Limiting Language Can Make Unenforceable Indemnification Agreements Partially Enforceable

Background

New York G.O.L. § 5-322.1 was intended to mitigate the widespread construction industry practice in which subcontractors assume the liability of upstream contractors and owners by promising to pay for an upstream contractor’s or owner’s losses for their own negligence. Promises by one party to pay for another party’s losses – often referred to as “indemnification agreements” – are typically included in contracts drafted by owners and general contractors, as well as subcontractors soliciting bids from sub-subcontractors. Section 5-322.1 voids indemnification agreements between two construction contractors where Contractor A promises to pay for Contractor B’s losses resulting from Contractor B’s own negligence.

In practice, section 5-322.1 voids an indemnification agreement between a general contractor and a subcontractor when the general contractor is found partially negligent in an action brought by the subcontractor’s employee and the agreement provides for full, rather than partial, indemnification to the general contractor. That is, section 5-322.1 bars the enforcement of an agreement providing that the subcontractor promises to compensate the general contractor for the general contractor’s own negligence.

Situations where § 5-322.1 applies and does not apply

• Applies: Negligence actions involving contracts for the “construction, alteration, repair or maintenance of a building, structure, appurtenances and appliances…”
• Does not apply: Contractual provisions providing that a subcontractor will indemnify a general contractor for the subcontractor’s own negligence.
• Does not apply: Contractual provisions requiring subcontractors to carry insurance coverage against personal injury.
• Does not apply: Contracts for the sale of goods that are governed by the Uniform Commercial Code (“UCC”).

Comment

Importantly, section 5-322.1 does not prohibit agreements in which a subcontractor agrees to indemnify an owner or general contractor for liability resulting from the subcontractor’s own negligence. Contractors can agree to pay for losses resulting from their own negligence but cannot assume liability for another contractor’s negligence. Consistent with this rule, New York courts have sometimes preserved that part of an indemnification agreement which is not prohibited by section 5-322.1. In cases where the indemnification agreement at issue was prefaced by language stating that the agreement is valid “to the extent permitted by law,” some courts have upheld the part of the agreement that was not invalidated by section 5-322.1. For example, if the subcontractor agrees to indemnify a general contractor for (1) the general contractor’s negligence, and (2) the subcontractor’s negligence – the part of the agreement providing that the subcontractor agrees to indemnify the general contractor for the subcontractor’s own negligence may be upheld with certain limiting language.

Ultimately, in certain circumstances, owners and contractors can partially save an otherwise unenforceable indemnification agreement by (1) limiting the agreement “to the extent that it is permitted by law” with express language, and (2) providing for partial, allocated indemnification in the agreement.

If you would like more information regarding this topic please contact Gregory J. Spaun at gspaun@wbgllp.com or call (914) 607-6425