How to find them, what they cost, and the equitable language to negotiate in their place.
What follows is a guide to negotiating better indemnity language in your agreements, and about 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 most states have some form of legal protection against 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, for two reasons.
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 protect your interests. What follows is guidance that will protect you from predatory indemnification because it’s fair and balanced for both parties.
This is one of six papers, each covering a different place indemnity risk can be hidden in a typical subcontract. Most subs and suppliers read the section titled “Indemnification” and if they get improvements to that, they assume the risk is covered. But overbroad indemnity risk can show up in at least five other places, and this paper covers one of the most dangerous places for that risk to hide: the Default and Termination section.
This paper covers the Default and Termination section, where a contingent indemnity the GC can trigger by allegation alone can expose you to costs that dwarf the contract value.
The other papers in this series cover the Indemnification section itself, the Insurance section, the Flow-Down section, the Warranty section, and the Patent and Intellectual Property section.
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Typically in the back half of the contract, under “Default,” “Termination,” “Termination for Cause,” or “Subcontractor Default.” The indemnity provisions in this section are activated by the GC’s allegation of a default. That makes them especially dangerous, because the GC controls the trigger.
“In the event of Subcontractor’s default, Subcontractor shall indemnify Contractor for all costs incurred in completing the Work, including but not limited to the cost of replacement subcontractors, delay damages assessed by Owner, attorneys’ fees, and consequential damages of any kind.”
This is a contingent indemnity. The trigger is when the GC alleges you have defaulted. Once activated, it makes you responsible for every cost the GC incurs completing your work, including the difference between your contract price and what the replacement sub charges, plus delay damages the Owner charges the GC, plus consequential damages of any kind and the GC’s legal fees incurred. To add insult to injury, this type of claim of indemnity is not covered by the sub’s liability insurance as there is no occurrence, a requirement of coverage.
“Consequential damages of any kind” is the most dangerous part. Consequential damages can include lost profits, lost rental income, lost business opportunities, and reputational harm. In commercial construction, these can dwarf the underlying contract value. A modest default on a modest contract can trigger consequential damage exposure many times larger than the contract itself.
The trigger for all of this is the GC’s allegation of default. In the typical version of this language, no court determination is required. No opportunity to cure is required. No proportional fault analysis is required. The GC alleges default, takes over completion, refuses to pay outstanding draws and retainage, and sends you the bill for costs exceeding what is otherwise owed.
Default and termination disputes are among the most expensive disputes in construction. Completion costs plus delay damages plus attorney fees plus consequential damages can easily exceed the original subcontract value by several multiples. The exposure is rarely proportional to the size of the job, which is what makes this provision so dangerous even on a modest contract.
“In the event of Subcontractor’s material default, and provided Contractor has given Subcontractor written notice of the alleged default and a reasonable opportunity (not less than ten business days) to cure, Subcontractor shall be responsible for the reasonable, documented direct costs incurred by Contractor in completing the defaulted portion of Subcontractor’s Work, less any amounts then owed to Subcontractor. Subcontractor shall not be liable for (a) consequential, incidental, or punitive damages, (b) costs caused by acts or omissions of Contractor, Owner, or other subcontractors, or (c) attorneys’ fees, except as expressly permitted by applicable law. Liquidated damages or delay damages assessed by Owner shall be passed through to Subcontractor only to the extent directly caused by Subcontractor’s default.”
Six things are improved by this language. The default has to be material, not technical. Written notice and a cure opportunity are required before the GC can take action. Costs are limited to reasonable, documented direct costs for the actual defaulted scope. Consequential damages are excluded entirely. Costs caused by others are not your problem. And owner-imposed delay damages only flow down to the extent you actually caused them.
The consequential damages waiver is where GCs push back hardest. They’ll argue they can’t accept the risk of being unable to recover consequential damages from a defaulting sub. The honest response is that no sub can price consequential damage exposure at the time of bid. Especially since there is no insurance in place to cover such costs. Consequential damages usually reflect failures in the GC’s overall project management rather than a sub’s specific work, and that mutual consequential damage waivers are increasingly standard in major commercial construction contracts. Point them to AIA A401, the standard form subcontract, which contains a mutual waiver of consequential damages.
The cure right is the other point sometimes ignored, but worth holding firm on. Without written notice and an opportunity to cure, the GC can convert an ordinary performance dispute into a default and bring the whole cascade of costs with it. A cure provision keeps an honest disagreement from becoming a company-ending event.
NOTE: 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.
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