The construction industry has long used contractual indemnification provisions to affirmatively allocate risk for property damage, bodily injury and defective construction claims amongst the entities designing and performing the work. Historically, the Minnesota legislature and judiciary have both taken a restrictive approach to these risk-shifting provisions to the extent that they attempt to shift liability to the indemnitor for an indemnitee's own actual or alleged negligence.[1] Specifically, in 1979, the Minnesota Supreme Court adopted a rule of "strict construction" to all indemnification provisions that attempted to shift liability for an indemnitee's own negligence. Farmington Plumbing & Heating v. Fischer Sand & Aggregate, Inc., 281 N.W.2d 838 (Minn. 1979). Pursuant to the strict construction test, an indemnification provision will not be construed to cover claims arising out of an indemnitees' own alleged or actual negligence absent an express and unequivocal statement manifesting this intent. Applying strict construction, the Minnesota Court of Appeals held that the standard form AIA indemnity provision was equivocal, hence could not be construed to cover claims for an indemnitees' own negligence. See Braegelmann v. Horizon Development Co., 371 N.W.2d 644 (Minn. Ct. App. 1985). Since adoption of the Farmington strict construction test, Minnesota Appellate Courts have continued to restrictively construe and invalidate construction-related indemnity provisions to the extent that they attempt to shift liability for the indemnitees' own active negligence. See National Hydro Systems, a Div. of McNish Corp. v. M.A. Mortenson, 529 N.W.2d 690 (Minn. 1995); Mattila v. Minnesota Power & Light Co., 363 N.W.2d 842 (Minn. Ct. App. 1985).
Similarly, the Minnesota legislature has taken affirmative steps to limit the enforceability of such provisions pursuant to its adoption of Minnesota Statute § 337.01 et seq.[2] That statutory provision invalidates all indemnity provisions "executed in connection with a building and construction contract" to the extent that they attempt to shift liability for an indemnitee's own negligence. See Minn. Stat. § 337.02. Pursuant to the Minnesota statutory scheme, such provisions will only survive to the extent that they affirmatively require the procurement and maintenance of insurance to insure indemnification for the indemnitee's own negligence. See Minn. Stat. §§ 337.04 and 337.05.
Despite this historical animosity to indemnity in this context, the Minnesota Court of Appeals recently issued an opinion that expansively construed a construction-related indemnity agreement and allows construction practitioners a new procedural avenue to pursue claims. In Rice Lake Contracting Corp. v. Rust Environment & Infrastructure, Inc., 616 N.W.2d 288 (Minn. Ct. App. 2000), the City of Two Harbors contracted with Rice Lake Contracting ("Rice Lake") to improve the City's sewage-treatment plant. The City also hired two design professionals, Rust Environmental ("Rust") and GME Consultants, Inc. ("GME") to perform the design and engineering work. After Project Completion, Rice Lake sought an additional $2.16 Million from the City for unanticipated rock excavation based upon a traditional differing-site condition claim. Rice Lake initiated suit and the City brought third-party indemnity claims against both Rust and GME.
Rice Lake and the City then entered into a settlement agreement whereby the City paid Rice Lake $200,000 and executed a conditional promissory note in favor of Rice Lake for the value of the third-party claims. The "condition" of the note was success in the indemnity action against Rust. Rice Lake then took over prosecution of the City's indemnity claim and was ultimately successful in obtaining judgment against Rust for $1.95 Million.
Rust argued that the settlement agreement limited the City's third-party indemnity claim to $200,000 pursuant to the common law indemnity rule that requires actual payment as a pre-condition to enforceability. See Restatement of Restitution § 76 cmt. c (1937). The Minnesota Court of Appeals tersely rejected this argument reasoning that indemnity is an "equitable doctrine that does not lend itself to hard-and-fast rules, and its application depends upon the particular facts of each case." Rice Lake, 616 N.W.2d at 292 (quoting Zontelli & Sons, Inc. v. City of Nashwauk, 373 N.W.2d 744, 755 (Minn. 1985)). The Court held that once judgment was entered, the indemnity obligation secured by the conditional promissory note no longer became conditional. The Court went on to expressly approve this procedure on judicial economy grounds because it turned a three-sided dispute into a two-sided dispute.
The Rice Lake holding is important because is allows practitioners to unify and simplify construction claims in this context. Construction practitioners are often faced with the difficult dilemma of pursuing claims against design professionals and contractors in different forums because, often times, on party has a binding arbitration provision while the other does not. Use of this conditional settlement technique will allow practitioners to avoid this dilemma and substantially simply claims.
[1] See e.g., Daniel S. Kleinberger, No Risk Allocation Need Apply: The Twisted Minnesota Law of Indemnification, 13 Wm. Mitchell L. Rev. 775 (1987).
[2] Professor Kleinberger has labeled Minnesota's legislative approach as restrictive in comparison to other states' anti-indemnification statutes.