What is Indemnity, and why should you care?

Posted on September 16, 2010 by Melissa Dewey Brumback

If you have ever asked a lawyer to review your construction contracts (and you should have), you may have noticed that lawyers get very excited over the indemnity provisions that may or may not be in the contracts you are contemplating signing. What are indemnity provisions, and why should you care?

What is it?

Quite simply, an indemnity provision is a statement that one of the parties agrees to pay any sums the other party might otherwise be legally required to pay to a third party. Now that I’ve mentioned picking up someone else’s tab, I hope I have your attention. As you might imagine, an indemnity provision can be a costly item, so you should have a thorough understanding of what such a provision means.

In general, indemnity provisions are contractual, and contract rules concerning them apply. What that means is, if the contract says you will pay for the owner/builder/developer/designer’s legal liabilities to others, you may have to open the checkbook.

Common Indemnity Provision

An example of one type of indemnity provision is AIA A201 3.18.1, which states:

To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. . . .

When is it not legal?

There are some exceptions to the general applicability of indemnity provisions in North Carolina—most noticeably: you cannot be indemnified against your own negligence. If an indemnity provision purports to indemnify one party against that person’s own negligence, public policy and state law prohibit such an indemnification in North Carolina The applicable statute N.C. Gen. Stat. §22B-1, which reads:

§ 22B-1. Construction indemnity agreements invalid

Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify or hold harmless the promisee, the promisee’s independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee’s independent contractors, agents, employees or indemnitees against liability for damages resulting from the sole negligence of the promisor, its agents or employees.
[Emphasis added].

However, construction indemnity clauses indemnifying a party for its own negligence can be valid and enforceable so long as the offending portion of the indemnity clause can be redacted (that is, stricken from the paragraph). Vecellio & Grogan, Inc. v. Piedmont Drilling & Blasting, Inc., 183 N.C.App. 66, 644 S.E.2d 16 (2007). In the example of the AIA A207 provision above, the phrase “To the fullest extent permitted by law” acts to keep the phrase within the permissible parameters of North Carolina law. Therefore, if you signed a contract with such a provision, you may be on the hook.

Be Careful with Indemnity Provisions

Not all indemnity provisions are equal. Some, such as in the above example, make attorney fees part of the expense which is passed along. Others expressly exclude attorney fees. Some provisions include a “duty to defend” on behalf of the other party, while others are silent on that issue. What is most important is that you recognize that such language is extremely important and should be discussed in detail with your knowledgeable construction lawyer.

As with getting your hair cut, you could do it yourself, but should you?

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Photo “Barber Shop Pole” by MyEyeSees via Flickr/Creative Commons License.

Follow your Change Order Requirements

Posted on August 12, 2010 by Melissa Dewey Brumback

It is extremely important that you follow your written contract requirements. No where is this more evident than in the change order process.

Most contracts have an explicit provision for the payment for additional work– and they generally require a written, signed change order (or change directive) before the work is performed. Can you get by with verbal agreements for additional work? Sometimes yes, sometimes no. Will it be much harder to get paid for additional services without a signed change order? You bet. So why put yourself through that trouble?

Often times parties begin to “waive” formal requirements for written change orders, and construction projects are often on tight deadlines where stopping work to get a fully executed change order would bog down the schedule. However, you run the risk of throwing yourself on the mercy of the Court when you don’t play by the contract rules.

A new case out of the Eastern District of Virginia demonstrates this fact very clearly. In Artistic Stone v. Safeco, 2010 WL 2977894 (E.D.Va July 27, 2010), the Court held that the requirement that change orders be in writing was to be strictly construed and the subcontractor in that case could not recover for verbal change orders that violated the written change order requirement. The Court held that where there is a method to ensure recovery of additional extra work in the written contract, the subcontractor could not recover additional money when it failed to follow that method.

“Written change order requirements maintain order and predictability in the construction business, and are meant ‘to avoid subsequent disagreement, and prevent just such a controversy as has arisen in this case. For this reason, ‘where there is a method under the contract by which a party can insure the recovery of the cost of extra work, that party is not entitled to recovery where it fails to follow that method.'” Artistic Stone Crafters at 5. [Internal citations omitted.]

A North Carolina court would likely concur.

To ensure you can fully recover for extra work, make sure it is authorized. Follow the contract. If circumstances make it so you cannot always follow the contract terms, document the situation as best as you can. A follow-up email, confirming a verbal change order, would at least provide written evidence you can present in Court, should it come to that. Otherwise, arguments can and will be made that the person who gave the change order wasn’t authorized to do so, and you may be stuck with no recovery for the extra work.

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Photo “white check mark on blue- acrylic on canvas” by kylemac via Flickr via Creative Commons license.

Those Pesky “Gentlemen’s Agreements”

Posted on August 6, 2010 by Melissa Dewey Brumback

Head on over to Construction Law Musings today to read my guest post on why you should never rely on a “gentlemen’s agreement” for a construction project. Handshakes are well and good, but put it in writing. Same goes for any agreement, really. Read, review, and understand your contracts, settlement agreements, and warranty deeds.

