An indemnity clause in an architect’s contract with its client (building developer) was found void for violating anti-indemnity statute applicable to “contractors” performing work on “any contract relating to construction” because it required indemnity “for any and all losses, liabilities, expenses, claims …. relating to the services performed by the Architect.” The indemnification obligation made no exception for cases in which the negligence of the Owner was the sole cause of damages. It required only that the liability “relate to” the Architect’s services, such a “low bar”, said the court, that this “could lead [Architect] to indemnify [Owner] for [Owner’s] own negligence” [and] Indemnification of a party for that party’s own negligence is precisely the situation forbidden by [the statute].” The Travelers Indemnity Company of Connecticut v. Lessard Design, Inc., (,U.S. Dist. Ct., E.D. Virginia 2018).
This indemnification litigation arises out a previously decided copyright infringement case in which Lessard Design, Inc. and its client, the project owner were sued by Humphreys & Partners Architects for alleged copyright infringement concerning the design of a condominium building. Lessard and the owner were successful in their defense and prevailed by obtaining summary judgment dismissing the action against them. By the time all appeals were resolved affirming the summary judgment, the Owner as a “prevailing party” sought recovery of $990,995 in attorneys’ fees from Lessard. This amount was reduced to $792,796 by the federal district court upon remand, and the parties ultimately agreed upon $745,000 for the attorneys fees.
The indemnification dispute in this current case arose because when Humphrey’s sued the owner, the owner tendered defense of the claim to Lessard, and Lessard declined to provide the defense. As a consequence, the Owner was able to get its own general liability carriers, Travelers Insurance, to provide the defense on its behalf.
After successfully defending against the copyright infringement case, Travelers sought, by way of a subrogation claim, to recover those defense costs from Lessard by way of the indemnity agreement in the contract between Lessard and its client.
“The indemnity provision provided in pertinent part the following:
[i]ndemnify, defend and hold the Owner, Owner’s Developer, and Owner’s and Owner’s Developer’s wholly owned affiliates and the agents, employees and officers of any of them harmless from and against any and all losses, liabilities, expenses, claims, fines and penalties, costs and expenses, including, but not limited to reasonable attorneys’ fees and court costs relating to the services performed by the Architect hereunder . . .”
When Lessard declined Travelers requests of indemnification, Travelers filed a complaint alleging breach of contract and quantum meruit. Lessard moved to summary judgment by asserting that a Virginia statute invalidated the indemnification clause. As set forth by the court,
4.12 Section 11-4.1 invalidates indemnification provisions “by which [a] contractor performing” work on “any contract relating to construction” is required to indemnify other parties to the contract for negligence relating to the performance of the contract. Thus, the statute invalidates an indemnification provision if:
(i) the contract containing the indemnification provision is a “contract relating to construction[,]”
(ii) the indemnifying party is a “contractor[,]” and
(iii) the indemnification provision requires the contractor to indemnify other parties to the contract against liability for damage caused by the other parties’ sole negligence.”
The first question to be decided by the court was whether the Architect’s Agreement was a “contract relating to the construction alteration, repair or maintenance of a building” within the meaning of the statute. Based on the facts here, the court found Lessard had duties and responsibilities related to the “Construction Phase” of the building process as well as to the design phase. It was required to “administer the contract between the Owner and contractor and to perform periodic site visits”. Given that the Agreement imposes these obligations on Lessard, it follows that the Agreement falls squarely within the category of contracts “relating to construction” within the meaning of Sec. 11-4.1.
The second statutory question was whether Lessard was a “contractor” within the meaning of the statute. Travelers argued that the term “contractor” did not include Lessard because it was a licensed Architect, not a contractor. In rejecting that argument, the court stated that, “if the contract ‘relates to’ construction of a building, then the party performing the contract is a ‘contractor’ covered by the statute whether or not that party is also an architect.” The definition of “contractor” in the statute “is broad enough to include architects involved in the supervision of construction contracts….”
The final issue resolved by the court was whether the indemnification provision could be saved and applied – basically because it didn’t expressly state that Lessard must indemnify the Owner for the Owner’s negligence. In holding the clause void, the court stated,
This indemnity obligation makes no exception for cases in which the negligence of the Owner or PDT Builders (the Owner’s Developer) is the sole cause of the liabilities and claims that arise. The indemnity obligation only requires that the liability “relat[e] to” Lessard’s services, a low bar that could lead Lessard to indemnify PDT for PDT’s own negligence. Indemnification of a party for that party’s own negligence is precisely the situation forbidden by § 11-4.1.
In sum, because Section 2.7 of the Agreement, the indemnification provision, required Lessard, as a contractor, to indemnify the owner of the building and PDT for the owner’s and PDT’s sole negligence, the provision is void pursuant to § 11-4.1.
Comment and Lessons Learned
1) Strike out the duty to defend. From this decision we learn again how important it is to strike any defense obligation in the indemnification clause of a professional services contract. A professional liability carrier will not cover such a duty to defend. If the duty to defend cannot be completely eliminated from the clause, it should at least be modified to state that the duty will apply only to the extent it is covered by insurance the design professional is required by the contract to maintain.
2) Limit indemnity to damages “to the extent caused by negligent performance.” The clause in the Lessard contract was far too broad. By stating that Lessard would indemnify for damages “relating to the services performed by the Architect hereunder” that was so open ended that it certainly didn’t limit indemnity to damages caused by negligence. Any damages obligation resulting from an indemnification clause that would not have been awarded at common law in the absence of the indemnity language is uninsurable. The contractual liability exclusion of the professional liability policy will bar such coverage.
3) Limit indemnity to damages arising out of “third party claims.” This clause said nothing about whether an Owner could recover its own first party damages and attorneys fees in the absence of a third party claim. Some courts will read a clause such as this, which fails to clarify first party versus third party claims, and will hold that the clause applies only to third party claims. See for example, Int. Fidelity Ins. Co. v. Americaribe, 906 F.3d 1329 (11th Cir. U.S., 2018). But other courts will find that such a clause can also apply to first party claims. See for example, Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, 454 Md. 475, 164 A. 3d 978, (Maryland 2017).
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 21, No. 4 (Apr 2019).
Copyright 2019, ConstructionRisk, LLC
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