Contracts aren’t considered leisurely reading. The language used in indemnity provisions can be complicated. Terms like “indemnitor” and “indemnitee” aren’t used in everyday language. To help you navigate the complexity of indemnity provisions, let’s put the risk transfer language in common terms.
Each state has developed anti-indemnity laws that limit the amount of risk that can be transferred between parties to a contract, and some are industry-specific. Texas, for example, has statutes for: (1) Oil & Gas operations; (2) Commercial Construction; and (3) Common Carrier transportation.
Oklahoma has a statute specifically designed to prohibit certain types of contractual language for the construction industry. Oklahoma’s law limits the amount of risk that can be transferred between parties to a contract based on the work that will be performed, namely a construction contract. So, the first step in analyzing the indemnity provision is asking, “Does the nature of the contract fall into the type of work as described in the statute?” Second, answer whether Party A is being asked to indemnify Party B for Party B’s own negligence.
If you answered “yes,” then it’s a good idea to review some vocabulary.
- “Indemnitor” – The person who is bound, by an indemnity contract, to indemnify or protect the other.
- “Indemnitee” – The person who, in a contract of indemnity, is to be indemnified or protected by the other (Indemnitor).
There are three basic types of indemnity:
- Limited form – Indemnitor indemnifies Indemnitee only for the amount of the loss directly attributable to the Indemnitor’s negligence.
- Intermediate form – Indemnitor indemnifies Indemnitee for the entire loss arising from the project if responsibility for some of the loss can be placed on the Indemnitor.
- Broad form – Indemnitor indemnifies Indemnitee for any loss arising from the project even if the loss is caused by the Indemnitee’s own negligence.
The Oklahoma Anti-Indemnity Act
In 2006, Oklahoma passed a law limiting broad form indemnities in construction contracts (Oklahoma Statute, Title 15. Contracts, §15-221). This law prohibits an Indemnitor from indemnifying an Indemnitee for the consequences of the Indemnitee’s own negligent acts or omissions. Why did the legislature address this issue? Many times, one party has much more bargaining power than the other, and this inequity in bargaining power led to indemnity provisions where one party sought to transfer all of its risk to another party. Situations where Party A asks to be indemnified by Party B, even for Party A’s negligence, are what the legislature sought to eliminate. A provision like this does not pass the common sense test, and in many states (including Oklahoma), a provision such as this is void and unenforceable. When an indemnity is unenforceable, each party will be responsible for the consequences of its own negligence.
Construction Contract Defined
According to Oklahoma law, a “construction contract” is a contract, subcontract or agreement for construction, alteration, renovation, repair or maintenance of any building, building site, structure, highway, street, highway bridge, viaduct, water or sewer system or other works dealing with construction, or for any moving, demolition, excavation, materials or labor connected with such construction. Texas has exceptions to its anti-indemnity law – it doesn’t apply to residential (single family house, townhouse, duplex and the land development involved) or public works construction projects. However, Oklahoma does not have exceptions for these types of projects, which means in Oklahoma, broad and intermediate forms of indemnity are prohibited without these specialized exceptions that were carved out of the Texas law.
To put it simply, in a construction contract in Oklahoma, you or your company cannot ask to be indemnified for your company’s own negligence or other fault. More specifically, the statute states that any provision, covenant, clause or understanding in a construction agreement that conflicts with the provisions and intent of this section or attempts to circumvent this section by making the agreement subject to the laws of another state, or that requires any litigation, arbitration or other dispute resolution proceeding arising from the agreement to be conducted in another state, is void and unenforceable. The Oklahoma legislation likely protects smaller contractors and subcontractors from the unequal bargaining power of a bigger company.
Navigating the Complexities
Being unaware of the industry and state-specific statues affecting your contracts can lead to unexpected costs and litigation in the event of a claim. When you partner with the experts at Higginbotham for your contract review process, you’ll get the tools you need to make smart decisions about managing your contractual risks. We can help you avoid the pitfalls so your business thrives, regardless of the state in which you operate.