In the construction litigation arena, indemnification agreements play a prominent role. Accordingly, the parties to the agreements need to have a clear understanding of the rights and obligations lurking in such agreement. The key to such an understanding is the language of the indemnification agreement at issue. This language differs from agreement to agreement and case to case. The recent case of Rush v. Norfolk Electric Company illustrates the need for everyone in the construction industry to focus on the particular language of their indemnification agreements.

The case provides guidance on the following indemnification issues in the construction context:

• The ability of a general contractor to shift its indemnity obligations in its contract with an owner to a subcontractor by having the subcontractor assume those obligations in the subcontract;

• The ability of a general contractor to have a subcontractor agree in a subcontract to indemnify the general contractor for the entirety of a loss or expense when the subcontractor’s negligence is only partially responsible for the loss or expense;

• The validity of both negligence-based indemnification clauses and act-based indemnification clauses in the same contract;

• How the Massachusetts courts resolve which indemnification clause applies when the contract contains two such clauses which are inconsistent in their scope;

• Whether the indemnitee’s subrogee/insurer can pursue the insured’s indemnification claim when the underlying judgment is paid by the insurer and not by the insured.

Party Relationship

In Rush, Modern Continental Construction Co. was hired by the Massachusetts Water Resources Authority as the general contractor for its Deer Island secondary waste treatment project. Modern Continental subcontracted the electrical work to co-defendant Norfolk Electric Co. and the plumbing work to the third-party defendant, Harding & Smith. Harding & Smith, in turn, entered into a sub-subcontract with the fourth-party defendant, New England Insulation, under which NEI would provide piping and insulation for the project. The plaintiff Rush was employed by NEI at the time of the accident. After the verdict was reduced to account for Rush’s 25 percent negligence, Rush obtained a judgment for $865,083.75 against both defendants. The judgment was paid by the insurer for Norfolk Electric, pursuant to its obligation to indemnify Modern Continental.

By means of a third-party complaint, Modern Continental asserted a claim for complete indemnification (judgment and defense costs) against Harding & Smith pursuant to the subcontract between those parties. Harding & Smith filed a fourth-party complaint seeking indemnification pursuant to its subcontract with NEI. Based on the language of the indemnity agreements, the trial judge allowed Modern Continental’s indemnification claim only in part. The issue on appeal was whether the court erred by not ordering full indemnification by Harding & Smith.

Modern Continental claimed that it was entitled to full indemnification because part of its subcontract with Harding & Smith required Harding & Smith to assume toward Modern Continental “all the obligations and responsibilities pertaining to that work that Modern Continental … by the contract documents has assumed to the owner Â…”

Pursuant to that language, Modern Continental argued that each and every part of the general contract applied to the plumbing work undertaken by Harding & Smith.

Paragraph 6.29.1 of the general contract obligated Modern Continental to hold harmless and indemnify the authority with respect to bodily injuries sustained in connection with work performed on the project by Modern Continental if such injuries were attributable, even in part, to the negligence of Modern Continental or any person or entity for which it was responsible. Modern Continental argued that its subcontract with Harding & Smith entitled it to full indemnification from Harding & Smith in the event that the negligence of Harding & Smith or the negligence of those for whom it was responsible contributed in any way to losses or expenses suffered by Modern Continental. Under Massachusetts law, an undertaking by a subcontractor to indemnify for the entirety of a loss or expense, notwithstanding that its negligence is only partially responsible, is legally permissible.

