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Leitao v. Damon G. Douglas Co.

301 N.J. Super. 187, 693 A.2d 1209 (App. Div. 1997)

CONTRACTS; INDEMNIFICATION; NEGLIGENCE—Is a subcontractor’s contractual indemnification of a contractor valid even if the subcontractor is without fault and the contractor had been found to be 51% liable? The Court says yes because the contractor was not solely liable.

S&J Electrical Contractors (“Subcontractor”) entered into an agreement with Damon G. Douglas Company (“Contractor”) to perform electrical work on a construction project. The contract contained an indemnification clause requiring Subcontractor to indemnify Contractor for all claims caused in whole or in part by a negligent act of Subcontractor or anyone directly or indirectly employed by it, regardless of whether the damage was also caused in part by the Contractor. An employee of Subcontractor tripped and fell on wire mesh that had been installed by the masonry subcontractor. He sued Contractor, the masonry subcontractor and the owners of the building for damages resulting from his injuries. Contractor filed a third party complaint against Subcontractor for indemnification pursuant to the contract. The owners of the building and the masonry subcontractor were found not liable by a jury, while the employee and Contractor were found to be 49% and 51% liable, respectively. Following entry of judgment, the trial court granted Contractor’s motion for indemnity based on the indemnification clause. Subcontractor appealed, claiming the lower court misinterpreted the indemnification clause and that to allow Contractor to avoid liability based on its sole negligence was contrary to the contract and public policy. Its contention was that since the employee’s recovery was reduced by the percentage of his contributory negligence, the damages that Contractor had to pay were attributable solely to its own negligence, and that under the contract, Subcontractor should not be compelled to indemnify Contractor for damages caused by Contractor’s sole negligence.

The Appellate Division cited several cases holding that an indemnification agreement in a construction contract purporting to hold the indemnitee harmless for damages caused by its sole negligence is against public policy. However, there is no public policy impediment to indemnification where the indemnitee is not solely at fault. Furthermore, an employee’s negligence does not alter the indemnification obligation owed by his employer to a contractor. In other words, even though the Subcontractor was not found liable, the indemnification clause at issue included anyone directly or indirectly employed by Subcontractor, therefore the indemnification clause was enforceable. The Court also indicated that the legislature intended to permit “hold harmless clauses” in construction contracts to allow a contractor to obtain indemnification from a subcontractor when sued by that subcontractor’s employee for injuries caused in part by the employee’s own negligence. The Court then observed that such a notion derives from the reality in construction contracts that the financial responsibility is really shifted to the insurance carriers, and therefore the practical effect of any indemnification agreement is simply the allocation of risk between the insurance carriers. As such, the parties should be free to determine how the insurance burdens are distributed and who will agree to undertake liability for specific risks. The Court affirmed the lower court decision, holding that the “sole negligence” theory argued by Subcontractor was not enough to bar indemnification for injuries found to have been partially caused by the negligence of Subcontractor’s own employee. [Note: Certification has been denied.]


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