By Joseph Etter
We hear the same story from contractors when they are sued, “I have indemnity, so I am protected.” Unfortunately, contractors who believe they are protected are shocked when their indemnity clauses do not hold up in court. Contractors must be wary when drafting their construction contracts so they can avoid the nightmare of defending a lengthy lawsuit that could have easily been avoided by careful drafting.
Why Is Indemnity Important?
Indemnity occurs when one party agrees to undertake a duty or be contractually obligated to pay for a loss suffered by another party. Essentially, indemnity shifts the risk of loss from one party who would otherwise be responsible to a separate party. Let’s face it, like all businesses, profits drive construction companies. One way to keep the lights on is being insulated from any liability and avoiding costly litigation. Each time a claim against a contractor is made, the insurance premiums rise, often times minimizing profits and making it too difficult to continue to operate one’s business. Contractors want their subcontractors or suppliers to indemnify them for their work or for a particular scope of a project out of necessity and because it makes great business sense. Thus, indemnity solves this dilemma for many contractors.
What Does Florida Law Require For a Valid Indemnity Provision?
Florida Statute § 725.06 contains two important restrictions for an indemnitee (e.g. general contractor) against an indemnitor (e.g. subcontractor): (1) any indemnity provision must be expressed in bid documents or project specifications; and (2) a monetary limitation must bear a “reasonable commercial relationship” to the contract.
Where Do Most Indemnity Provisions Fall Short?
More often than not, Florida courts strictly construe this statute and find indemnity clauses to be invalid and unenforceable. In most instances, contractors fail to comply with the statute by not including a monetary limitation. Other times, the monetary limitation does not bear a “reasonable commercial relationship” to the contract; i.e. a $10 million monetary limitation for a $1 million project.
How to Avoid the Nightmare?
It makes sense to protect your business at the outset with valid and enforceable contracts. Consulting an attorney prior to finalizing a construction contract is essential to ensure you limit your potential exposure. Should you have any further questions regarding indemnification provisions or any other area of construction law, please contact Englander Fischer at 727-898-7210 to see how one of our attorneys can assist you.