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Do Parties’ Indemnification Obligations Arise Before Or After Negligence is Proven?

Most construction and design contracts have indemnification clauses. Normally, contractors or design professionals are required to “indemnify” owners for certain losses, but sometimes contracts require owners to indemnify contractors and design professionals. Construction professionals often assume that all indemnification provisions are created equal and carry the same legal rights and obligations, but this could not be further from the truth. You should carefully study the exact language of any indemnification clause that you are asked to sign, and discuss the implications with your legal advisor. A recent case in New Hampshire illustrates this point.

The case of Penta Corporation v. Town of Newport, N.H. v. AECOM Technical Services, involved the Town of Newport, New Hampshire’s wastewater treatment facility, which discharged treated wastewater into the Sugar River. In 2007, the U.S. Environmental Protection Agency (EPA) issued a permit authorizing the Town to discharge treated wastewater into the Sugar River, albeit with certain effluent limitations. Two years later, the EPA issued an Administrative Order finding that the Town had violated the terms of the 2007 permit by exceeding the effluent limits. As a result, the Town hired engineering firm AECOM to complete the engineering design services necessary to upgrade the Town’s treatment plant in order to satisfy the requirements of the EPA’s Administrative Order.

The Preliminary Design Contract between the Town and AECOM contained an indemnification provision requiring AECOM to

indemnify, exonerate, protect, defend, hold harmless and reimburse the Town. . . from and against any and all damages (including without limitation, claims predicated upon theories of negligence, fault, breach of warranty, products liability or strict liability) litigation . . . , suits . . .  including attorneys’ and experts’ fees . . . which may at any time be imposed upon . . . the Town of Newport which are in any way related to the Engineer’s performance under this Agreement . . . .” 

The Town subsequently hired Penta Corporation, a general contractor, to construct the treatment plant improvements that AECOM designed. Construction began but trouble ensued, and the Town stopped paying Penta. Penta sued the Town, alleging that it had completed construction according to AECOM’s plans and specifications, and was entitled to payment of the balance of its contract price. The Town sent a letter to AECOM demanding that AECOM “defend and indemnify” the Town against Penta’s claims. AECOM refused, saying that its “duty to defend” could not be triggered until its negligence or breach of contract had actually been proven in court. The Town then sued AECOM and sought summary judgment on its claim for indemnification under the Town’s contract with AECOM.

The New Hampshire court reasoned that all courts must look to the “plain language” of the indemnification clause in the specific contract to determine exactly when the duty to defend a lawsuit against the other party actually arises. It examined the indemnification provision and found  that the “duty to defend” applied to “claims, suits, and litigation that are asserted against the Town and which related to AECOM’s contract performance, including unproven allegations.” The court found that this specific indemnification language was broad enough to include even unproven allegations, meaning that AECOM’s duty to defend would necessarily arise before any factual finding that AECOM had actually been negligent. So AECOM was required to “indemnify and defend” the Town against Penta’s claims. The decision came down in May 2017, and although it has yet to be determined whether AECOM was actually negligent, AECOM is nonetheless on the hook to pay for the Town’s legal defense, because of the specific words found in the indemnification clause in its contract. 

What are the “lessons to be learned” from the Penta case? First, all indemnification clauses are NOT created equal. Some, may require indemnification, but only after a finding of negligence. Others, as in Penta, may require a legal defense from the get-go. Still others will require both. Before you sign, read your contracts carefully, and speak to your legal advisor about the legal duties you are assuming. If you are an owner, contractor, or design professional, you will want to review the indemnification clause in your contract carefully to confirm exactly when the parties’ indemnification obligations arise.

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