by David Wonderlick, Associate

Introduction

The indemnification clause of a construction contract can present the most dense, impenetrable “legalese” in a lengthy agreement.  As a result of two March 2, 2007 decisions by the Virginia Supreme Court, contractors performing work in the Commonwealth would be wise to scrutinize these clauses more carefully to avoid exposure to liability for personal injuries well beyond their own degree of fault for a jobsite accident.

In the pair of cases, W.R. Hall, Inc. v. Hampton Roads Sanitation District, 273 Va. —, 641 S.E.2d 472 (2007) and Estes Express Lines, Inc. v. Chopper Express, Inc., 273 Va. —, 641 S.E.2d 476 (2007), the Virginia Supreme Court held unanimously that a prospective agreement to indemnify a party (the “indemnitee”) for personal injuries arising from the indemnitee’s own negligence does not contravene Virginia public policy.  Although only one of the cases, W.R. Hall, involved a construction contract, the indemnification provisions at issue in both cases reflected those often included in Owner- Contractor and Contractor-Subcontractor agreements.

W.R. Hall, Inc. v. Hampton Roads Sanitation District

In W.R. Hall, the Hampton Roads Sanitation District (“HRSD”) had contracted with the Norfolk and Portsmouth Belt Line Railroad Company (the Railroad) to allow the installation of a sewer line running underneath a set of the Railroad’s tracks.  HRSD’s contractor, W.R. Hall, who would actually perform the work, had agreed to install several sewer lines for HRSD in the City of Norfolk, including the one running under the Railroad’s tracks.  HRSD’s contract with the Railroad required HRSD to indemnify the Railroad for any damages resulting from HRSD’s work on the Railroad’s property.  In turn, HRSD’s agreement with its contractor, W.R. Hall, required W.R. Hall to indemnify HRSD, providing, in pertinent part:

[W.R. Hall] shall indemnify and hold harmless [HRSD] against all claims, costs, losses, and damages … caused by, arising out of, or resulting from the performance of the Work, provided that any such claim … (i) is attributable to bodily injury, sickness, disease or death … and (ii) is caused in whole or in part by any negligent act or omission of [W.R. Hall] … regardless of whether or not caused in part by any negligence or omission of a person or entity indemnified hereunder. 641 S.E.2d at 473-74.

One of W.R. Hall’s employees suffered a severe injury to his foot when a train car on the tracks lurched forward.  The employee subsequently sued the Railroad for negligence.  Pursuant to its indemnity agreement with the Railroad, HRSD assumed defense of that lawsuit.  Later, HRSD demanded that its contractor, W.R. Hall, pay HRSD’s costs of defending the suit, based on the indemnity clause in the HRSD-W.R. Hall contract.

The trial court dismissed HRSD’s indemnity claim against its contractor, holding that Virginia public policy prevented HRSD from contracting W.R. Hall to assume liability for the negligence of another party in advance of any actual injury.  HRSD appealed, and the Virginia Supreme Court reversed.  The Supreme Court distinguished the earlier Virginia cases relied upon by the trial court.  Those prior cases held that allowing a party to insulate itself fully from negligence liability through a pre-injury release – for example, one signed by a participant in a triathlon – would violate public policy.  See, e.g., Hiett v. Lake Barcroft Cmty. Ass’n, 244 Va. 191, 193-95, 418 S.E.2d 894, 895-96 (1992).  The Supreme Court held that the indemnity provision at issue in W.R. Hall, in contrast, never implicated this public policy because the injured employee still had an avenue of recourse for his injury.  Instead, the indemnity agreement merely shifted the ultimate responsibility for this injury between commercially sophisticated parties who had negotiated their contracts at arm’s length.  Accordingly, the Court upheld the validity of the indemnity provision.

Estes Express Lines, Inc. v. Chopper Express, Inc.

In Estes, the plaintiff (“Estes”) leased several trucks to Chopper Express (“Chopper”).  The indemnity clause of the lease agreement stated, in pertinent part: 

[Chopper] agrees to indemnify, defend and hold [Estes] harmless from … [a]ny and all loss, cost, claim, expense, cause of action, loss of use and liability by  reason of injury (including death) to persons or damage to property arising out of the use, operation, ownership, maintenance or control of a [leased] Vehicle …. 641 S.E.2d at 476.

An employee of Chopper was injured while operating one of the leased trucks.  The employee sued Estes and a repair company.  Estes settled with the driver for $350,000.  Estes then brought an indemnity claim against Chopper for the settlement amount, plus over $23,000 in attorneys’ fees Estes had incurred defending the suit.

