A FAIRBUILD WHITE PAPER | Six Indemnity Traps | The Indemnification

A FAIRBUILD WHITE PAPER
Six Indemnity Traps in a Single Subcontract

TRAP 1: The Indemnification Section.

How to find them, what they cost, and the equitable language to negotiate
in their place.

FairBuild’s Approach to Contract Negotiation

What follows is a guide to negotiating better indemnity language in your agreements,
and where to look for hidden indemnity exposure. Indemnity is an area where many
states have effective limitations on the degree to which indemnity can be invoked, and
almost all states have some sort of legal protection for overly aggressive indemnification
language.

That could be taken to mean that subcontractors and suppliers don’t really need to
worry about negotiating better indemnification terms because the courts will protect
them. We think that is a risky approach. There are three reasons for this. 1. The only
clear case where those laws can help you is in the formal Indemnity language. That
leaves out the exposure in up to five other areas. 2.) The courts might protect you.
Lawyers are clever and leaving your customers’ indemnity language as-is is a risky
strategy. There may be exposure there that you haven’t accounted for. 3.) If the courts
do protect you, it will be after you have spent real money on legal fees and engaged in a
successful legal action of some sort. We think you should avoid that process and the
risk that comes with it if you can.

For those reasons, FairBuild’s entire philosophy on contracts is to always seek what’s
equitable. That’s what’s fair and that standard doesn’t rely on the courts to intervene to
project your interests. What follows is guidance that will protect you from predatory
indemnification because it’s fair and balanced for both parties.

Introduction
Subcontractors and suppliers that negotiate their agreements often leave negotiating
indemnification out of the redlined changes they send to the builder. Indemnification language
can be very hard to read and there are other more immediate issues like payment terms to push
back on.

The ones that do negotiate the indemnity language often confine their resistance to what’s in the
Indemnity section.

Unfortunately, a typical commercial subcontract carries indemnity language in as many as six
different places. Each one is independent. Each one can be triggered by different facts. And that
gives the GC’s lawyer up to six ways to come after you for a claim that you might have had
nothing to do with.

This paper walks through all six. For each one, I’ve laid out:
• Where the language usually lives in the contract
• What it actually obligates you to do, in plain terms
• What it can cost you when a claim gets filed
• The equitable replacement language a reasonable counterparty should accept
• How to handle the negotiation

The goal isn’t a perfect contract. The goal is the best contract you can get without losing the job.
That means knowing where the real risk lives so you can focus your negotiation effort where it
counts, and having the specific language to push back with credibility.
This is written for operators, not lawyers. I’ll assume you know your trade, you know your
business, and you don’t need the basics explained. What I’m offering is structured analysis of
how risk transfer actually works inside the subcontract or supply agreement, and the language
tools to address it.

A note on what this is and isn’t
FairBuild doesn’t provide legal advice. This paper is designed to help you review and
understand agreements from general contractors. For specific legal questions about your
contracts, talk to a construction attorney in your jurisdiction.

“Subcontractor shall indemnify, defend, and hold harmless Contractor and Owner from
and against any and all claims, damages, losses, and expenses, including attorneys’
fees, arising out of or related to the performance of Subcontractor’s Work.”
Trap 1

The Indemnification Section

Where it lives
Usually under a heading marked “Indemnification,” “Indemnity,” “Hold Harmless,” or “Defense.”
It’s the only obvious indemnity in the agreement and the only indemnity most subs or suppliers
read at all.

The language to watch for
The dangerous version uses the phrase “arising out of or related to” your scope of work. Here’s
what it usually looks like:

“Subcontractor shall indemnify, defend, and hold harmless Contractor and Owner from
and against any and all claims, damages, losses, and expenses, including attorneys’
fees, arising out of or related to the performance of Subcontractor’s Work.”

Why it matters
“Arising out of or related to” captures any claim that touches your scope, whether or not you
were at fault. A worker gets hurt on your jobsite because of an unsafe condition the GC created.

The injured worker happens to be your employee. The injury happened while your scope was
being performed. Under this language, you’re indemnifying the GC for the GC’s own negligence.
The narrower phrase “caused by your negligence” limits the indemnity to claims that actually
result from your acts or omissions. The difference is the difference between accepting
responsibility for your own work and accepting responsibility for whatever happens to occur on
the same project that touches or relates to your scope.

What it can cost you
Defense costs, settlements, and judgments under broad indemnity language can be substantial,
and they compound quickly because the defense obligation typically kicks in as soon as a claim
is asserted, before anyone has decided who was actually at fault. Even where state law limits
enforcement of the broadest language, defense costs pile up before the question of what’s
enforceable ever gets answered. If you’ve been on the receiving end of this, you know it takes
no time at all to run into tens of thousands.

The equitable replacement
“Subcontractor shall indemnify, defend, and hold harmless Contractor and Owner from
and against claims, damages, losses, and expenses, including reasonable attorneys’
fees, to the extent caused by the negligent acts or omissions of Subcontractor or
anyone acting on Subcontractor’s behalf in the performance of Subcontractor’s Work.”
Subcontractor shall not be obligated to indemnify, defend, or hold harmless Contractor
or Owner for liability arising from the negligence or willful misconduct of Contractor,
Owner, or their other contractors or agents.”

How to negotiate it
Two concepts to get into the language. “To the extent caused by” replaces “arising out of or
related to.” And an explicit carve-out for the GC’s own negligence (see the second sentence
above). Both are standard in commercial subcontract negotiation, and any reasonable GC
counsel will recognize them as fair. “To the extent” allows fault to be allocated proportionally
when more than one party contributed to a loss, which is how most courts will end up doing it
anyway.

Expect pushback on the negligence carve-outs, especially from large GCs with standardized
templates. A reasonable fallback is comparative fault: each party is responsible for its own
proportional share. That’s still a meaningful improvement over the original.

contracthelp@fairbuild.ai