Hark! A recent Alabama Supreme Court indemnity decision, Mobile Infirmary Association v. Quest Diagnostics Clinical Laboratories, may require you to retrieve your drafting pen. Although not a case involving a construction dispute, Mobile Infirmary does address a key component of risk shifting in construction contracts — the indemnity clause. Put simply, contractual indemnity is the right of one party (the indemnitee) to claim reimbursement for a loss from another party (the indemnitor). Unlike nearly every other state, Alabama does not (yet) statutorily restrict when indemnity clauses between project owners, general contractors, and subcontractors are enforceable. Instead, its courts decide an indemnity clause’s validity through different enforcement tests (depending on the type of clause at issue).
Alabama’s construction industry most commonly uses three indemnity forms (listed from the most to least expansive): broad-form, intermediate-form, and limited-form indemnity. Broad-form indemnity obligates an indemnitor to pay for its indemnitee’s covered tort liability, even if the indemnitee is solely at fault. Intermediate-form indemnity obligates an indemnitor to pay for its indemnitee’s covered tort liability, so long as the indemnitor is at least partially at fault. Limited-form indemnity obligates an indemnitor to pay for an indemnitee’s covered tort liability but solely to the proportionate share that the indemnitor is at fault.
When an indemnity clause shifts liability for an indemnitee’s own fault (e.g., with broad or intermediate-form indemnity), Alabama courts have considered the clarity of the language used, the sophistication of the parties, and the indemnitee’s retention of control over the covered work. In Mobile Infirmary, the Alabama Supreme Court considered how to enforce a reciprocal indemnity clause in a situation where both the indemnitee and indemnitor were partially at fault. There, a hospital settled a wrongful death action brought by a former patient’s estate. Believing that its laboratory management contractor was partially responsible, the hospital sought indemnification from the laboratory contractor under a reciprocal indemnity clause. Each of the reciprocal clauses required each party to indemnify the other party for third-party injuries arising from the indemnifying party’s fault, but only “to the extent” that the underlying claim did not “arise from a [claim] for which” the party seeking indemnification “[was] required to provide indemnity” under the other reciprocal clause. The Alabama Supreme Court affirmed the trial court’s decision that the reciprocal clauses were unenforceable because they did not expressly provide for proportional liability. Rather, the court found the clauses ambiguous because when both parties were partially at fault, one could reasonably understand them to (1) permit “indemnification back and forth ad infinitum,” (2) “cancel each other out,” or (3) “require apportionment of fault.”
Although the use of reciprocal clauses is a tactic sometimes utilized in contract negotiations, contract drafters may be wary of such an approach when negotiating indemnity terms in Alabama. To address the contingency that both the indemnitee and indemnitor are both at fault, consider including explicit language requesting that liability be allocated based on the parties’ proportionate share of fault or provide a formula that otherwise determines who pays whom and in what proportionate amount. If you have any questions on indemnity clauses, please contact Chris Selman or Zachary Stewart.