The Construction Counselor

The construction industry continues to face challenges in securing qualified workers for their projects, with some companies turning to staffing agencies and temporary workers to solve this challenge. Companies turning to this solution need to be aware of the unique legal and practical considerations of doing so, as illustrated in the recent Iowa Court of Appeals case of Calabretto Building Group v. Tradesmen International, LLC.

On November 8, 2023, the Iowa Court of Appeals rendered a decision in Calabretto Building Group v. Tradesmen International, LLC, which provided guidance on indemnification provisions in contracts for temporary workers in the construction industry. In short, the Court declined to hold the staffing agency liable for a worksite accident through upholding the indemnification provision in the parties’ contract, but importantly such contract predated an Iowa statute that bars certain indemnification provisions in Iowa construction contracts. Notably, in its holding, the Court did not decide whether this type of ongoing contract to supply temporary workers to construction projects constituted a “construction contract” as that term is defined under the relevant statute, so there remain unanswered questions regarding these types of staffing agreements.

Iowa Law on Indemnity in Construction Contracts

An indemnification clause in a contract is used to shift the risk of potential liability from one party to another. In other words, one party agrees to protect the other party against losses that may occur during the performance of the contract. Although indemnification clauses are common in many contracts, they can also be restricted in construction contracts by state statutes. Iowa, and several other states, have enacted an anti-indemnity statute.

Iowa Code Section 537A.5—which was at the center of the Court’s decision in the Calabretto case—bars so called broad-form indemnification provisions in construction contracts under which the indemnitor is required to indemnify for all liability, including for the indemnitee’s own negligence and fault. Subsection 1 broadly defines a “construction contract” to mean:

an agreement relating to the construction, alteration, improvement, development, demolition, excavation, rehabilitation, maintenance or repair of buildings, water or sewage treatment plants, power plants or any other improvements to real property in this state, including shafts, wells and structures, whether on ground, aboveground or underground, and includes agreements for architectural services, design services, engineering services, construction services, construction management services, development services, maintenance services, material purchases, equipment rental and labor. [Further, the term] includes all public, private, foreign or domestic agreements as described in this subsection other than such public agreements relating to highways, roads and streets.

Subsection 2, as shown below, voids indemnification provisions in construction contracts that require the indemnitor to indemnify the indemnitee for claims/damages caused by the indemnitee:

[A] provision in a construction contract that requires one party to the construction contract to indemnify, hold harmless or defend any other party to the construction contract, including the indemnitee’s employees, consultants, agents or others for whom the indemnitee is responsible, against liability, claims, damages, losses or expenses, including attorney fees, to the extent caused by or resulting from the negligent act or omission of the indemnitee or of the indemnitee’s employees, consultants, agents or others for whom the indemnitee is responsible, is void and unenforceable as contrary to public policy.

The only exceptions to this prohibition—contained in Subsection 3—are for indemnification of a surety by a principal on a surety bond, an insurer’s obligations to its insured, a borrower’s obligations to its lender or any obligation of strict liability under the law.

Note that Iowa Code Section 537A.5 was enacted in July 2011. Prior to that date, there was no anti-indemnity statute in construction contracts in Iowa.

Facts & Procedural History of the Calabretto Case

The facts of the Calabretto case are relatively simple. In 2008, Calabretto Building Group (Calabretto) signed a “Client Services Agreement” (the Agreement) with Tradesmen International, LLC (Tradesmen). Under the Agreement, Tradesmen agreed to provide temporary workers to Calabretto in exchange for payment. The terms also specified that Calabretto was responsible for directing, supervising and controlling these workers. Most importantly, the Agreement contained an explicit broad-form indemnification provision. Therein, Calabretto agreed to indemnify Tradesmen against any and all loss or damages to persons or property caused by the workers provided and to release, defend, indemnify and hold Tradesmen harmless from any and all claims, losses, liabilities and costs regardless of whether Tradesmen’s workers were negligent. In other words, Calabretto agreed to take on the entire risk of liability from Tradesmen for any damages caused by these temporary workers.

All apparently went well between the parties until 2019. That year, a forklift operator provided by Tradesmen accidentally drove his forklift into a precast beam, knocking it over and gouging a hole in the concrete floor. Calabretto’s superintendent on the project later reported that the temporary worker admitted that he screwed up (he used a different term) “and put a hole in my concrete.” The incident resulted in $61,653.92 in damages. Tradesmen refused to compensate Calabretto for these costs, citing the indemnification language in the Agreement.

Calabretto ultimately sued Tradesmen and both parties moved for summary judgment at the district court level, i.e. asking the court to resolve the case as a matter of law in their respective favors ahead of trial. The lower court sided with Tradesmen, holding the Agreement was not a “construction contract” but rather merely an agreement to provide workers. It further held that the underlying facts did not invoke indemnification and the contract provision was not void. Both these issues (among others) were further explored on appeal by Calabretto to the Iowa Court of Appeals, as discussed further below.

The Court’s Holdings

On perhaps the most important question of whether an ongoing contract to provide temporary workers in the construction industry constitutes a “construction contract” under Iowa Code Section 537A.5(1), the Court recognized that both sides had “persuasive points” and chose to “bypass th[e] definitional dilemma” and resolve the case on other grounds. In other words, at this juncture, it remains an open question whether this type of contract falls within the scope of Section 537A.5 at all.

The Court was instead inclined to consider the more straightforward conclusion that these facts did not involve indemnity. Generally, indemnity occurs when a third party brings a claim against one party and liability is then shifted to a different party under the terms of a contract between the two. In this case, there was no third party claiming damages against Tradesmen that it then tried to shift to Calabretto. Rather, it was only Calabretto itself that was injured. For example, had the precast beam fallen on a truck owned by a supplier and the supplier made a claim against Tradesmen for the cost to repair the truck and Tradesmen then attempted to shift liability to Calabretto under the contract, that situation would involve indemnity. However, again, those facts were not present here. Thus, because the prohibition on indemnification was not triggered, the Court sided with Tradesmen.

The Court also found that Section 537A.5 did not apply to the Agreement because it was executed three years before the statute was enacted. Noting that the Iowa Legislature did not explicitly state that the statute applied retroactively, the Court determined that the statute should only be applied prospectively. In other words, even if the Agreement were a “construction contract” and even if the facts involved indemnity, the indemnity provision here would nonetheless be proper because it was agreed to prior to the enacted of the Section 537A.5.

As a result of these conclusions, the Iowa Court of Appeals affirmed the decision of the lower court.

Key Takeaways

• Be aware that broad-form indemnification provisions in “construction contracts” involving Iowa construction projects are generally void in Iowa.
• However, this prohibition does not apply to construction contracts that pre-date July 2011.
• It is unclear whether contracts to supply temporary workers for construction projects constitutes a “construction contract.” Thus, indemnification provisions in these contracts may or may not be effective regardless of when the contract was executed.
• The prohibition against indemnity in construction contracts can only be invoked when true indemnity is present, i.e., a third party makes a claim against one party who then shifts the liability to another party under a contract between the two.

If you have questions regarding contracts, temporary workers and indemnification in the construction industry, please contact Jodie McDougal (jmcdougal@fredlaw.com, 515.242.8971) and Jack O’Brien (jobrien@fredlaw.com, 515-242-8931).