New law significantly modifies indemnification in construction and design contracts

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By Paul E. Davis
Special to North Carolina Construction News

This summer, the North Carolina General Assembly re-wrote the primary statute governing the enforceability of indemnity provisions in construction and design contracts. The legislation, signed into law by Gov. Roy Cooper on July 8, 2019, both expanded and restricted the permissible scope of certain indemnity agreements.

House Bill 871 (ratified as S.L. 2019-92) amended N.C. Gen. Stat. §22B-1, North Carolina’s “anti-indemnity” statute.

The legislation added new subsections to §22B-1 that (1) render unenforceable agreements requiring design professionals to defend others for claims arising from the designer’s actions; and (2) authorize award of attorneys’ fees.

Duty to defend

It is common in contracts in the construction industry that one party (indemnitor) will expressly agree in its contract to “indemnify and hold harmless” the other party to the contract (indemnitee) for damages the indemnitee incurs from claims brought against the indemnitee by a third party arising from actions of the indemnitor. For example, a designer may agree in its contract with the project owner to indemnify the owner for damages in the event a third party is injured and sues the owner for damages caused by the designer’s alleged negligence.

Commonly coupled with this obligation to indemnify is the duty to defend. The duty to defend is distinct from the obligation to indemnify. Whereas the obligation to indemnify essentially requires the indemnitor to reimburse the indemnitee for losses, damages and expenses the indemnitee incurs from claims by a third party as a result of the indemnitor’s actions, the duty to defend requires the indemnitor to provide the defense for the indemnitee from third-party claims.

Under the amended statute, design professionals can no longer be contractually required to defend other parties to their contracts. A contract’s indemnity agreement may still be drafted to require the designer to indemnify others, but the duty to defend has been declared “against public policy, void, and unenforceable.”

This prohibition applies only to certain design professionals; and it does not apply to others in the construction industry such as contractors, subcontractors, or suppliers.

Attorneys’ fees

The focus of much of the commentary in the industry on the amended statute has been on the prohibition of requiring design professionals to defend others against third-party claims. Of equal or perhaps greater significance was the addition of a new section to the statute, §22B-1(d), that expressly authorizes an award of attorneys’ fees in the context of indemnification. Entitlement to recover attorneys’ fees is regulated by statute and is permissible in only limited circumstances. Prior to this amendment, the anti-indemnity statute did not address whether an agreement to reimburse an indemnitee for its attorneys’ fees incurred in defending third-party claims was enforceable. The statute was silent on this issue. The amended statute now expressly validates indemnity agreements that require the indemnitor to reimburse the indemnitee for the indemnitee’s attorneys’ fees incurred in defending against claims brought by third parties that are based on the indemnitor’s actions.

This new section applies to all parties in construction and design contracts. Therefore although design professionals may not be required to provide a defense to an indemnitee, there is now a statutory pronouncement validating contractual indemnity agreements that require design professionals (along with contractors, subcontractors and suppliers) to reimburse other parties to their contracts for the indemnitees’ attorneys’ fees incurred in defending against third-party claims.

Effective date

The amendment to the statute became effective on Aug. 1, 2019, and applies to contracts “entered into, amended, or renewed” on or after that date.

It is not clear why the General Assembly opted to vary from the commonly used effective date for legislation affecting contracts – that the effective date of the legislation is a certain date and applies to contracts “entered into” on or after that date. This amendment’s much broader effective trigger date (contracts “entered into, amended, or renewed”) presents the opportunity to review existing open contracts and determine whether it would be in one’s interest to amend or renew these contracts to take advantage of this statutory change. Beyond the obvious and common amendments to a contract, there is disagreement in the industry as to what constitutes a renewed or amended contract. For example, in this context, does the execution of a change order render a contract “amended?” Does a change to an existing design or construction contract that makes a change only to the contract’s indemnity provision constitute an “amended” contract where

the change to the contract was made solely for the purpose of taking advantage of the amended statute?

Paul Davis
Paul Davis

Paul Davis is a construction lawyer with Conner Gwyn Schenck PLLC, based in Raleigh. He has studied and briefed virtually every aspect of construction contract law and concentrates his practice in the areas of construction arbitration and litigation and contract drafting and negotiation for public and private clients, including general contractors, construction managers, and subcontractors. He can be reached by email at pdavis@cgspllc.com or by phone at (919) 789-9242 (Ext. 2343).

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