The indemnity clause in a design and construction contract is usually a very long paragraph, consisting of many very long sentences, near the end of the contract. It usually makes my head hurt to read. However, the indemnity provision can impose significant liability and is very important to thoroughly understand and negotiate.
The first thing you need to know is that indemnity clauses should not provide a remedy for breach of contract. Indemnity occurs when a claim is asserted by a third party against a contracting party who is not at fault. The at-fault party then should indemnify this innocent party with whom he contracted.
Assume for example, that a structural engineer incorrectly designs the anchor bolt connection for a column and an employee of a steeel erector is injured because the column falls after installation with the incorrect anchor bolts. If the injured worked sues the owner of the building who had no input into the design, the structural engineer should indemnify the innocent owner.
A key to reviewing an indemnity clause to to make sure it applies only to claims asserted by third parties. It should not provide a claim by one contracting party against the other merely for a contracting party’s damages. Such a claim is addressed by breach of contract and is not a proper indemnity claim.
For example consider:
Party 1 agrees to indemnify, defend, and hold Party 2 harmless from any claims asserted by any third party to the extent such claims are caused by the negligient acts of Party 1.
We will discuss many additional issues regarding indemnity clauses in future posts.