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A government contractor wants to place a blanket PO to our small business but has this open-ended indemnity clause:

The Subcontractor agrees to indemnify and hold harmless [the contractor] and the United States Government, and their respective officers, employees and agents (the "Indemnities"), from and against any and all liabilities, of whatsoever kind or nature, arising out of or in any way connected with the Subcontractor's performance under this Agreement, excepting only (i) liability arising from affirmative acts, done with intent to cause loss, damage or injury, by the Indemnities; (ii) liability arising from the sole negligence of the Indemnities; or (iii) any express liability as may be specified elsewhere in this Agreement.

Why would any business agree to such a clause when, at least in our case, a minor innocent error on our part could result in liability far exceeding the value of the PO? I spoke with multiple sources including lawyers and can't get a clear answer. The contractor claims they NEVER waive or modify the clause.

  • Likely because all contractors do it because they all get away with it and companies that need that work are willing to risk it based on good faith. – Patrick87 Apr 27 '17 at 0:20
  • I added a "tort" tag, because you need to consider the default tort rules in the absence of an indemnity contract, to provide a complete answer. – ohwilleke May 26 '17 at 21:41
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A contractor would agree because it basically it comes close to restating the state of the law in the absence of any agreement between the parties.

So contrary to the answer of ShazamoMorebucks it probably would be enforced. Sometimes contracts that waive liability that would otherwise exist in the absence of an agreement are viewed as objectionable. But, a requirement in a contract that simply places upon a party the liability that they would have in the absence of an agreement is usually enforced.

The Subcontractor agrees to indemnify and hold harmless [the contractor] and the United States Government, and their respective officers, employees and agents (the "Indemnities"), from and against any and all liabilities, of whatsoever kind or nature, arising out of or in any way connected with the Subcontractor's performance under this Agreement, excepting only (i) liability arising from affirmative acts, done with intent to cause loss, damage or injury, by the Indemnities; (ii) liability arising from the sole negligence of the Indemnities; or (iii) any express liability as may be specified elsewhere in this Agreement.

The big limiting factor here is that the liability must arise out of or be connected with the Subcontractor's performance under the Agreement.

Usually, if liability arises from the Subcontractor's performance, the Subcontractor would be, at least, jointly and severally liable for the liability in any case, where liability does not arise from the other party's intentional acts, or from the other party's sole negligence.

Liability for defects in goods sold is generally a matter of strict liability.

If the Subcontractor did defective work, and the general contractor simply purchased that work and did nothing else to contribute to the liability, why should it be on the hook?

The only case where this may modify the default rule is when both the subcontractor and the general contractor are at fault. For example, maybe the subcontractor made a defective good but the defect was so obvious that the general contractor should have noticed a returned the goods before using them in a larger project. This puts full liability on the subcontractor, even when the general contractor is also negligent.

But, in practice, the general contractor will still be on the hook for most of the liability that the general contractor is forced to pay, because the subcontractor will generally be almost judgment proof and will go bankrupt before it pays a small portion of the amount that it owes to the general contractor in the event of the subcontractor's fault giving rise to a major liability (e.g. if goods it supplied caused a multi-million dollar project to have to be done over from scratch).

Also, subcontractors routinely can and do insure against this risk and figure the cost of the insurance into their prices. Working on a federal government subcontract can be a source of lots of business, and this is worth it if the primary risks can be insured against and the insurance cost can be recovered in the price charged for the work.

  • In our situation we can conceive that an innocent error on our part would create a liability of 100 or more times the value of the PO and far in excess of our current insurance policy, so we requested to limit liability to the value of our insurance. The cost to fully insure would be prohibitive. An analogy would be a supplier of paper schredders gets a $10,000 PO from a GC of a new skyscraper where a fire caused by the schredder could burn down the building. Must the supplier insure for the value of the building? Or would it be more reasonable for the GC to limit the supplier's exposure? – Jim Lewis May 29 '17 at 18:33
  • @JimLewis You insure up to a level that can fit into the budget and recognize that if a low probability, high liability event comes up that the company may need to file for bankruptcy under Chapter 11 and you don't personally guarantee that contract. This is what limited liability entities were invented to address. – ohwilleke May 29 '17 at 22:44
  • I would be interested to hear from any subcontractors that have been in this situation to hear why they decided to proceed. – Jim Lewis May 30 '17 at 9:45
  • @JimLewis Also, "An analogy would be a supplier of paper schredders gets a $10,000 PO from a GC of a new skyscraper where a fire caused by the schredder could burn down the building. . . . Or would it be more reasonable for the GC to limit the supplier's exposure?" FWIW, I don't find it at all unreasonable for their to be unlimited supplier exposure in this case. If your shredder causes a skyscraper to burn down, you probably should go out of business. – ohwilleke May 31 '17 at 0:48
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Note: this answer doesn't constitute legal advice

A business would agree with such a clause because a court would generally find the clause so broad or unfair that it would refuse to enforce it.

Firstly such clauses can never protect a party from damage it illegally caused, even a mistake won't be protected under such a clause.

The fact that the relative bargaining positions between both parties is so vast (e.g the other part is unwilling to modify the clause in any circumstance) will also likelt make the clause ignored in court.

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