Have you or your clients been sued by an individual or company seeking indemnity for damages allegedly incurred? Are you wondering how to combat and defend against such a claim?
Most boilerplate or standard form construction and design professional contracts include indemnification provisions, which seek to shift to some other party the risk for liabilities that may arise during or after a project. (For an in-depth explanation of the different types of indemnity, see “Different Types of Indemnity and Their Relative Enforceability in Construction Litigation.”)
For individuals and entities subject to those indemnity provisions, it is imperative to be knowledgeable about potential defenses to such claims in the event that the other contracting party makes a claim for indemnity. When it comes to express indemnity, that is, an indemnity provision contained in a written contract (also known as contractual indemnity), most states, including North Carolina, have enacted anti-indemnity statutes that limit, or in some cases even prohibit, the enforceability of such clauses.
The First Line of Defense: North Carolina’s Anti-Indemnity Statute
North Carolina’s anti-indemnity statute, N.C. Gen. Stat § 22B-1, likely will be you or your client’s first line of defense against an indemnity claim. At its core, N.C. Gen. Stat § 22B-1 aims to curtail agreements that seek to shift the burden of liability onto parties whose own negligence contributed to the harm, stating, “Provisions in … a construction agreement or design professional agreement purporting to require a promisor to indemnify or hold harmless the promisee … against liability … proximately caused by … the negligence, in whole or in part, of the promisee … is against public policy and is void and unenforceable.” Put simply, one cannot be indemnified by another for his/her own negligent acts or omissions. One of the rationales behind the statute is that if a general contractor, for example, is allowed to shift most of the financial burden of liability away from itself onto its subcontractors, then it will have little incentive to avoid risk in performing its own work.
The statute applies only to construction and design professional agreements, so when evaluating this statute as a potential defense to an indemnity claim, it is important to first determine if the contract or agreement in question qualifies as a “construction” or “design professional” agreement. A “construction agreement” is defined as “a contract or agreement relative to the design, planning, construction, alteration, repair, or maintenance of a building, structure, highway, road, appurtenance, or appliance, including moving, demolition, and excavating connected therewith,” while a “design professional agreement” is defined as “a contract or agreement with a design professional to provide design professional services.” N.C. Gen. Stat § 22B-1(f)(1) and (5). To qualify as a “design professional,” an individual must be licensed under and provide professional services controlled by several specific Chapters of the North Carolina General Statutes, and the statute defines “design professional services” as “[a] service or work performed by a design professional for which licensure is required under” those same select Chapters of the North Carolina General Statutes. § 22B-1(f)(4), (6).
Despite the clarity of the anti-indemnity statute, challenges may arise in determining its applicability to specific contractual agreements. Disputes regarding whether a given agreement falls under the purview of a “construction” or “design professional” agreement warrant careful scrutiny, especially in cases where the work involved extends beyond traditional construction, architectural, and engineering scopes of work.
After you have determined that the contract in question meets the definition of a “construction” or “design professional” agreement, then you must determine whether you can make an argument that the indemnity clause contained therein is void under N.C. Gen. Stat § 22B-1.To assess this, you must look at the specific contractual language and how closely it tailors the scope of the indemnification to the negligent actions or omissions of the parties involved. Courts are more likely to strike down intermediate form and broad form indemnity clauses (i.e., the least narrowly tailored to the indemnitor’s own negligence) as void and unenforceable, compared to limited form indemnity clauses (i.e., the most narrowly tailored to the indemnitor’s own negligence). (Seemy previous articlefor an explanation of what constitutes limited form, intermediate form, and broad form indemnity clauses.)
Additionally, if a clause of an indemnification provision violates N.C. Gen. Stat § 22B-1, as long as the remainder of the provision is not dependent upon enforcement of the violative clause for its validity and the Court does not have to add its own language or terms to the contract, a Court may sever the violative clause and enforce the remainder of the indemnity provision. See, e.g., Int’l Paper Co. v. Corporex Constructors, Inc., 96 N.C. App. 312, 385 S.E.2d 553 (1989); Jackson v. Associated Scaffolders and Equip. Co., Inc., 152 N.C. App. 687, 568 S.E.2d 666 (2002).
In Int’l Paper Co. v. Corporex Constructors, Inc., Plaintiff-property owner and Defendant-contractor entered into a contract whereby Defendant was to design and construct an expansion to Plaintiff’s Raleigh, North Carolina facility. 96 N.C. App. at 313, 385 S.E.2d at 554. Non-identical indemnity provisions were included in two different places in their written contract. Id. One of the indemnity provisions covered the negligent acts of both the contractor and its subcontractors, while the other provision did not cover the negligent acts of Defendant’s subcontractors. Id. Defendant hired a roofing subcontractor for the project, and one of the roofing subcontractor’s employees was injured on the job. Id. After the employee filed suit against Plaintiff and Defendant (among others), Plaintiff filed suit against Defendant seeking indemnification for attorney’s fees that it incurred after Defendant refused to assume the defense in the underlying lawsuit. 96 N.C. App. at 313-14, 385 S.E.2d at 554. The parties stipulated that the employee’s injuries and damages “were not due to an act of, or the neglect of” Plaintiff and that the injuries and damages “were caused in whole or in part by a negligent act or omission of a subcontractor, or by someone directly or indirectly employed by a subcontractor.” 96 N.C. App. at 314, 385 S.E.2d at 554.
