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Credit Managers Should Scan for Risk from Indemnity Clauses

Suppliers and other players in construction are increasingly encountering indemnity provisions within contracts. It has become more important than ever for credit managers to carefully examine such documents to limit any potential associated risk to their companies.

“The key for a credit manager is to recognize them and understand how to react,” said Sam Smith, regional finance manager-East, at Crescent Electric Supply Company in East Dubuque, IL.

Indemnity provisions are agreements in which one party agrees to protect and “hold harmless” another party from liability that arises from personal injury or property damage on the job, according to Don Gregory, the American Subcontractors Association’s (ASA) general counsel and partner with Columbus, OH-based firm Kegler, Brown, Hill & Ritter. These provisions can shift the risk of liability from a negligent party to an innocent one, and have been criticized as being unfair, he said.

Clauses that contain indemnity provisions can be difficult to spot, Smith said. For example, instead of including the term “indemnification clause,” the terms “hold harmless,” “indemnify” or “defend” may appear in a contract. Also, a clause can be buried in other contracts with which one’s company is linked. If there is language present that is similar to “This purchase order incorporates by reference all terms of subcontractor’s contract with the general contractor” or “All warranties in the general conditions are incorporated herein,” proceed with caution and request a copy of the contract for review. “Not only can you be tied to indemnification clauses, but also to terms such as liquidated damages, uncapped liability or even extended warranties,” he said.

An early defense for a credit manager is to redline any contract language as it may not even apply to one’s company, Smith said. Note that some states have anti-indemnification statutes, which provide that an indemnity provision in a construction contract that purports to indemnify and hold harmless a party from its own negligence is void as it’s against public policy and unenforceable, Gregory said. Regardless, try to limit the value of the indemnification to the value of your contract, Smith advised.

Another option is to ask vendors to agree to the indemnification clause, shifting the risk, often appropriately, to them, he said. It’s appropriate for a vendor to agree to the clause if, for instance, the indemnification clause revolves around guaranteed delivery dates.

It is important to remember that the value of the contract should not dictate the level of importance placed on reviewing its language, Smith said. If you agree to a $500 contract that contains an uncapped indemnification clause, for example, your organization might be subject to a $10,000 or higher claim.