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Indemnity Provisions: Shift Liability from One Party to Another

Companies seeking to avoid liability from other parties can include broad indemnity provisions in their contracts in hopes of shifting financial responsibility for injuries to another party.

An indemnity agreement is common in construction projects and other transactions. It is a provision that legally indemnifies (protects) one party against certain future losses or claims from another party. A typical agreement shifts liability to the party deemed to be more responsible.

The advantage of such provisions was highlighted in one case involving an indemnity agreement between two South Carolina construction companies working on a project together.

Hightower Construction Company Inc. hired A.J. Concrete Pumping LLC for the purpose of providing equipment and manpower pouring concrete for a building’s foundation. There was an oral agreement between the two companies’ owners.

One of A.J. Concrete’s employees testified that he was instructed by Hightower’s foreman to “move the boom pump closer and closer to power lines during the course of the pour.” He was troubled by doing so but didn’t object because the Hightower foreman “had previously stated that he and his workers would keep an eye on the lines” and his duty was to “perform the concrete pump job to the requirements of my customer.”

While the crew was pouring the concrete, the boom on A.J. Concrete’s truck came in contact with overhead power lines and a Hightower employee on the site was injured.

Work on the project continued and after the job was finished, A.J. Concrete officials presented Hightower managers with a “job ticket” that listed the work done and also provided an indemnification provision. The provision, located on the back of the ticket, made Hightower liable for all injuries caused by A.J. Concrete’s equipment and workers on the job site. “Nothing on the front of the job ticket directed the reader to the back of the ticket,” according to court records. Hightower officials signed the ticket and paid A.J. Concrete for the work.

The Hightower employee involved in the accident later successfully pursued a workers’ compensation claim. He then sued A.J. Concrete and other sub-contractors working on the project, seeking compensation for his injuries. A.J. Concrete officials then sued Hightower in an effort to have a judge declare the general contractor was financially responsible for covering any judgment against the concrete subcontractor because of the indemnity provision.

The trial judge threw out A.J. Concrete’s suit against Hightower, concluding that the indemnity provision wasn’t part of the two companies’ oral contract and that such a provision violates the public policy of the state.

On appeal, the state’s Court of Appeals reversed the trial court’s finding. “Although the disputed term of the contract was presented on the back of a job ticket and signed by Hightower Construction after completion of the pour,” the court stated, A.J. Concrete produced evidence showing that inclusion of indemnity provisions in contracts was part of the “habit and custom” of the construction industry in the state.

According to the court, that meant that Hightower officials knew or should have known that they would be financially liable for injuries caused by use of A.J. Concrete’s equipment and workers when they hired the company as a sub-contractor. In addition, the inclusion of the indemnity provision on the back the job ticket served as a clear notice that the customary practice was in effect, the court added. (Keith v. River Consulting Inc., No. 4001, S.C. Ct. of Appeals, 6/20/05)

Lesson to be drawn: Indemnity provisions designed to shift tort liability in a broad array of circumstances are often found to be valid. Keep in mind, however, that other courts have struck down indemnity provisions for trying to cover too many situations. Laws vary from one state to another. Consult with your attorney about how such provisions should be drafted to help protect your firm.