In general, compensation refers to “the obligation of a party to compensate for any loss or damage suffered by another party”. In the past, the obligation to compensate took three forms: (1) compensation expressly provided for in the contract (express compensation); (2) indemnification implied by a contract in which compensation is not expressly mentioned (implied contractual set-off); and (3) compensation resulting from the equality of certain circumstances (traditional reasonable compensation). Implied contractual set-off Implicit contractual set-off is not based on an agreement to conclude a set-off obligation. Simply put, this doctrine is based on the premise that the non-performance of one party under contractual obligations results in the debt of the other party for reasons of equity. The third type of indemnification clause, type III clause, provides that the subcontractor (beneficiary of the compensation) compensates the general contractor (beneficiary of the compensation) for the liability of the general contractor (compensation) if it was caused by the subcontractor (beneficiary of the compensation), but excludes compensation for liability caused by someone other than the subcontractor (compensation). According to a Type III clause, any negligence of the general contractor (indemnitor), whether active or passive, eliminates the compensation of the subcontractor (beneficiary of the compensation), whether or not it caused the liability of the general contractor. A Type I clause is a clause that expressly and unequivocally provides that the subcontractor (beneficiary of the compensation) compensates the general contractor (person entitled to compensation) for the negligence of the general contractor (person entitled to compensation). With such a clause, the general contractor is exempt whether the liability is solely due to his negligence or contributory negligence towards third parties or not. Since 1973, California courts have divided indemnification clauses into three basic types. To explain the types of clauses, this article assumes that the general contractor is the one who demands compensation (Indemnified) from the subcontractor (Indemnitor). Due to the increase in construction defects and employee lawsuits, insurance companies have attempted to limit their risk for such claims. Insurance companies have recognized that explicit indemnification clauses are a way to limit the liability of their policyholders and therefore their risk.
As a result, many carriers will make the issuance of liability insurance dependent on the contractor, including certain types of indemnification clauses or indemnification language in their contracts. Explicit contractual set-off Express contractual set-off requires the formulation of conditions in a valid and enforceable contract. This is usually related to the traditional principles of contract law, where each individual party is responsible for compliance with agreed obligations. Different types of compensation A compensation clause or agreement can take several forms. Claims for compensation may be based on the principle of equity, an implied agreement or a clause in a contract. Each of these forms is different. For more information about your particular case, seek legal advice from a competent lawyer. A competent lawyer with the right experience will help you understand the legal aspects of indemnification and how the different types can be related to each other and, most importantly, how they will affect your case or claim. Using the above examples, which refer to the general contractor as the indemnifier and the subcontractor as the indemnifier, subcontractors should aim at a type III clause and not a type I clause. If you are a subcontractor or supplier, you may not prefer a set-off clause in the contract.
By removing the indemnification clause, the subcontractor`s liability is based on the comparative fault of the negligent parties. However, you should discuss this with your lawyer. In general, if you are a general contractor designing a subcontract or a developer designing a master contract, you would prefer a Type I clause. Simply put, indemnification clauses are a contractual tool to shift customary law and legal risk associated with negligent actions from one party to another. Essentially, one party (indemnification) promises to pay the other parties` attorneys` fees (indemnification) and any judgment that may result from the misconduct of both parties. If there is no indemnification clause in a contract, the liability and consequential damages for negligent actions of several parties are divided according to the comparative fault of the respective parties. An implied contractual claim for compensation, such as a traditional equitable claim, is governed by the rule that a party`s liability for reasonable compensation is based on its proportionate share of the liability for the harm caused to the injured party. Prince, op. cit. cit., 45th calf. 4. at p.
1165. . . .