Does an indemnification agreement apply only to third-party claims? International Fidelity Insurance Co. v. Americaribe-Moriarty JV. United States Court of Appeals, 11th Circuit (2018), by Hugh Anderson

Summary: Americaribe-Moriarty was the general contractor on a building project in Miami. CPM was a swimming pool subcontractor. The subcontract did not include a prevailing-party attorneys’ fees clause. The Subcontract’s general indemnity clause, however, did include a commitment by the subcontractor to pay attorneys’ fees as part of its indemnification.
The general contractor ultimately terminated the pool subcontractor, and made a claim on the sub’s performance bond. After litigation including an appeal, the surety, Fidelity, prevailed in an argument that the general contractor had failed to give adequate notice of its claim under the bond. The surety argued that it was entitled to recover its attorneys’ fees ($154,000) because (1) the indemnification clause established a basis for contractor recovering attorneys’ fees, (2) under a Florida law such provisions will be construed as establishing reciprocal attorneys’ fees rights for the other party—here the subcontractor, and (3) the surety “stood in the shoes” of the subcontractor. The trial court agreed with this logic and awarded the attorneys’ fees to the surety.

Decision: The Court of Appeals reversed the award of attorneys’ fees. The core of the decision is an examination of whether the indemnification clause plays any role in a direct dispute between contractor and subcontractor. The appellate court concluded that the indemnification clause applied only to third-party claims, and was not relevant to the dispute between the contractor and its sub (or between contract and the surety in the shoes of the sub).

Many indemnification clauses contain broad wording to the effect that the indemnification applies to “any and all claims.” Such wording could be interpreted as including claims directly between indemnitor and indemnitee. However, the original purpose of indemnification was to protect the indemnitee from third-party claims, such as injury claims, and many courts continue to impose the assumption that unless stated otherwise the indemnification clause applies only to third-party claims, not to claims directly between the two parties. Such is the case in Florida—case law strongly supported the argument that the indemnification clause (and its attorneys’ fees provision) was inapplicable because there was no third-party claim.

Because there was no basis in either the bond itself, or in any other provision of the subcontract, for prevailing party attorneys’ fees, the inapplicability of the indemnification clause meant that the surety’s quest for attorneys’ fees was in vain.

Comment: EJCDC has always viewed its indemnification clauses as applying to third-party claims only. That viewpoint has been reinforced in recent years through the express addition of the words “third party” in key indemnification clauses, such as the general indemnity in the Standard General Conditions of the Construction Contract (C-700—2018, Paragraph 7.18) and the engineer’s indemnification of owner in the Agreement between Owner and Engineer for Professional Services (E-500—2014, Paragraph 6.11).