CZone Legal News
Legal News from Couch, White

CONSTRUCTION NOTES - April 1998

There is an ancient Chinese curse: May you live in interesting times. We are living in interesting times for the Construction Industry. These construction notes are being published to lessen the impact of the curse as much as possible. We will change the notes at the beginning of each month to try to keep you informed on the latest legal developments.

Our first issue is devoted to a recent case decided by the New York State Court of Appeals (the State’s highest court). This case was a curse on the prime contractor involved, but it lifted a curse on subcontractors. It also showed the dangers of ignoring the law and of overreaching.

BACKGROUND

Most of you know that if your employee is hurt on the job, his sole recourse against you is workers’ compensation. However, he may have a claim against the owner or another contractor for either common law negligence or failing to provide a safe place to work. If the negligence of the owner really is the negligence of the injured party’s employer, then the owner sues the employer. In effect, the injured employee is recovering damages from his employer, albeit in a roundabout manner.

Quite often, the subcontract has a clause under which the subcontractor/employer indemnifies his prime for damages from such claims. Such an indemnification clause is legal so long as the indemnity only is for damages caused by the acts of the subcontractor/employer.

THE ITRI BRICK CASE

Facts

Very briefly, the Itri Brick case arose from a common situation on a job site. Itri Brick was a subcontractor to MMT, the general contractor. An employee of Itri Brick was injured on the job. The employee could not sue Itri Brick because, as an employee, he was limited to his worker’s compensation rights. Therefore, and not surprisingly, he sued MMT for negligence and for failing to provide a safe place to work. MMT then sued Itri Brick for indemnification on the grounds that Itri Brick’s negligence had caused the dangerous condition which caused the injury. The jury found for the injured worker and determined that Itri Brick was 75% negligent and MMT was 25% negligent. But the employee’s judgment could be against MMT only.

MMT then looked to Itri Brick for indemnification for the loss it suffered under a clause in their contract which provided that Itri Brick would hold MMT harmless "from all liability . . . from claims or injuries or death from any cause while on or near the project . . . whether or not it is contended that the first party (MMT) contributed thereto in whole or in part." In other words, no matter how negligent MMT was in causing the loss, it was indemnified by the Itri Brick under the terms of the contract.

Itri Brick took the position that it was not required to indemnify MMT because the clause relied upon by MMT was void and unenforceable as against public policy under General Obligations Law § 5-322.1(1). This is a law passed in 1981 declaring that agreements in a construction contract to indemnify another party for damages arising out of that party’s own negligence are void and unenforceable as against public policy.

In the action to enforce indemnity provision, MMT acknowledged that by law it was not entitled to indemnification for its own negligence, but that Itri Brick was required to indemnify MMT for 75% of the amount MMT was required to pay since Itri Brick was 75% negligent. MMT took the position that it was entitled to enter into a contract to be indemnified for any losses caused to MMT by Itri Brick’s negligence. Because Itri Brick had agreed to indemnify MMT for Itri Brick’s negligence as well as MMT’s negligence, MMT certainly was entitled to be paid the 75% of the judgment against it attributable to Itri Brick’s negligence.

The Court of Appeals disagreed and rejected MMT’s arguments. MMT did not contract to be indemnified for Itri Brick’s negligence only, or to the full extent allowed by law. Instead, MMT insisted on a 100% indemnification agreement which had been declared by statute to be against public policy, void and unenforceable. Therefore, the whole indemnification agreement was declared void and unenforceable and MMT was required to bear the entire loss. Had MMT drafted its subcontract to require indemnification only for those injuries and damages suffered as a result of Itri Brick’s negligence, the indemnification agreement would have been enforceable. However, because MMT chose to demand indemnification to which it was not entitled in violation of public policy, it lost all protection.

At the request of General Building Contractors of New York State, Inc., Joel M. Howard, III, of this office, John W. Dreste, of Ernstrom & Dreste, LLP in Rochester, and James W. Gresens, of Gresens & Gillen, LLP in Buffalo, collaborated to write a sample clause for contractors to review with their own attorneys and insurance professionals for possible incorporation into their subcontract forms. That language follows:

To the fullest extent permitted by law, the Subcontractor shall indemnify, defend and hold harmless the Contractor, Owner and Architect/Engineer from and against all claims, damages, loss, liability or expense of any kind, which is in any way connected with the Work, to the extent such arises or results from any negligent act, omission, breach of statutory duty or obligation, on the part of Subcontractor or any other person. This indemnity does not extend to that part of any claims, damages, loss, liability or expenses arising from the negligent acts or omissions of the Contractor.

This indemnification includes, but is not limited to, any claims, damages, loss, liability or expense of any kind, which is in any way connected with the Work and which is based upon a breach of statutory duty or obligation on the part of the contractor where the Contractor is not found to have committed a negligent act or omission. Subcontractor agrees to purchase and maintain such insurance as will protect it and Contractor including contractual coverage. If the foregoing indemnity is made void or otherwise impaired by any law controlling the construction thereof, such indemnity shall be deemed to conform to the fullest indemnity permitted by law.

Couch White’s construction notes publishes information of general interest of the construction industry. It is not to be taken as legal advice. Readers are urged to secure the advice of legal counsel before acting on any of the information in this publication.

We believe that good communication is a two way street and we encourage you to give us your reactions to the construction notes. If you have any thoughts that you would like to share with us or if you have suggestions as to what you would like to see addressed in future newsletters, contact one of the attorneys in our construction group

Leslie F. Couch - lcouch@couchwhite.com

Joel M. Howard, III - jhoward@couchwhite.com

Michael B. Mager - mmager@couchwhite.com

James J. Barriere - jbarriere@couchwhite.com

David G. Anderson - danderson@couchwhite.com

or by mail or telephone at 540 Broadway, Albany, New York 12207, phone (518) 426-4600, fax (518) 426-0376.

Copyright © 1999-2009 Chilstead Associates