There are always developments in the laws that affect Owners and construction projects, and each development merits a detailed discussion of the significance of the impact locally and on a broader stage. What worked on one project in a given year may no longer be feasible or even possible in the following year or in a different location. Even before a dispute arises, the participants to a construction project should always be aware of the legal environment in which the work is being done. It is too late to correct an erroneous assumption as to the law after a dispute has arisen. COAA is a great resource for maintaining currency on industry practices and identifying the correct questions to ask to avoid assuming that a past practice remains correct. That is also the value that the construction lawyer may bring to the project whether allocating risk or assessing claims.
Timing and Scope of Indemnification Claims Can be Very Different than What Is Expected
To most people, the topic of “indemnification” ranks near “insurance” as the least favorite dinner conversation, much less as topics of contractual negotiations. However, it is one of the critical risk transfer and allocation tools for the parties. But in order to assess the value and importance of indemnification, each party needs to know how the applicable state law addresses the scope and timing of indemnification.
Some states, such as Illinois, prohibit parties from requiring indemnification from one’s own negligence, while other states, such as Michigan on many construction projects, may allow indemnification so long as the indemnified party is not solely negligent. In many of the states that limit indemnification, the state laws also restrict the ability of the parties to obtain the same result through insurance requirements, either as an additional insured or in mandating that insured indemnification. When determining the value of the indemnification obligation, all parties should be aware of the allowable scope. While it is possible that a court will modify the contract to comport with state law, some states may invalidate the provision that violates statutory prohibitions.
In order to avoid the application of inconsistent laws, some parties may attempt to choose the law that will interpret the contract language regardless of where the project is located. However, some states, such as Iowa, will prohibit the application of another state’s law to a construction project performed entirely within one state.
Occasionally, some states having many differences in various legal topics, as applied to construction, may share a particular principle. Both Illinois and Michigan recognize that claims enforcing indemnification requirements are not barred by the statutes of limitation or repose that apply to construction defects. 15th Place Condominium Association v. South Campus Development Team, LLC, decided by the First District Illinois Court of Appeals on June 26, 2014, recognized that the four-year period of limitation on actions arising from the “design, planning, supervision, observation or management of construction” does not apply to apply to bar an express contractual indemnity claim asserted more than six years after the project was substantially completed.
Michigan’s Supreme Court reached a similar conclusion in Miller-Davis Company v. Ahrens Construction, Inc., on April 15, 2014 holding that the timing for a contractual indemnity claim runs from the point in time when the party refused to indemnify—regardless of when the project was completed. In fact, depending on the wording of the indemnity provision, the claim may not need to be caused by the indemnifying party. Many indemnity agreements trigger the obligation by claims that “may arise from” [ConsensusDOCS] or that are “arising out of or resulting from” [AIA A201] the work being performed. Thus, indemnity claims may be brought several years following completion of the project, as long as the claim is brought prior to the expiration of the period of limitations applicable to actions for breach of contract.
These topics, while making boring dinner conversation, can have a material effect on the long-term success or viability of a project and on the risk profile assumed by Owners and contractors. When negotiating the indemnity provisions, all parties should keep in mind the variations of the legal environment and be very wary of relying on guidance or “industry standards” that are not tailored to the requirements of the state in which the project is located. As always, the best practice is to consult with construction counsel who is familiar with the jurisdiction for the most current and accurate application of the law to the language of the contracts.
John Sier, with the firm of Kitch Drutchas Wagner Valitutti & Sherborook in Detroit, Michigan, is Associate Counsel to COAA.