemnification provision was not enforceable. Here, a utility company hired a contractor to improve its telecommunications services. Part of the work required the contractor to provide access to preexisting underground telecommunication lines located in neighborhood easements.  The contractor hired a subcontractor to perform the required excavation to access the preexisting underground lines.   This work resulted in a personal injury action where the injured person sued the contractor, subcontractor, and utility company.

 

The contractor’s subcontract with the subcontractor required the subcontractor to indemnify the contractor and its directors, officers, employees, and agents, from loss caused wholly or partially by the subcontractor.  Thus, the indemnification provision required the subcontractor to indemnify the contractor for losses that were caused partially by the contractor’s own negligence (otherwise, the indemnification provision would be limited to losses solely attributable to the subcontractor). 

 

The contractor and utility owner both claimed that the subcontractor was responsible for contractually indemnifying them for all losses including attorney’s fees.  The subcontractor argued that the indemnification provision should be deemed unenforceable because it did not contain a monetary limitation on the extent of the indemnification. 

 

Indemnification as to the Contractor

 

The appellate court affirmed the trial court that the indemnification provision as to the contractor was enforceable because the statute (s. 725.06) did not apply.  What?  That is right, the statute did not apply because the statute does not apply to utility contracts.  What?  That is right, the appellate court held that the statute applies to “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” so if the excavation is not connected to a building, structure, appurtenance, or appliance, it does not apply.  Since the project dealt with underground utility lines, s. 725.06 did not apply so the contract did not need to contain a monetary limitation on the indemnification provision.

 

Of course, in my opinion, it is hard to truly reconcile the distinction between a vertical project of a building or structure and a horizontal project, such as the project at-issue.  In other words, why would a limitation on indemnification provisions apply to one type of project but not the other?  I do not know the answer to this other than to say the court reading s. 725.06 noticed that it mentions nothing about applying to horizontal type projects that do not involve a building or structure.

 

Indemnification of Utility Owner

 

The appellate court however reversed the trial court as to the application of the indemnification provision extending to the owner.  The indemnification provision mentioned nothing about the utility owner.   That is true.  The contractor argued that because the prime contract was incorporated into the subcontract, the subcontractor’s duty to indemnify the utility owner arose from the prime contract.  But, the prime contract required the contractor to indemnify the utility owner; it mentioned nothing about subcontractors being required to indemnify the owner.

 

Interestingly, if this contract were governed by s. 725.06, this perhaps would be an issue because s. 725.06 provides that contractors may not require the indemnitor to indemnify the indemnitee for damage to persons or property caused in whole or in part by any person other than the (a) indemnitor, (b) the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, agents, or their employees, or (c) the indemnitee’s officers, directors, agents, or employees.   Thus, the indemnification provision would not permissibly authorize the subcontractor to indemnify the owner for the owner’s own negligence. 

 

Ultimately, what this means is that the owner can pursue contractual indemnity from the contractor based on the indemnification provision in the prime contract.  The contractor would owe this indemnification (since any negligence attributable to the subcontractor would be attributable to the contractor that hired the subcontractor). This would get resolved (or play out at trial) and the contractor, based on this loss, would sue the subcontractor for indemnification for the loss connected with the subcontractor’s negligence.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS – COVERED VS. NON-COVERED CGL CLAIMS

If you are a contractor or subcontractor and a construction defect claim is asserted against you, then you have tendered such claim to your commercial general liability (CGL) insurer.  No doubt about it.  In doing so, you have wondered whether your CGL insurer will indemnify you for the damages asserted against you by the third-party.  You have wondered whether the damages asserted against you are covered by your CGL policy.   If you have not wondered and asked these questions, then you should!  Below is a portion of a presentation I recently put on regarding construction defect indemnity obligations under CGL policies and, particularly, covered claims versus non-covered claims.  

 

Download (PDF, 195KB)

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

INDEMNIFICATION PROVISIONS AND “IN WHOLE OR IN PART” LANGUAGE

imagesIf you negotiate or prepare construction contracts, then you should be familiar with Florida Statute s. 725.06.  This statute contains requirements for indemnification provisions in construction contracts and is a must-know and must-read for all construction participants responsible for negotiating and preparing construction contracts, especially those that contain indemnification provisions for bodily injury and property damage (and all such contracts do and should contain such indemnification language!).   For more on Florida Statute s. 725.06, please check out these articles:

 

  1. Make Sure Indemnification Provisions Clearly Reflect the Required Scope of the Indemnification;
  2. The Scope of a Release in a Settlement and Contractual Indemnification; and
  3. Buttoning-Up Contractual Indemnification Language.

 

Although not a construction case, the opinion in ATC Logistics Corporation v. Southeast Toyota Distributors, LLC, 41 Fla. L. Weekly D816b (Fla. 1st DCA 2016), demonstrates the importance of drafting clear indemnification language.    This case contained the following indemnification provision:

 

(a) ATC [Carrier] shall indemnify and hold harmless SET from and against any and all losses, liabilities, damages, costs, fines, expenses, deficiencies, taxes and reasonable fees and expenses of counsel and agents, including any costs incurred in enforcing this Agreement, that SET may sustain, suffer or incur arising from (i) Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder; (ii) any loss of or damage to a Vehicle while loaded onto, transported on or unloaded from a Car Carrier; (iii) any damage to any property of SET caused by the maintenance or operation of any Car Carrier or the loading or unloading of any Car Carrier; (iv) any claims by any third person with respect to death, injury or property damage caused by the maintenance or operation of any Car Carrier or the loading, transportation or unloading of Vehicles on or from a Car Carrier and (v) any claims resulting from or arising out of injury or death of any employee, agent of contractor of Carrier including claims alleging that SET failed to provide a safe place to work.