In looking at the express indemnification provision that covered the negligent acts of Defendant and its subcontractors, the Court held that the last clause, which attempted to transfer liability to the Defendant “regardless of whether or not” the damage was “caused in part by a party indemnified” under the contract, violated the anti-indemnity statute and was therefore void and unenforceable, and the Court severed the offending language from the indemnity provision. 96 N.C. App. at 315-16, 385 S.E.2d at 555. Regarding the rationale for severing the clause, the Court reasoned that the parties had stipulated that the employee’s damages were not due the negligence of Plaintiff and that the violative clause was not a “central feature of the contract or even of the [indemnity] provision.” 96 N.C. App. at 315, 385 S.E.2d at 555. Rather, the broad purpose of the provision – that Defendant would indemnify Plaintiff for injuries or damages arising from the negligence of Defendant, its subcontractors, and employees – would not be changed by severing the violative portion of the provision, and redacting the clause would not cause the contract to be rewritten or require the Court to add language or replace its own terms for those of the contracting parties. 96 N.C. App. at 315-16, 385 S.E.2d at 555. Finally, the Court held that the two separate indemnity provisions contained in the contract were not in conflict; rather, when the contract was read as a whole, Defendant appeared to have agreed to indemnify Plaintiff from damages stemming from its own negligence and the negligence of any subcontractors. 96 N.C. App. at 316, 385 S.E.2d at 556.
Therefore, when evaluating whether N.C. Gen. Stat § 22B-1 provides a basis to invalidate an express indemnity provision in you or your client’s contract, you still need to be cognizant of a Court’s ability – and willingness – to sever a violative clause and still enforce the remainder of the indemnity provision under certain circ*mstances.
Other Important Defenses to Consider
In addition to North Carolina’s anti-indemnity statute, you or your client should be aware of other defenses to indemnity claims in the construction context, including the statute of limitations and the statute of repose, which impose independent temporal limitations on the pursuit of indemnity (and other) claims.
In North Carolina, a party seeking damages for defects to improvements to real property must file a lawsuit within three years from when the defect or damage “becomes apparent or ought reasonably to have become apparent to the claimant.” N.C. Gen. Stat. § 1-50(f), § 1-52. If the claimant does not file within this time frame, his/her claim will be barred.
Additionally, with a few exceptions, a party cannot bring an action to recover damages arising out of defects to improvements to real property more than six years “from the later of the specific last act or omission of the defendant giving rise to the cause of action or substantial completion of the improvement.” § 1-50(a)(5). This includes, but is not limited to, actions to recover damages for the following: breach of contract; negligent construction or repair; personal injury, death, or damage to property; economic losses; and contribution indemnification. § 1-50(b)(1)-(9). The statute of repose also applies to actions in contract, in tort, or otherwise. § 1-50(b)(5).
Importantly, the statute of limitations and the statute of repose each have a distinct trigger for commencement, and each provides an independent basis to contest an indemnity claim.
Beyond North Carolina: A Comparative Overview
While N.C. Gen. Stat § 22B-1 provides a framework for indemnification within North Carolina, other jurisdictions have adopted slightly different approaches through their own anti-indemnity statutes. For example, neighboring South Carolina’s anti-indemnity statute, S.C. Code Ann. § 32-2-10, is less restrictive than that of North Carolina, prohibiting indemnification only for an indemnitee’s sole negligence, but allowing indemnification for the concurrent negligence of the indemnitor and indemnitee. On the other hand, going a little further south, Georgia has a very strong policy against indemnifying an indemnitee for its sole negligence; courts there have held indemnity provisions unenforceable if they could be construed to cover the sole negligence of the indemnitee, even if it is not expressly stated in the contract with terms such as “indemnity” and “hold harmless.” Lanier at McEver, L.P. v. Planners and Engineers Collaborative, Inc., 284 Ga. 204, 209, 663 S.E.2d 240, 244 (2008). And Virginia falls somewhere in the middle of the two, having chosen to invalidate clauses that require indemnification for the indemnitee’s sole negligence. Va. Code Ann. § 11-4.1.
Conclusion
Navigating the complexities of indemnity claims in the realm of construction and design professional contracts necessitates a comprehensive understanding of statutory frameworks, contractual provisions, and potential defenses. By becoming familiar with N.C. Gen. Stat § 22B-1, including how North Carolina courts have interpreted it, along with other available defenses, you and your clients can better defend against indemnity claims and mitigate the risks inherent in construction projects.
