A glossary of construction legalese: Waiver and Indemnification

BY ROBERT KENNALEY

As discussed in a previous article, many legal or contractual concepts, terms or conditions used in tender packages, contracts, insurance policies and legislation can be confusing or incomprehensible. Accordingly, here is the second installment of my glossary of construction law and contract legalese.

Waiver
Many contractual obligations appear to be in place for the benefit of only one of the parties. For example, the contract might require that all changes, or extras, be approved in writing before they are performed, failing which the contractor will not be paid for the additional work. Similarly, the contract might require the contractor to give notice if he requires a schedule extension. Other clauses might require the owner to give the contractor notice of default under the contract, before he will be entitled to terminate the contract or take over the work. Similar clauses exist under subcontracts.

Waiver occurs where one of the parties says, “Even though I have a contractual right to insist on something under the contract, I will waive that right.” For example, an owner might waive the requirement for a written approval of changes in the work, or extras. This often occurs where both the owner and the contractor agree the change needs to be performed and they don’t want to delay the work while the paper work is formalized.

Waiver often arises by the “conduct of the parties.” Where one of the parties, by his conduct, has verbally approved and paid for extras throughout the life of the project, the court will often find that he has waived his entitlement in that regard such that, at a later date, he cannot then go back and say, “I don’t need to pay for the extra work because there is no approval.” With respect to notice provisions, the court might also look at the circumstance and waive the formal requirement if the party complaining about the lack of formal notice had actual notice of the situation, and wasn’t prejudiced.

Many contracts (and most standard form contracts) will contain “non-waiver clauses,” which allow the parties to waive a formal requirement without waiving the same or other requirements in the future. Even the non-waiver clause, however, can be less than effective: In some cases, courts have determined that the parties, by their conduct, have “waived the non-waiver clause.”

The lesson to be learned in relation to waiver is this: Contractual obligations might not be as clear as they seem. Even though a contract might, in clear language, require the other side to do (or not do) something, the overall circumstances and conduct of the parties will often have to be assessed to determine whether or not a party is actually entitled to rely on the contract language in that regard.

Indemnification
Indemnification occurs where one party reimburses the other for costs or damages incurred as a result of a certain claim or event. Indemnification generally involves claims against an owner or contractor by third parties or obligations owed by them to third parties. Indemnification should be distinguished from the circumstance where one party under a contract must pay damages or costs to the other side, directly.

For example, if a contractor hits his client’s building with a machine, the contractor must pay his client the cost of repairing the building, directly. If a contractor hits the neighbour’s building – and the neighbour pursues the contractor’s client – the contractor may have to indemnify his client for any amount his client has to pay the neighbor to satisfy the claim. Similarly, if a contractor has a contractual obligation to clean up the site, and he doesn’t do it, he will probably be liable to pay his client directly for the cost of doing so. If, however, he doesn’t clean up the sidewalk and boulevard, and the city ends up doing it and adds those costs to his client’s taxes, the contractor may have to indemnify his client for those costs. 

In the winter maintenance context, if you are hired to perform winter maintenance services and there is a slip and fall, you might be liable to the victim directly if he or she sues you. However, you might also be required to indemnify your client, if the victim sues him or her. In many circumstances, of course, the indemnification will cover not only the amounts claimed by the third parties, but your client’s costs of defending or administering the claim.

It should be understood, of course, that parties don’t generally need indemnification clauses in their contracts to pursue indemnification. If, again, you hit the neighbour’s building and the neighbour sues your client, chances are you will be made to reimburse your client even if your contract is silent on the issue. Indemnification clauses, however, can be important, as they can limit the scope of the indemnification. It is common, for example, for the contract to state that the owner will only be indemnified to the limits of the contractor’s insurance (so the contractor is not assuming a risk that he or she is not insured for). In addition, indemnification clauses will often limit the scope of the indemnification to damages for property harm or personal injury, thereby removing purely economic losses from the scope of the indemnification.  As an example, if you are constructing a retail mall and you are delayed, the indemnification might not cover the claims made by the retail tenants against your client, for lost profits arising from delayed opening of the mall.

Robert Kennaley has a background in construction and now practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law issues and can be reached for comment at 416-368-2522 (Toronto), 519-426-2577 (Simcoe) or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.