PENNSYLVANIA SUPREME COURT ABROGATES USE OF "PASS-THROUGH" INDEMNIFICATION PROVISIONS

January 2005

BY: JAMES J. DONOHUE AND EDWARD M. KOCH

On December 22, 2004, the Pennsylvania Supreme Court issued a decision in Bernotas v. Super Fresh Food Markets, Inc., 2004 WL 2961156 (Pa. Dec. 22, 2004) that substantially abrogates the use of so-called "pass-through," "conduit," or "flow-through" indemnification provisions that are common in construction subcontracts. Under the Supreme Court's decision, "pass-through" obligation is stated in clear and unequivocal terms. This decision reverses a lower court's decision which upheld the use of such provisions, and therefore changes the landscape in this area of the law in Pennsylvania.

Overview of Indemnification

Stated generally, indemnification refers to one's obligation to insure another for certain events. The source of this obligation can be either through the common law or, as addressed by the Supreme Court in Bernotas, through contract. Historically, Pennsylvania courts have closely scrutinized contractual indemnification provisions. For example, one could see indemnity from another for one's own negligence, but general indemnity language would not suffice. Rather, a clear and unequivocal statement of indemnification for one's own negligence had to be clearly spelled-out in the provision for it to be effective.

"Pass-Through" Indemnification Provisions

In the construction industry, indemnification provisions are common in general contracts and usually require the general contractor to indemnify the owner for certain events. In turn, the general contractor usually includes similar provisions in its subcontracts that require the subcontractors to indemnify the general contractor for certain events. In some cases, these subcontracts include a "pass-through" indemnification provision obligations assumed by the general contractor in the general contract. Thus, the general contractor's duty of indemnification to the owner is "passed-through" to the subcontractor. This type of indemnification provision was at issue in Bernotas.

Bernotas v. Super Fresh

In Bernotas, construction was being performed on a supermarket. During the course of construction, a patron was injured when she fell into a hole in the construction area inside the supermarket. The supermarket had a contract with the general contractor that required the general contractor to indemnify the owner for all liability resulting from incidents, except where the supermarket was solely negligent. The general contractor had, in turn, a subcontract with a subcontractor which sought to "pass-through" its indemnification obligation to the supermarket by incorporating by reference in the subcontract the general contractor's indemnification obligations to the supermarket assumed in the general contract.

A $200,000 settlement was reached with the supermarket, general contractor, and subcontractor, with each contributing a third of the statement. A bench trial was then held to determine the indemnification obligations among the parties. The court determined that, because the supermarket was not solely negligent, the general contractor had to indemnify the supermarket for its third of the settlement. The general contractor appealed and argued that the subcontractor had to pay the entire settlement because of the "pass-through" indemnification provision. On appeal, the Superior Court agreed with the general contractor and held that the "pass-through" provision was valid. As a result, the subcontractor was required to fund the entire settlement.

On appeal to the Pennsylvania Supreme Court, the case was reversed. The Court reviewed the strict construction historically accorded indemnity provisions, especially those provisions that sought indemnity for one's own negligence, and reasoned that a general "pass-through" indemnity provision was insufficient to assign more indemnity exposure to a subcontractor than it assumed under the subcontract. The Supreme Court ruled that "pass-through" indemnification clauses violate public policy unless expressly stated.

Conclusion

While the Supreme Court's decision may sound the death-knell for standard "pass-through" indemnity provisions that merely incorporate language of another contract, such provisions may be nonetheless valid if "expressly stated." As a practical matter, this means that if a contractor seeks indemnification for its own negligence, such an obligation must be expressly spelled-out in the contract. After Bernotas, simply incorporating the language of another contract is insufficient.

About the Authors: James J. Donohue (215-864-7037, donohuej@whiteandwilliams.com) is a partner Litigation Department of White and Williams LLP and chairs its Products Liability Practice Group. Edward M. Koch (215-864-6319, koche@whiteandwilliams.com) is an associate in the Appellate Practice Group.