 

The indemnity obligation was broken into five (i – v) sections. 

 

In this case, SET sued ATC (the named Carrier in the indemnification provision) to recover amounts it paid out in a settlement.  SET argued that ATC was responsible for indemnifying it for its (SET’s own) negligence based on the language in section (i) that required ATC to indemnify SET for “Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder.”

 

The issue, however, was that SET was really seeking indemnification relating to section (iv) which did NOT contain any “in whole or in part” language.  In other words, section (iv) did not require ATC to indemnify SET for its actions whether caused “in whole or in part” by ATC’s negligence.  Had section (iv) contained this “in whole or in part” language, then ATC would have likely been required to fully indemnify SET for its actions even if the damages were partially caused by the negligence of SET.  While SET wanted the “in whole or in part” language included in section (i) to be read into the language in section (iv), this was NOT how this clause was written and the court is not there to rewrite parties’ contracts.  Accordingly, the First District held that ATC was not required to indemnify SET for SET’s negligence.

 

Importantly, if the indemnification provision pertained to a construction contract and required the indemnitee (e.g., subcontractor) to indemnify the indemnitor (e.g., contractor), it would need to include certain language for it to be enforceable under s. 725.06Such indemnification provisions that require the indemnitee to indemnify the indemnitor for “liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” Fla. Stat. s. 725.06.   

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

UNDERSTANDING COMMON LAW INDEMNITY

SHOWERDOOR4Common law indemnification is a “common” third party claim in multi-party litigation, particularly construction defect litigation. For instance, if a general contractor is sued by an owner for defects, the contractor may third party in the applicable subcontractors and assert a common law indemnification theory against the subcontractors to flow through liability. However, common law indemnity does not have to be asserted as a third party claim, but can be asserted as an affirmative claim after a judgment is entered against a party.

 

For example, in Diplomat Resorts Limited Partnership v. Tecnoglass, LLC, 38 Fla. L. Weekly D1126a (Fla. 4th DCA 2013), a hotel owner hired a contractor to furnish and install glass shower doors in hotel rooms. The subcontractor, naturally, purchased the glass doors from a fabricator / manufacturer and then installed the doors at the hotel. Unfortunately, many of the glass shower doors spontaneously fractured. The hotel owner obtained a judgment against the contractor in arbitration for the damages it incurred in replacing the doors. However, because the contractor was likely not collectible, the hotel owner took an assignment of the contractor’s claims against the fabricator / manufacturer because the thought was the glass fractured due to a defect in the fabrication process.

 

The hotel owner, standing in the shoes of its contractor through the assignment, sued the fabricator / manufacturer and asserted a common law indemnification claim which was dismissed with prejudice by the trial court. On appeal, the Fourth District reversed finding that the hotel owner (standing in the shoes as the contractor) properly asserted the following elements of common law indemnification: 1) that the contractor is wholly without fault, 2) the fabricator / manufacturer is at fault, and 3) the fabricator / manufacturer is liable to the contractor because the contractor was vicariously, constructively, derivatively, or technically liable to the hotel owner for the wrongful acts of the fabricator / manufacturer.

 

One of the challenges with common law indemnification is that there are court decisions that require the party seeking indemnification to be in a “special relationship” with the party it is seeking indemnification from. The Fourth District, however, maintained that a party does not need to specifically plead the existence of a special relationship because this “merely describes a relationship which makes a faultless party ‘only vicariously, constructively, derivatively, or technically liable for the wrongful acts” of the party at fault.”  Diplomat Resorts Limited Partnership.

 

Although the Fourth District’s decision in Diplomat Resorts appears to make a common law indemnification claim easier to prevail on a motion to dismiss, it is still a challenging claim to prove because it requires the party seeking indemnity to be wholly without fault. In other words, if that party is slightly at fault, there is no common law indemnity. Putting this in context, if the contractor is slightly at fault regarding installing the shower doors, it will not prevail on its common law indemnification claim.

 

In fact, the fabricator / installer in Diplomat Resorts argued that the contractor failed to properly install the glass doors for this very reason; however, there was no finding by the arbitrator that the contractor improperly installed the glass doors. Had there been a specific finding, there likely would be no common law indemnification claim because “a former adjudication against an indemnitee [e.g., contractor], finding the indemnitee’s acts to be wrongful, is binding against the indemnitee and precludes indemnification.” Diplomat Resorts Limited Partnership.

 

Notably, there are times in arbitration or litigation where parties do not want specific findings of fact. One of those is in a situation where a defendant may look to another for a common law indemnification claim (such as against a manufacturer) because that party does not want a finding that it did anything wrong that would be contradictory to its position that its liability flows 100% from the party it is pursuing the common law indemnification claim against.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.