BAILOUT FOR AN IMPROPERLY DRAFTED INDEMNIFICATION PROVISION

Posted on December 22, 2018January 30, 2022 by Edward Garber

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact. In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect).

This opinion arose from a construction defect case, CB Contractors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5^thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on the contractual indemnification provision in the subcontracts. Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06. The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06. (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.)

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail. But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.

This case leads to a couple of very important takeaways:

Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06. Have a construction attorney review the indemnification provision. Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed. That is not good practice.

Include a severability provision in your contract. Always. Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

UPDATE: DOES FLORIDA STATUTE s. 725.06 APPLY TO (HORIZONTAL) UTILITY CONTRACTS?

Posted on May 6, 2018May 6, 2018 by Edward Garber

In a prior article, I discussed a recent case that held that Florida Statute s. 725.06–the statute that governs indemnification provisions where the indemnitor is required to indemnify the indemnitee for personal injury or property damage caused wholly or partially by the indemnitee–does not apply to a horizontal, utility project as it only applies to the “construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” per the wording of the statute. (Please refer to the article regarding the facts of the case.) From a logic standpoint, the case did not make a whole lot of sense as there would be restrictions on indemnification provisions for vertical projects but not a horizontal project such as underground utility improvements. The reason this was an important issue in the case is because if s. 725.06 did govern the indemnification provision, it was not in compliance with the requirements of the statute. If it was not in compliance, then it was not an enforceable indemnification provision. The enforceability of an indemnification provision is a BIG deal!

Recently, the Fourth District substituted a new opinion, Block Builders, LLC v. Katryniok, 2018 WL 194095 (Fla. 4th DCA 2018), although I cannot say it is that helpful. The appellate court still maintained that Florida Statute s. 725.06 did not apply to the contract at-issue since the contract involved underground utility improvements and the wording of s. 725.06 only applied to the “construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance.” However, in this substituted opinion, the appellate court held that while s. 725.06 did not apply to the contract at-issue, this does not mean it can never apply to a utility contract. Whatever that specifically means is unknown.

Indemnification is a very importation provision in any construction contract. Very important. It is a provision that should never be overlooked and it should be drafted with an eye towards the requirements of s. 725.06. Parties need to understand the application of the indemnification provision, particularly in light of the liability insurance they maintain for purposes of the project. Irrespective of this appellate court’s opinion, parties really should make sure their indemnification provision complies with s. 725.06. Banking on the hopeful position that s. 725.06 does not govern their construction contract seems overly optimistic and quite unnecessary since a ruling that the provision is unenforceable can be damaging.

THE INDEMNIFICATION LIMITATION IN SECTION 725.06 DOES NOT APPLY TO UTILITY / HORIZONTAL-TYPE PROJECTS

Posted on February 2, 2018February 2, 2018 by Edward Garber

One of the most important provisions in construction contracts is the indemnification provision. Appreciating contractual indemnification obligations are critical and certainly should not be overlooked. Ever!

Florida Statute s. 725.06 (written about here and here) contains a limitation on contractual indemnification provisions for personal injury or property damage in construction contracts. There should always be an indemnification provision in a construction contract that addresses property damage or personal injury. Always!

Section 725.06 pertains to agreements in connection with “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith…” If the contract requires the indemnitor (party giving the indemnification) to indemnify the indemnitee (party receiving the indemnification) for the indemnitee’s own negligence, the indemnification provision is unenforceable unless it contains a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” It is important to read the statute when preparing and dealing with a contractual indemnification provision.

A common defense from an indemnitor in a case dealing with contractual indemnification on a construction project is that the provision is unenforceable because it does not comport with s. 725.06.

In a recent case, Blok Builders, LLC v. Katryniok, 43 Fla. L. Weekly D253b (Fla. 4^th DCA 2018), the indemnitor argued the indemnification provision was not enforceable. Here, a utility company hired a contractor to improve its telecommunications services. Part of the work required the contractor to provide access to preexisting underground telecommunication lines located in neighborhood easements. The contractor hired a subcontractor to perform the required excavation to access the preexisting underground lines. This work resulted in a personal injury action where the injured person sued the contractor, subcontractor, and utility company.

The contractor’s subcontract with the subcontractor required the subcontractor to indemnify the contractor and its directors, officers, employees, and agents, from loss caused wholly or partially by the subcontractor. Thus, the indemnification provision required the subcontractor to indemnify the contractor for losses that were caused partially by the contractor’s own negligence (otherwise, the indemnification provision would be limited to losses solely attributable to the subcontractor).

The contractor and utility owner both claimed that the subcontractor was responsible for contractually indemnifying them for all losses including attorney’s fees. The subcontractor argued that the indemnification provision should be deemed unenforceable because it did not contain a monetary limitation on the extent of the indemnification.

Indemnification as to the Contractor

The appellate court affirmed the trial court that the indemnification provision as to the contractor was enforceable because the statute (s. 725.06) did not apply. What? That is right, the statute did not apply because the statute does not apply to utility contracts. What? That is right, the appellate court held that the statute applies to “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” so if the excavation is not connected to a building, structure, appurtenance, or appliance, it does not apply. Since the project dealt with underground utility lines, s. 725.06 did not apply so the contract did not need to contain a monetary limitation on the indemnification provision.

Of course, in my opinion, it is hard to truly reconcile the distinction between a vertical project of a building or structure and a horizontal project, such as the project at-issue. In other words, why would a limitation on indemnification provisions apply to one type of project but not the other? I do not know the answer to this other than to say the court reading s. 725.06 noticed that it mentions nothing about applying to horizontal type projects that do not involve a building or structure.

Indemnification of Utility Owner

The appellate court however reversed the trial court as to the application of the indemnification provision extending to the owner. The indemnification provision mentioned nothing about the utility owner. That is true. The contractor argued that because the prime contract was incorporated into the subcontract, the subcontractor’s duty to indemnify the utility owner arose from the prime contract. But, the prime contract required the contractor to indemnify the utility owner; it mentioned nothing about subcontractors being required to indemnify the owner.

Interestingly, if this contract were governed by s. 725.06, this perhaps would be an issue because s. 725.06 provides that contractors may not require the indemnitor to indemnify the indemnitee for damage to persons or property caused in whole or in part by any person other than the (a) indemnitor, (b) the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, agents, or their employees, or (c) the indemnitee’s officers, directors, agents, or employees. Thus, the indemnification provision would not permissibly authorize the subcontractor to indemnify the owner for the owner’s own negligence.

Ultimately, what this means is that the owner can pursue contractual indemnity from the contractor based on the indemnification provision in the prime contract. The contractor would owe this indemnification (since any negligence attributable to the subcontractor would be attributable to the contractor that hired the subcontractor). This would get resolved (or play out at trial) and the contractor, based on this loss, would sue the subcontractor for indemnification for the loss connected with the subcontractor’s negligence.

Please read this article for an update / follow-up on this issue and this case.