RISK MANAGEMENT IN CONSTRUCTION CONTRACTS: UNPACKING THE INDEMNITY CLAUSE
Most construction contracts usually, and if not, should provide an obligation where the parties to the contract agrees to compensate an aggrieved party for losses or damages incurred due to a breach in the contract, this is known as an indemnity clause. In this article we will explain an indemnity clause in depth and its significance thereof.
UNDERSTANDING INDEMNITY IN CONSTRUCTION CONTRACTS
Indemnification clause is defined as a legally binding clause between two or more parties specifying that one party (an indemnifying party) will compensate the other party (an indemnified party) for any loss or damage that may arise upon a particular event. The indemnifying party is the one who bears the obligation to cover the cost of any losses/damages that may occur.
For example, suppose that a contract is entered between a contractor and a client, and such contract includes an indemnity clause, the contractor may be required to compensate the client for any damage to the client’s property arising from the execution of the work. The indemnity clause would outline the conditions, as well as the circumstances under which the indemnifying party would be responsible for compensating the indemnified party. Effective indemnification clauses can mitigate risk exposure, ensure compliance with regulations and successful project outcomes.
Contractual indemnification provisions are a crucial risk management tool in contractual agreements, and thus it is imperative to note that indemnity provisions in a contract can either be limited to cover only specific damage or can be extended to cover all damages.
LEGAL IMPLICATIONS OF INDEMNITY CLAUSES IN CONSTRUCTION
By incorporating indemnity clauses in construction contracts, parties are empowered to specify the types of potential risks to be covered; to define the scope of indemnification; to negotiate better contracts and evaluate contractual risks. All pre-mentioned benefits can be achieved through a well-crafted contract with applicable indemnity clauses.
There are a number of common exceptions with indemnification, and these relate to circumstances where the indemnified party’s own actions either cause or contribute to the harm that triggers the indemnification, this is seen as negligence. However, whether negligence negates the enforceability of an indemnity clause, it will depend on the circumstances.
The matter of Masstores (Pty) Ltd v Murray & Roberts Construction (Pty) Ltd (“the Construction Company”) touches on indemnification clauses. Masstores, was a wholesaler of a multitude of commodities and engaged with Murray and Robbers Construction to extend one of its stores. In the course of the building project, a fire broke out which damaged the property of Masstores. The Construction Company objected to a claim by the Masstores for damage caused by the Construction Company to its building during the course of construction and on the basis that the construction contract exempted the Construction Company from liability for such damage. The main issue before the court was whether the exemption clause had the effect of exempting the Construction Company from liability for having negligently breached the contract, and the answer rested on whether such exemption was ambiguous so as to render the breach ineffective.
The indemnity clause in the contract gave rise to a wide ambit and did not expressly exclude liability for negligence. The Court held that Masstores was precluded from suing the Construction Company for damages caused to the existing building and its contents by negligent breach of the contract.
It is thus essential for parties engaging in construction projects to draft contracts which include indemnity clauses that are clear and unambiguous, and they must be it must be tailored to suit the circumstances of the parties in a construction project.
If you need any assistance with drafting a contract and incorporating an indemnity clause to protect your interests, kindly contact Hahn & Hahn Attorneys.