Construction projects are slowed or disrupted all the time because of one party’s actions and omissions. Enforcing a right to contribution or indemnification because of that party’s failures or missteps can be challenging, however — particularly if more than one party might be responsible for project delays. What happens when one party on the project bears an unfair or disproportionate charge for the disruption? That’s when concepts like indemnification and contribution come into play. Disruptions that are compensable under these principles are being further confused and complicated by the COVID-19 pandemic. Successful construction partners in 2020 need to understand their rights and obligations surrounding contribution and indemnification.
Contribution and indemnification are related but different rights of recovery and arise under potentially different circumstances. Rights to indemnification are typically defined by parties’ contracts. As a general rule, breach of contract claims accrue or arise at the time the breach occurs. Contractual indemnity is, as its name implies, a creature of contract. When does an indemnitor breach its indemnity obligation? Must the indemnitee first make a demand upon the indemnitor? Does breach occur only after the indemnitee incurs a loss? As with any contractual right or obligation, the details dictating the obligation are defined in the contract itself. So, when in doubt, review your contract. A party’s right of indemnity arises when that party performs an obligation or has already performed an obligation when another party breaches an obligation impacting project performance. If the party suffers harm as a result of the other party’s breach — for example, in the case of a charge-back against a contractor for a supplier’s breach — the non-breaching party can have a right to indemnification. A right to indemnification can also occur if an owner is harmed as a result of a downstream subcontractor’s breach — the owner’s contract with a general contractor can create a right of indemnification.
There is not a great deal of uniformity in indemnification obligations, in part because the language of the indemnification agreement can influence the outcome, as does the law in the jurisdiction in which the contract is being formed and enforced. Significantly, a claim for indemnification can sometimes accrue when the wrong occurs, that is when the promise is breached, “regardless of when damage results.” The “wrong” on which the contract claim is based is determined by examining the parties' contract. So, a claim alleging breach of a so-called charge-back clause and an indemnification clause arises when the breaching party failed to perform — not when the damaged party notified the breaching party of its default or the damaged party was actually damaged. What is key — particularly in the present business market — is to track potential contract breaches carefully and at the time the breach occurs, not when the breach causes harm.
Here’s a typical example: a supplier provided materials that do not comply with project specifications or the parties’ contracts. The breach occurs on delivery, not on installation or on failure of the deficient materials. If a damaged party waits until the party suffers damage as a result of the non-compliant materials — as opposed to raising the issue on its delivery — it may be too late to enforce the damage that flows from the defects.
Different from indemnification, the right to contribution occurs between parties who may share some responsibility for damage. This is not uncommon on a construction project where damage from delay or a defective product may be shared between contractors or suppliers. The right to contribution arises if one party assumes more responsibility for the damage than is that party’s share. A party's right of contribution exists from the time the person seeking recovery is injured, which in the case of a contractor or owner can be at the moment when non-compliant materials are delivered and installed, not when the materials actually fail.
Here are a couple key points to consider regarding indemnification and contribution rights:
- Know what your contract provides. If there is not a contractual right to these claims, a party may be out of luck.
- If there is a contractual right to indemnification, understand what is required to bring a claim and when the claim accrues. Now, more than ever, it is important for owners, general contractors, subcontractors and suppliers to monitor a project’s progress. An unwary construction partner may otherwise inadvertently sleep on the party’s rights to indemnification or contribution.
- If a construction partner suspects or fears that there has been a breach of another partner’s construction obligations, know your rights. Rights to indemnification and contribution and how those rights are triggered and enforced can differ dramatically by jurisdiction and forum.
An ounce of understanding and attention to indemnification and contribution rights can often save a pound of unforeseen damage and loss.
This article summarizes content from Bruner & O'Connor on Construction Law. For more information on this topic, or for additional citations, see Section 10:6.
As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.