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27 Constr. Law. 5 (2007)
Advanced Analysis of Contract Risk-Shifting Provisions: Is Indemnity Still Relevant

handle is hein.journals/conlaw27 and id is 169 raw text is: INDEMNITY Advanced Analysis of Contract Risk-Shifting Provisions: Is Indemnity Still Relevant? Steven G.M. Stein and Shorge K. Sato Shorge K. Sato Construction projects are inherently risky. Worker injury, chemical spills, fires, and property loss are but a few of the nightmares that can afflict a project. Indemnities are com- monplace in the construction industry, popular as a means to directly control and allocate responsibility for such risks. ' The adoption of comparative fault and contribution princi- ples, for the most part, has rendered indemnities for such tort risks only marginally important because statutory mecha- nisms allow litigants to allocate damages equitably according to relative fault.2 However, there is no comparable statutory mechanism to shift nontort risks involving purely economic damages arising from construction projects-e.g., the costs of repair or replacement, loss of use, and other pecuniary damages resulting from defective work or materials. As a result, indemnities are still important as a mechanism to allo- cate nontort risks. Upon analysis, the differences between a commercially obtainable express indemnity and remedies available at com- mon law are not as significant as one would think. This arti- cle examines and compares the performance of express indemnities and both of the risk-shifting alternatives avail- able at common law on four levels: (1) the entitlement to maintain an action; (2) the extent of damages available; (3) the ability to obtain attorneys' fees; and (4) the duty to defend. Comparing Express Indemnities and Common-Law Alternatives For various reasons, express indemnities may be unavail- able for construction defect claims. For instance, parties may Steven G.M. Stein is a partner in the law firm of Stein Ray & Harris in Chicago. Shorge K. Sato is an associate in the law firm ofJenner & Block in Chicago. either fail to include such provisions or intentionally omit them. After all, certain standard form contracts simply do not provide indemnity for economic losses. For example, AIA standard form agreements provide for an indemnity that only covers claims attributable to bodily injury or injury to or destruction of tangible property (other than the Work itself).'3 Thus, if the original action is an action for recovery of an owner's repair costs for the construction defects, the indemnity is inapplicable to the owner's claim.4 Express indemnities also can be rendered void and unen- forceable under an applicable anti-indemnity statute.5 A majority of states have enacted statutes that invalidate agree- ments in construction contracts that attempt to indemnify persons (particularly design professionals and general con- tractors) against the consequences of their own negligence, as being contrary to public policy.6 These statutes are gener- ally justified on two grounds: first, courts have reasoned that allowing such persons to be free from the consequences of their own negligence reduces their incentive to operate or supervise a worksite that is safe for workers and the general public,7 and second, such statutes are believed to combat overreaching in the construction industry, wherein small con- tractors and suppliers may be powerless to negotiate a truly fair allocation of risks. 8 Additionally, these anti-indemnity statutes operate to invalidate indemnity clauses, simply because such clauses might violate public policy.9 Courts evaluate the language of an indemnity clause for potential abuses and disregard the actual application of the language in the case at hand. Because anti-indemnity statutes operate to void express pro- visions in a contract, the bargained-for allocation of risk can be altered radically.10 To measure what is lost when an express indemnity is unavailable, the qualities of express indemnities must be compared to similar remedies available at common law. Although there are many possible qualities that could serve as the basis of comparison, the following four characteris- tics are probably most important: Entitlement: When does the duty to indemnify arise? Extent of damages: How much liability/loss can be shifted? Attorneys' fees: Can attorneys' fees be recovered? Duty to defend: Can another party be compelled to assume defense obligations against an underlying claim? Comparing express indemnities to common law remedies can be difficult because express indemnities vary substantial- ly and no model is readily identifiable. For purposes of this analysis, the AGC standard form of indemnity set forth in 9.1.1 of AGC Document 650i-1998 serves as well as any THE CONSTRUCTION LAWYER Steven G.M. Stein Fall 200 7

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