By Aaron Kastens of Michael Best & Friedrich LLP
and Bailey Steffes of Tri-North Builders Inc.
Be careful of the language you use when drafting indemnity provisions in contracts.
That is a key lesson of the 7th Circuit Court of Appeals’ recent decision in Krien v. Harsco Corp. in which the court ruled that, under a construction contract’s indemnity provisions, a general contractor was required to indemnify a subcontractor for injuries suffered by one of the general contractor’s employees.
Riley Construction Co. Inc. was the general contractor on a project in Wisconsin. Riley hired Harsco Corp. to supply scaffolding for the project. Robert Krien, a Riley employee, was injured when another Riley employee placed a plank on an undecked scaffold. The scaffolding broke and Krien fell, suffering serious injuries.
Krien sued Harsco for negligence and strict liability. Krien and Harsco settled the claim for $900,000.
Prior to the settlement, Harsco filed a third-party complaint against Riley seeking contractual indemnification for any damages Harsco may pay to Krien by way of judgment or settlement. Harsco and Riley filed cross-motions for summary judgment on Harsco’s indemnification claim, and the district judge ruled in favor of Riley, holding that the general contractor had no duty to indemnify Harsco for the amounts Harsco paid Krien. Harsco appealed, and the 7th Circuit reversed, directing the district court to grant judgment in favor of Harsco.
The relevant indemnity provision at issue provided that Riley “shall defend, indemnify and be liable to [Harsco] . . . for any loss or damage (including bodily injury or death) which may arise from” Riley’s employees’ use of Harsco’s scaffolding, “except to the extent that such loss or damage is caused by the negligence of [Harsco’s] employees operating [Harsco’s] equipment.”
Riley challenged the effect of that indemnity provision, arguing that requiring it to indemnify Harsco for Krien’s injuries would nullify the Wisconsin Worker’s Compensation law’s prohibition on an employee suing its employer for work-related accidents.
The court rejected Riley’s argument, concluding that an employer is free to contractually waive its workers’ compensation exemption, and that Riley in fact did so by agreeing to indemnify Harsco. The court ruled that Riley had to indemnify Harsco for the amounts Harsco paid to Krien, as well as Harsco’s legal expenses.
Indemnification clauses frequently are hot-button issues in construction contracts, both in drafting and in litigating them. Krien v. Harsco provides another example of why parties negotiating indemnification provisions should review those clauses carefully and consider potential unintended consequences.
Companies entering into contracts may assume that statutory exemptions or prohibitions will protect them from contractual obligations. But courts often will give deference to a contract negotiated by two businesses because they assume those two businesses knew what they were doing.
The warning should be clear: don’t wait until something bad happens to challenge the legality or breadth of a contract clause. Rather, it is safer to assume that a contractual provision that appears to modify or waive statutory protections may, in fact, do just that.
The 7th Circuit’s decision undoubtedly will concern employers across the state who regularly negotiate contracts containing indemnification clauses. However, there is no need to rush to delete all indemnity provisions from your contracts.
Well-drafted, balanced clauses remain an effective means of allocating and transferring risk, so long as both parties carefully consider the wording and the breadth of what is set forth. For example, in order to preserve the employer’s exemption, include a clarifying sentence in the contract stating that any indemnification contained therein does not constitute a waiver of any workers’ compensation exemption the indemnifying party may have under applicable law.
As long as you are cautious about the clauses you include in your contracts, aware of their consequences and proactive about including clarifying language where necessary, you can potentially save your company a significant amount of time and expense.
Aaron Kastens is a partner with the law firm of Michael Best & Friedrich LLP. Bailey Steffes is a second-year student at the University of Wisconsin Law School and legal intern at Tri-North Builders Inc.