Are You (Really) Indemnified…?
By Alan Jones On March 12, 2020 | Best Practices, Contracts
Indemnification clauses run a close third for “Most Tortured Interpretations” in the history of the written word, just behind the United States Constitution and the lyrics to The Beatles’ “I Am the Walrus.” One would think that, by now, a razor-sharp indemnification clause would exist such that it would become essentially boilerplate language, with a few changes here and there. However, as is apparent in the South Carolina Court of Appeals’ ruling in Concord & Cumberland Horizontal Prop. Regime v. Concord & Cumberland, LLC, 424 S.C. 639, 819 S.E.2d 166 (Ct. App. 2018), even standardized indemnification clauses such as those found in AIA contracts will be strictly interpreted by South Carolina courts.
Concord & Cumberland is a condominium development located in Charleston, South Carolina, and this case arose out of alleged construction defects. The homeowners at Concord & Cumberland filed suit against the parties involved in the development and construction of the condominiums. Some of the homeowners’ allegations included claims against the general contractor and the window installation subcontractor regarding water intrusion around the windows.
In response, the general contractor pursued a contractual indemnification claim against the window installer, taking the position that the window installer owed the general contractor indemnity for damages resulting from (1) the window installer’s negligence and (2) the general contractor’s own concurrent negligence. The circuit court disagreed with the general contractor’s position and stated that the window installer only owed indemnification for the window installer’s portion of negligence and not for any of the general contractor’s own concurrent negligence, finding that an indemnification clause for concurrent negligence must be “clear and unequivocal” in its language.
The general contractor argued three essential points to the Court of Appeals to support its claim for indemnification:
- A court should only use the “clear and unequivocal” standard when construing indemnification clauses intended to have an indemnitee (here, the window subcontractor) pay for the sole negligence of the indemnitor (here, the general contractor). It should not use that standard when construing an indemnification clause intended to have an indemnitee pay for the concurrent negligence of the indemnitor.
- The express terms of the subcontract show that the window subcontractor broadly assumed a duty to indemnify the general contractor for anything connected to the window installer’s scope of work.
- The court should have read the original subcontract in conjunction with a later contractual agreement between the general contractor and window installer (a contract dealing with the water intrusion issues at the project), which, when combined, evidenced a clear intent for the window installer to indemnify the general contractor for its concurrent negligence.
The Court of Appeals rejected each of these arguments. First, they held that any indemnification clause that purports to relieve a party from the consequences of its own negligence, whether sole negligence or concurrent negligence, will be construed under the “clear and unequivocal” language standard. Second, broad language such as “any and all claims” and similar will not withstand the scrutiny of that standard. Further, language such as “to the extent of Party A’s negligence” indicates a desire for the parties to share proportional liability, each according to his or her negligence. Finally, absent specific contract language showing the intent for separate contracts (and therefore separate indemnification provisions) to be read together and/or merged, the courts will view those contracts as completely separate and interpret the indemnification provisions within the context of each contract alone.
But wait a minute…wasn’t the contract a standardized form? Shouldn’t contractors be able to rely on those? The answers to those questions are yes, and…sometimes (and with a litany of caveats too extensive to list here). The subcontract in this case was a standardized form designed to be used in concert with AIA documents. While the form was not a very recent one, the indemnification clause was not out of step with many that are utilized today.
The Court of Appeals empathizes with those wishing to understand exactly what a “clear and unequivocal” indemnification clause looks like, noting that “[b]ecause South Carolina appellate courts have never upheld an indemnity clause as ‘clear and unequivocal,’ parties and their lawyers have little guidance.” However, cases like Concord and Cumberland do provide guidance of their own and contain valuable insight into what, at the very least, a “clear and unequivocal” indemnification clause doesn’t look like in South Carolina.
One final thought: the Court of Appeals made mention of a policy reason behind its “clear and unequivocal” language requirement, which is that parties will often draft indemnification clauses that are broad and just vague enough to confuse the other party as to what degree of indemnification they are signing up for. As a practical matter, the bolder and more explicit the language in an indemnification clause is, the greater the chance the offered contract will be rejected, or the clause sent back with modifications. Vague language may get a party to sign a contract, but the Court of Appeals warns that South Carolina courts will not be kind to the drafters in interpreting such clauses. Therefore, at the time of contracting, it is critical to look closely at the precise wording of indemnification clauses to understand as clearly as possible the risks that are transferred and to whom they are being transferred. Otherwise, the parties may find themselves asking a court for an interpretation, which may come with undesirable consequences.