Indemnification Clauses in Construction Contracts in New Jersey and Their Enforceability

February 5, 2014

Indemnification clauses are common in many types of contracts. They shift, or allocate, risk or loss from one party to another. Construction contracts often involve various contracts and agreements that are entered into between the owner, architect/engineer, contractor, and the subcontractor. These agreements usually contain indemnification clauses. When a loss or injury takes place, an analysis of the various indemnifications provisions will determine which party was contractually bound to bear the risk of loss.

It is important to understand that not all indemnification provisions will be upheld by a court. Historically, indemnification provisions are not favored by courts. If a court finds that the language in an indemnification provision is unclear and capable of two meanings, it will often construe the provision in the manner that is less favorable to the party seeking indemnification. Additionally, if a court finds that the terms of the indemnification provision are unfair, it will label the clause null and void as against public policy. Thus, if you are a design professional, an owner, or a contractor/subcontractor – and you wish to shift the risk of loss to another party – it is vital that you have an attorney review the contract to ensure that: (1) its language is clear and unequivocal; and (2) the clause does not violate public policy. Moreover, if you are the party agreeing to indemnify another party, it is vital to have an attorney review the contract to ensure that the agreement says what want it to say and is not over-broad.

Indemnification and hold harmless agreements in construction contracts are governed by N.J.S.A. 2A:40A-1, which provides:

A covenant . . . purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury . . . by or resulting from the sole negligence of the promisee . . . is against public policy and is void and unenforceable . . . .

Thus, N.J.S.A. 2A:40A-1 prohibits, as against public policy, those hold harmless clauses that seek to indemnify a party for damages that resulted from that party’s own sole negligence. In other words, a clause which requires a contractor to indemnify an architect and/or engineer for damages that resulted from the architect’s and/or engineer’s sole negligence would be unenforceable. On the other hand, a clause requiring a contractor to indemnify an architect and/or engineer for any damages which were not the result of the architect’s and/or engineer’s sole negligence would be enforceable.

Likewise, New Jersey courts have held that public policy is not violated when an indemnitor promises to hold harmless the indemnitee for the indemnitee’s own negligence, as long as the indemnitee is not solely at fault. This principle derives from the recognition that ordinarily the financial responsibility for the risk of injury during the course of a construction project is shifted in any event by the primary parties to their insurance carriers. The impact of the indemnity agreement is therefore, in practical effect, the parties’ allocation between themselves of the total required insurance protection for the project.

Having an attorney review your construction contract could end up saving your thousands of dollars in the future in the event that your indemnification clause is labeled ambiguous, void as against public policy, or is over-broad. Contact Randolph H. Wolf today if you have questions about the terms of your agreement.

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