As in W.R. Hall, the trial court dismissed the claim, and the Virginia Supreme Court reversed on appeal.  Again, the Court held that parties negotiating at arm’s length should be permitted to allocate risk as they see fit, so long as an injured plaintiff is not wholly barred from pursuing a claim.

Implications of the Court’s Holdings

The Virginia Supreme Court did not adopt a novel or unique position by affirming the general validity of indemnity provisions covering the indemnitee’s own negligence.  A close reading of the holding in Estes, however, reveals the possibility for exposure to contractors greater than that which they might face in other states.  In Estes, the Court considered an exceedingly broad and general indemnity provision.  That provision did not reference the fault or negligence of Estes, the indemnitee – or for that matter any conduct on the part of Estes.  Moreover, the Court’s opinion does not indicate a finding of any negligence on the part of Chopper.  By approving indemnity of Estes in this situation, based on broad and general indemnity language, the Court signaled a divergence from the majority of jurisdictions which have considered the issue.

For example, most other jurisdictions require a “clear and unequivocal” statement that the indemnitor – usually a contractor or subcontractor, in a construction case – will assume liability even for the indemnitee’s own negligence.  In one such jurisdiction, Pennsylvania, the Pennsylvania Supreme Court ruled language similar to that in Estes insufficient to establish liability.  The Pennsylvania Supreme Court emphasized the indefinite and uncertain nature of such potential liability, stating that “[n]o inference from words of general import can establish such indemnification.” Ruzzi v. Butler Petroleum Co., 588 A.2d 1, 4 (Pa. 1991).  Other states, including New Jersey and Texas, take an even stricter approach by requiring the use of “magic words” – the indemnification clause must specifically use the terms “fault” or “negligence.” See Azurak v. Corporate Prop. Investors, 814 A.2d 600, 601 (N.J. 2003); Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 707-08 (Tex. 1987).  Under either of these formulations, the clause at issue in W.R. Hall likely would have passed muster.  That provision stated that W.R. Hall would be liable for indemnity “regardless of whether or not [the injury was] caused in part by any negligence or omission of” the indemnitees.

The language in Estes, however, was much broader and not quite as clear, referring simply to “[a]ny and all loss, cost, claim, expense, cause of action, loss of use and liability by reason of injury (including death) to persons or damage to property.” Because construction contracts often include similarly broad language, contractors and subcontractors should recognize the perils of these provisions.  Indeed, the company which had leased the truck in Estes faced liability of nearly $375,000, despite the fact the Supreme Court never noted any negligence or fault on its part.  A totally blameless contractor would escape a result that extreme, because a Virginia statute voids any indemnification clause in a construction contract purporting to relieve the other party from liability for that party’s sole negligence.  See VA. CODE ANN. § 11-4.1.  Because the statute only applies to an indemnitee’s sole negligence, however, a contractor even slightly responsible for a jobsite accident still could face liability disproportionate to its fault.  For example, a contractor found 5% at fault, against 95% fault for an owner, could be responsible to indemnify the owner for all damages paid to an injured worker.  Such liability could be magnified exponentially in the case of a serious construction accident resulting in multiple injuries, such as a collapse or explosion.

Although the truck lessee in Estes apparently did not challenge the broad nature of this indemnity language, the Court’s implicit approval of the phrasing in Estes should lead the parties to a construction contract to evaluate these provisions carefully.  The contractor should question whether the owner actually seeks such expansive protection.  That may in fact be the case – as the Court pointed out in W.R. Hall, the contractor is the party most responsible for the work site, and often occupies the best position to prevent such personal injuries or property damage.  Where an owner will monitor the site more actively, or does not wish to pay a premium for such additional protection, language similar to the indemnification clause in the AIA form General Conditions may present a reasonable alternative.  The AIA clause allows for indemnification if the indemnitee is negligent, “but only to the extent [an injury or property damage is] caused by the negligent acts or omissions of the Contractor.” AIA Document A201-1997, General Conditions of the Contract for Construction, § 3.18.  Such a clause essentially sets up a regime of comparative negligence, limiting the contractor’s exposure to its own level of fault.  Whatever the needs of a particular project may be, the contractor should not dismiss the indemnification clause of a proposed contract as simply standard verbiage.

Conclusion

The Virginia Supreme Court’s recent decisions regarding indemnity liability for the negligence of other parties to a construction contract can potentially expose contractors and subcontractors to damages well beyond the scope of their fault in the case of a jobsite injury.  Consequently, contractors should resist the temptation to treat the often-daunting indemnification clause of their construction contract as mere boilerplate, and should review these provisions closely to assess their potential risk under that contract.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.