Defense Digest

In the case of Integrated Project Services v. HMS Interiors, Inc., 2007 Pa. Super. 246 (2007), Pennsylvania's Superior Court confronted the issue of the whether "a pass-through indemnification clause in [a] subcontract serves to require Subcontractor to indemnify General Contractor for that portion of the damages attributable to General Contractor's negligence." The Superior Court confronted the issue after the general contractor, Integrated Project Services ("Integrated"), appealed the lower court's grant of judgment on the pleadings to the subcontractor, HMS Interiors, Inc. ("HMS"). The Superior Court affirmed the lower court's dismissal of the case against HMS based on the failure of the pass-through clause to clearly express the subcontractor's intention to be bound to answer for the contractor's negligence. The case holds significant implications for contractors seeking to obtain indemnification from subcontractors for their own negligent acts and omissions.

The underlying dispute between Integrated and HMS is an interesting one. It finds its genesis in an engagement by Integrated to provide renovation work for a building owned by Wyeth-Ayerst Laboratories ("Wyeth"). According to the contract between Wyeth and Integrated, Integrated was obligated to indemnify Wyeth to the fullest extent permitted by law for bodily injury and damage to property arising out of or otherwise resulting from the work that Integrated had contracted to perform for Wyeth. The indemnification afforded by Integrated to Wyeth covered not only conduct by Integrated, but that of any subcontractor, as well "anyone directly or indirectly employed by them or anyone for whose acts they may be liable for regardless whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder." The contract between Wyeth and Integrated also provided that Integrated's duty to indemnify Wyeth was not limited under the workers' or workmen's compensation acts. Finally, Integrated was required to maintain both workers' compensation insurance and comprehensive general public liability insurance.

Subsequent to the formation of the contract between Wyeth and Integrated, Integrated subcontracted with HMS to perform certain of the work Integrated was obligated to perform for Wyeth. Notably, the contract between Integrated and HMS provided that HMS was bound to Integrated by the terms of Integrated's contract with Wyeth. It specified that HMS "assume[d] entire responsibility and liability for any and all claims and/or damages of any nature or character whatsoever for which [Integrated] shall be liable under the CONTRACT DOCUMENTS [between Wyeth and Integrated], or by operation of law, with respect to the work covered by this SUBCONTRACT and agrees to indemnify and save [Integrated] and [Wyeth] harmless from and against all claims . . . personal injuries (including death) to any and all persons, whether employees of [Integrated] or others, or otherwise . . . to the same extent and obligation to which [Integrated] has assumed towards [Wyeth] under the CONTRACT DOCUMENTS . . . limited to the scope of the subject matter of this SUBCONTRACT." Like Integrated, HMS was required by its contract to maintain insurance, such as workers' compensation insurance and comprehensive general liability insurance.

Sadly, after the formation of the contract between Integrated and HMS, one of HMS's employees was injured after falling off a roof while at the Wyeth worksite. The injured employee commenced an action against both Wyeth as the owner of the site and against Integrated. Integrated then sought to have HMS brought into the action. Integrated was unsuccessful, and ultimately, through its indemnification obligations to Wyeth, found itself bound to answer for seven-figure liability.

Thus, the enforceability of the indemnification provisions in Integrated's subcontract with HMS became of paramount importance to Integrated. Unfortunately for Integrated, the lower court, and then the Superior Court, ultimately determined that the pass-through indemnification clause of the contract was insufficient to create an enforceable obligation on the part of HMS to indemnify Integrated for Integrated's own negligent acts and omissions. The reason why the court determined as much is rooted in the failure of the pass-through indemnification clause in the contract between Integrated and HMS to clearly communicate HMS's intent to bind itself in this manner. In concluding as it did, the Superior Court relied in large measure on the Pennsylvania Supreme Court's decision in the case of Bernotas v. Super Fresh Food Markets, Inc., 581 Pa. 12 (Pa. 2004).

In Bernotas, the Pennsylvania Supreme Court observed that "[i]t is well settled in Pennsylvania that provisions to indemnify for another party's negligence are to be narrowly construed, requiring a clear and unequivocal agreement before a party may transfer its liability to another party." The Pennsylvania Supreme Court went on to hold that, "unless expressly stated, pass through indemnification clauses violate the long standing policy underlying the rule narrowly construing indemnification provisions. When the provision sought to be 'passed through' involves indemnification for acts of another party's negligence, the theory will not be applied, unless the contract language is clear and specific." The language employed by Integrated was not, thus, leaving it burdened to answer to Wyeth for a sum that to some companies would represent a catastrophic loss.

The lesson of Integrated is clear. A contractor seeking to pass-through liability to a subcontractor under an indemnification provision contained in a prior contract must utilize clear and unequivocal language. A subcontractor should understand whether a contract it has executed contains sufficiently specific language to obligate it to indemnify its contractor for the contractor's own negligence before conceding liability. And an insurance company for either the contractor or the subcontractor should carefully analyze the agreement between the two in order to understand their ability to obtain or escape liability for what in some cases amounts to significant and even catastrophic sums.

* Joshua is an associate in our Philadelphia, Pennsylvania, office. He may be reached at jlkirsch@mdwcg.com or (215) 575-4557.