A written document almost always trumps oral “understandings,” so why chance your business to anything less?

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Photo “handshake I” by oooh.oooh [Álvaro Canivell] via Flickr via Creative Commons License.

Construction Law Musings: Sneak Peek

Posted on August 5, 2010 by Melissa Dewey Brumback

Regular readers know that “Construction Law Musings,” written by Virginia attorney Christopher Hill, has been a regular on my blogroll since its inception. Chris regularly features guest writers for his series “Guest Post Fridays.” He has graciously invited me to be tomorrow’s Guest Author.

Please visit his blog tomorrow to read all about the scary concept of “gentlemen’s agreements” in the construction contest. Until then, you might enjoy visiting some of Chris’ earlier posts at “Musings“.

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Clip Art licensed from Clip Art Gallery on DiscoverySchool.com.

The Sticky Statute of Limitations in NC

Posted on July 22, 2010 by Melissa Dewey Brumback

If you are not a lawyer, but you play one on TV, you may have a passing understanding of the legal concept of a statute of limitations. This is post is to provide you just a little more information about the concept, and how it applies to your North Carolina construction project.

What is a statute of limitations, and why is it important?

The Statute of Limitations is a time-barring statute which gives you a set time within which to bring an action (i.e., lawsuit) against another party. If you do not bring your lawsuit within that period of time, the court will kick it to the curb. The reasoning behind the statute of limitation (often, ironically, abbreviated as “SOL” in legal circles) is that people need to have some certainty in how long they can be sued for an event that happened in the past. Witnesses die or forget, papers are destroyed, and in general it is extremely difficult to try a case years after the fact. The law has, therefore, established a somewhat arbitrary deadline for when you can sue or be sued, and it is vital that you do not go past that deadline if you hope to bring a lawsuit.

What is the statute of limitations on a construction project?

The answer, as always, is: it depends. The statue of limitations is governed by whatever state’s law will apply to your case—usually, but not always, the state the project was built in. The statute of limitations is also determined by what type of lawsuit you are trying to bring (or defend against).

In North Carolina, the statute of limitations for most construction disputes (breach of contract, professional negligence, implied warranty of plans) is generally 3 years from the date time when you knew or should have known about the issue. N.C. Gen. Stat §1-52.1 ABL Plumbing and Heating Corp. v. Bladen Co Board of Education, N.C. App. 623 S.E.2d 57 (2005). See also AIA A201 para. 13.7. As always, there are exceptions. If a contract is “under seal”, a claim can be brought for up to 10 years. (N.C. Gen. Stat. §1-47).

If the contract involves merchandise and falls under the Uniform Commercial Code, the statute of limitations is 4 years. N.C. Gen. Stat §25-2-725. However, where a defect in merchandise results in bodily injury or damage to real property, the shorter 3 year statute still applies. Hanover Ins Co. v. Amana Refrigeration, Inc., 106 N.C. App. 79, 415 S.E.2d 99 (1992). In Hanover, a defective HVAC unit caused a fire, which destroyed a building. The court held that the shorter 3 year statute of limitations applied because the defective merchandise caused damage to the real property.

Therefore, it is best practice to assume that the Courts will find that the statute starts running at the first inkling of a problem, and bring your action accordingly. Also, regardless of the length of any warranty period, contractors can still be liable until the statute of limitations period expires.

What happens to claims after the owner accepts the project?

Once a project has been accepted by an owner, the owner waives his right to claim damages for all but latent defects. Acceptance by the owner with knowledge of a defective performance may be deemed a waiver of the defective performance.

Where, however, the defect is unknown (or “latent”), the owner’s acceptance does not waive the defective performance. Tisdale v. Elliott, 13 N.C. App. 598, 186 S.E.2d 685 (1972). If a defect is a “latent” defect, hidden or not readily discoverable, the statute of limitations starts running from the date of discovery. Under AIA A201 para 13.7, any statute of limitations is deemed to have accrued in any and all events not later than the date of Substantial Completion. This section may shorten the statute of limitations in some cases of latent defects.

Can the Statute of Limitations be lengthened or shortened?

Yes. But, as they say on television, “don’t try this at home.” Carefully drafted agreements for a shorter or longer period of time can be executed. Consult your attorney before you do so, however. You may also want to check with your insurance carrier to make sure you have sufficient insurance coverage for a longer warranty period.

What if the parties are working together to fix construction problems?

If the parties are working to fix problems, but the statute of limitations is fast approaching– run, don’t walk, to your attorney to discuss a tolling agreement to stop the running of the statute, or otherwise enter into legally enforceable agreements concerning the statute of limitations. Just because the parties are all working together to solve a construction issue now doesn’t mean that the finger-pointing won’t begin once the bill is presented.

Have a question about the statute of limitations?

Comment below, drop me an email, or find me on twitter @melissabrumback .