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As a builder, you can be held liable for any losses that happen while working on a construction site. Before you sign your next construction contract, you should pay attention to the indemnity clause. Not reviewing the indemnity clause could be costly for your business. This article will explain what builders should look for in an indemnity clause when reviewing a construction contract

What is an Indemnity Clause?

An indemnity clause is a promise by one party in the contract to provide protection and compensation to the other party if the loss, damage or costs occur.

For example, a basic indemnity clause could state that the builder indemnifies the principal against all claims that arise out of the contract. The builder is the “indemnifying party” and the principal is the “indemnified” party.

A well-drafted indemnity clause distributes risk between parties who are willing to bear the risk. This process is known as “apportioning liability” between parties. Depending on the party’s wishes, the clause can cover a broad or narrow range of losses. 

The most common types of indemnities in contracts cover:

Why Are Indemnity Clauses Important in Construction Contracts?

Indemnity clauses help to distribute the risk of certain losses between principals and builders. In a typical construction project, the principal engages a builder and the builder engages subcontractors to complete some of the work. The builder will usually indemnify the principal in their contract. The subcontractor will then indemnify the builder in their contract. This approach is known as “passing through” risk down the contracting chain. 

As the builder, you need to ensure you know who you are indemnifying and how you are indemnified for the particular losses. While you cannot avoid indemnity clauses altogether, you can negotiate a fairer indemnity clause. For example, an indemnity clause can state that one party will only indemnify the other party against one particular loss, not all causes of potential losses. The most common example is a clause that indemnifies for losses arising from a breach of contract.

Example Clause: The builder indemnifies the principal against all claims, costs, losses, damages or other liability arising out of a breach of the builder’s work health and safety obligations under the contract.

An indemnity clause can provide certainty for who is liable for particular losses. The most obvious benefit of an indemnity clause is that the indemnified party does not have to prove fault.

Example Scenario: A fire breaks out on the principal’s premises because a subcontractor failed to stamp out a burning cigarette butt. The fire causes $30,000 worth of damage. The principal does not have to prove the builder had caused the damage because of their action or inaction. The builder has already promised to compensate the principal for any loss caused.

How Can the Builder Indemnify the Principal?

Firstly, you need to understand the scope of your indemnity. Are you indemnifying the principal broadly for any losses, damages or costs? As the party indemnifying, you would want to make sure that the indemnity clause is precise and drafted as narrowly as possible. You should link the indemnity to a particular loss, such as losses linked to a contractual breach. 

Example Clause: The builder is liable for and agrees to indemnify the principal against any claim, action, damage, loss, costs, charge, expense, penalty, fine, or payment which the principal suffers, incurs or is liable for under the contract, which is caused or contributed to by a negligent act or omission by the builder or its personnel in the performance of the services.

How Can the Subcontractor Indemnify the Builder?

If you engage any subcontractors, you want them to indemnify you for all types of losses. Your indemnity clause should set out the subcontractor’s liability for types of losses or damage that occur in a construction project. Ensure the indemnity clause covers all the risks associated with any goods or services you provide. You can cover many types of losses in an indemnity clause, as long as the clause does not become so broad that it becomes ambiguous. 

Example Scenario: In a construction contract, the subcontractor agrees to provide services to the builder for a lump sum of $40,000. The subcontractor breaches the contract by negligently causing a fire which burns part of the principal’s premises. The principal sends the builder a bill for $30,000 to repair the damage. The indemnity clause in this situation will mean the subcontractor is responsible for paying the $30,000. 

Key Takeaways

Indemnity clauses highlight who is liable for certain risks that arise in projects. You can have a broad or narrow indemnity clause depending on who you indemnify or who will indemnify you. Always keep in mind who you are indemnifying and for what types of losses. If you have any questions or want assistance in drafting an indemnity clause, get in touch with LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page. 

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