Dueling Clauses

The court recognized that, standing alone, Paragraph 1.3 of the subcontract would entitle Modern Continental to full indemnification. The problem for Modern Continental was that Paragraph 1.3 did not stand alone. The subcontract also contained a separate indemnification provision in Paragraph 4.1, which limited Harding & Smith’s duty to indemnify to damages caused in whole or in part by the acts and omissions of Harding & Smith, its subcontractors, anyone directly or indirectly employed by Harding & Smith, or anyone for whose acts Harding & Smith may be liable. The two indemnity provisions differed in scope. The indemnification language of the general contract (which, Modern Continental asserts, is applicable to Harding & Smith by virtue of the incorporation clause in paragraph 1.3 of the subcontract) calls for indemnification for the entirety of any loss or expense incurred by the indemnitee whenever the indemnitor is at least partially responsible for the loss due to its negligence. Its trigger is negligence. In contrast, the extent of the indemnification obligation under paragraph 4.1 of the subcontract is limited in that the indemnitor is only responsible “to the extent [that damages are] caused in whole or in part by the acts and omissions of the [Harding & Smith].” Its trigger is any act or omission of Harding & Smith regardless of whether such act or omission was negligent.

Thus, Modern Continental’s indemnity rights were affected substantially by which indemnification provision applied because it would receive complete indemnification if the clause in the general contract applied, but only proportional indemnification if the clause in the subcontract applied.

Modern Continental argued that the two indemnity clauses were not in conflict since the clause in the general contract applied only when the indemnitor [Harding & Smith] has been negligent (in whole or in part), while the clause in the subcontract applied where there is merely a nexus between the indemnitee’s loss and the performance of the work of the indemnitor. Modern Continental argued that was entitled to elect which of the provisions it preferred to enforce.

The Appeals Court agreed that Massachusetts law recognizes the validity of both negligence-based indemnification clauses and act-based indemnification clauses. It also found that there is no reason why parties may not adopt multiple indemnification provisions that are applicable to varying circumstances. However, it rejected Modern Continental’s argument that the clauses were harmonious and part of a rational scheme agreed to by the parties for allocating risk because the general contract contained arcane boilerplate provisions, most of which had nothing to do with the work of a plumbing subcontractor.

To resolve the conflict between the conflicting indemnification clauses, the appeals court invoked the “conflicting clauses” rule. Under this rule, if the apparent inconsistency is between a clause that is general and broadly inclusive in character and one that is more limited and specific in its coverage, the latter should generally control. Since the indemnification clause in Paragraph 4.1 of the subcontract was more limited and specific than the provision in the general contract, it governed. The court also relied on the fact that the indemnification provision in the subcontract was bargained over and executed between Modern Continental and Harding & Smith, while the indemnification provision in the general contract was not bargained over by Harding & Smith. Thus, notwithstanding the various legal constructs advanced by the parties, the court, in the end, resolved the issue by applying a commonsensical notion of fairness.

The court’s resolution resulted in Harding & Smith only having to indemnify Modern Continental for damages “to the extent caused in whole or in part ” by Harding & Smith or a person or entity for which it is responsible. Reasoning that the only conduct for which Harding & Smith was responsible was the contributory negligence of Rush, an employee of its subcontractor NEI, the Appeals Court concluded that Harding & Smith’s proportional contribution to Modern Continental’s loss was equal to the percentage of negligence of Rush as found by the jury, 25 percent. Since Modern Continental had incurred no loss with respect to Rush’s 25 percent comparative negligence by virtue of the comparative negligence statute, there was nothing left to indemnify and Harding & Smith was not responsible for any portion of the judgment in favor of Rush.

Harding & Smith and NEI challenged Modern Continental’s claims for indemnification by arguing that, since Liberty Mutual, Norfolk Electric’s insurer, paid the judgment on behalf of Norfolk Electric and Modern Continental, Modern Continental sustained no loss (or expense because Liberty Mutual also paid Modern Continental’s defense costs pursuant to Norfolk Electric’s indemnity obligations) that required indemnification. The Appeals Court observed in dicta that it was unclear why, if Modern Continental was entitled to indemnification for amounts paid, an insurer that paid those amounts could not justifiably claim reimbursement from the indemnitor (Harding & Smith) on a subrogation theory. The court did not resolve this issue because, for the reasons stated above, Harding & Smith paid nothing on Rush’s judgment. Accordingly, this remains an open issue for the Massachusetts courts to resolve in the future.