What is Indemnification?
Contract negotiation is a big part of what we do. Lawyers often write contract forms so that only lawyers can read them, so I like to walk a client through the proposed terms and different approaches we are taking. It’s important you understand what we’re doing and why it matters from a practical perspective.
Contract negotiation is a big part of what we do. Lawyers often write contract forms so that only lawyers can read them, so I like to walk a client through the proposed terms and different approaches we are taking. It’s important you understand what we’re doing and why it matters from a practical perspective. And invariably one comment I get from a lot of contractors and other clients is, “I don’t even know what indemnification is…” You’re not alone.
In simple terms, indemnification (or indemnity – basically the same thing) means covering or saving one party to the contract from money damages and costs in specific situations. ABC Construction hires XYZ Electrical and in its form contract, ABC expects XYZ to “indemnify and hold harmless” ABC from all claims, loss, damage and expense arising from XYZ’s work. That’s pretty common, pretty broad, and not always enforceable.
Ohio has an anti-indemnity statute that makes any language in a construction contract unenforceable if it attempts to require a party like XYZ to indemnify another like ABC for ABC’s own negligence. (O.R.C. §2305.31.) This statute recognizes the unfairness in a contract making you indemnify (or cover or save) your customer for your customer’s own negligence. (Note that nearby states have very different anti-indemnity laws, or none at all.)
Contracts violate this statute often. Sometimes it’s through language similar to the broad indemnification above, sometimes it’s when the other party to the contract requires you to generally list them as an “additional insured” in your insurance coverage that applies to the project or the contract. Perhaps you’re thinking, “if the language is unenforceable, then so what? They can’t enforce it…”
Practically speaking, that’s not how it works.
If there’s language in the signed contract (legally enforceable or not), one party expects to and will try to enforce it – and until the other pays the court costs and legal fees to get a court to order that the language is unenforceable, they won’t stop. Contractors and businesses owe it to themselves to take these contracts seriously up front and negotiate contracts that are not only fair and reasonable, but legal! The alternative is an open invitation to a lot of headache and big expense that all could have been avoided.
The takeaway here is that contractors and subcontractors must be vigilant during the billing and payment progress to avoid prematurely settling disputes and/or unintentionally waiving claims. Most contractors and owners are good people who want to do the right thing. But there are certainly some that will take advantage of you, especially if you let them.
