Why we need to limit
hold harmless clauses

By Donald Croysdale

A few weeks ago, The Daily Reporter chronicled the saga of how a prime contractor and 19 subcontractors were denied prompt payment for services performed in the demolition of County Stadium. After months of delay, legal wrangling and mounting debts, a settlement was reached and payments made. Exposing this dispute to public sunlight might have been the catalyst that led to a successful result.

But as The Daily Reporter aptly opined, "It never should have taken so long." The prime contractor, prior to getting paid, was being asked to indemnify and hold harmless another firm, which was responsible for identifying asbestos in County Stadium, with whom it had no contract and no control. That firm’s judgment apparently was that no asbestos was present. When the demolition firm, though, discovered some asbestos, it immediately stopped work and reported it. The demolition firm probably prevented a much larger problem.

Just reward?

Yet when it came time to get paid, the demolition contractor’s "reward" for its diligence was a demand that it indemnify and hold harmless the firm that missed discovering the asbestos in the first place. No payment would be made either for the prime contractor’s work or for the 19 subcontractors who helped it until this "broad form" indemnification and hold harmless clause was signed.

It is unfair, and in our view should be against public policy, that a contractor be required to indemnify and hold harmless other parties for their actions or possible negligence. Yet that is precisely what a "broad form" indemnification and hold harmless clause does.

In the County Stadium case, if a claim were made against the firm that missed identifying the asbestos, and if the demolition firm were to have signed the "broad form" indemnification and hold harmless clause, then even if the asbestos firm were judged to be 100 percent responsible for the error, the cost of the claim could be passed on to the demolition firm and its subcontractors for payment. These costs may have exceeded $1 million.

A long road

Asbestos claims can go on for years and years. Recently, major multi-billion dollar companies including U.S. Gypsum, W.R. Grace and Owens Corning Fiberglas have declared Chapter 11 bankruptcy from asbestos claims. Much smaller contractors and subcontractors should be concerned, too, about being wiped out by claims.

If, due to financial pressure, a contractor signs a "broad form" indemnification and hold harmless clause as a quid pro quo for getting a payment it was fully entitled to it could lose everything.

This type of situation almost did in a local underground contracting firm. Through no fault of its own except possibly not recognizing the incredible risk of signing a broad firm indemnification and hold harmless clause this firm was presented with a $2.5 million bill, year’s after work was done, from a company it had indemnified and held harmless. Only by an obscure technicality did an appeals court and the Wisconsin Supreme Court reverse a decision that would have wiped the company out.

The construction industry is recognizing that broad form indemnification and hold harmless clauses are unfair and dangerous to sign. Two-thirds of the states now ban and make unenforceable broad form clauses. In 1997, the American Institute of Architects, in its model contracts, limited these clauses to "narrow form." In simple terms, each party is responsible for its own actions or negligence.

The American Subcontractors Association strongly supports use of the 1997 AIA A401 and A201 model contracts. In 1998, the Associated General Contractors also revised its contracts to narrow form. The revised AIA and AGC contracts are clearly a positive move for our industry.

Not there yet

Here in Wisconsin, though, we have some work to do. While in 1978 we were one of the first to recognize that these broad form clauses were inherently unfair, the original statute’s wording was deemed too ambiguous. This is why situations, such as the underground contractor’s near miss and the considerable payment delays for the County Stadium demolition work, continue to plague contractors primes and subcontractors alike.

Contractual language is complex. A phrase or two can alter a clause completely from one that is acceptable to one that is risky and dangerous. Attorneys know the difference, but many contractors, especially smaller contractors, might not.

The prime demolition contractor knew the difference, stood its ground and refused to sign a broad form clause. Under current Wisconsin statutes, this contractor and its subcontractors were pretty much stuck. They could either sign a dangerous clause, risking their companies, or they could incur months of delay, and potential financial disaster, from not getting paid.

This is a choice that contractors should not have to make. As a matter of public policy, broad form indemnification and hold harmless clauses should be unenforceable in Wisconsin. Contractors are responsible for their own actions, but they should not be forced to indemnify and hold harmless others.

The ASA is leading a coalition of construction groups to restore the original intent of the 1978 Wisconsin statute. We are grateful that payment for the demolition of County Stadium was eventually made, but this type of dangerous stalemate should not be allowed to hang over contractors’ heads. It’s time now for our industry to move forward restore contract fairness for small and large contractors alike by limiting indemnification and hold harmless clauses.

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