Condominium and homeowner associations frequently enter into contracts with third-parties. Examples include landscaping contracts, management contracts, and construction contracts. In order to protect the interests of the association, many community association attorneys include indemnity provisions in the contract. Here’s a common example of an indemnity provision:
Contractor will indemnify, defend, and hold harmless the Association from and against any and all claims of every kind, whether known or unknown, resulting from or arising out of Contractor’s work under this agreement.
In this example, the contractor is the “indemnitor” and the association is the “indemnitee”. What is the effect of this language? Let’s assume the Contractor is a landscaper hired to take care of the common areas of the community. One day the Contractor is trimming tree branches. Standard practice requires one worker to operate the saw, and another worker to control the direction of the falling branch. The contractor is short staffed, and there is no second worker to control the direction of the falling branch. A cut branch falls on a unit owner’s exterior deck and damages patio furniture and a BBQ grill. The unit owner then sues the association and wins a judgment for the damaged property.
If the agreement between the association and the contractor contains indemnity language, then the contractor is required to hire and pay for an attorney to defend the association, as well as pay the judgment against the association.
Indemnity provisions don’t transfer liability—the contractor caused the damage and remains legally liable. Instead, these provisions shift the financial obligation related to the claim from the indemnitee to the indemnitor.
Typical indemnity provisions fall into one of three categories: limited, intermediate, and broad. In Oregon, broad indemnity provisions are prohibited by law. I’ll explain each type of indemnity category.
1. Limited indemnity
The limited form indemnity obligates the indemnitor to save and hold harmless the indemnitee only for the indemnitor's own negligence. Let’s go back to our landscape contractor example. In that example, the property damage was caused entirely by the negligence of the contractor. The association did not cause or contribute to the damage. Here, the contractor must indemnify the association.
The intermediate form of indemnity obliges the indemnitor to hold harmless the indemnitee for all liability except that which arises out of the indemnitee's sole negligence. Back to the landscape contractor example. Let’s now assume that the tree branch fell much quicker and forcefully than normal because the tree is decaying. Also assume that the association has known that the tree is decaying and decided not to address the issue. In this case, both the contractor and the association are negligent and the contractor is required to indemnify the association.
The contractor would not be required to indemnify the association if the cause of the damage resulted entirely from the association’s negligence. Let’s now assume that the contractor has not touched the tree and the tree branch fell because of rot and decay. In this case, the damage resulted entirely from the association’s negligence. The contractor has no obligation to indemnify the association.
The broad form of indemnity requires the indemnitor to save and hold harmless the indemnitee from all liabilities arising from the project, regardless of which party's negligence introduces the liability. Under this category, the contractor is required to indemnify the association even if the association contributed to the damage or was entirely responsible for causing the damage. This form of indemnity is prohibited under ORS 30.140:
(1) Except to the extent provided under subsection (2) of this section, any provision in a construction agreement that requires a person or that person’s surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property caused in whole or in part by the negligence of the indemnitee is void.
(2) This section does not affect any provision in a construction agreement that requires a person or that person’s surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property to the extent that the death or bodily injury to persons or damage to property arises out of the fault of the indemnitor, or the fault of the indemnitor’s agents, representatives or subcontractors.
When entering into a third-party contract for any services related to construction, the association should always have a qualified attorney review the agreement. As part of that review, the attorney should make sure that the indemnity provisions do not fall under the “broad indemnity” category.