Reading time: 5 minutes

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. 

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

MG Moyo
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards