Can a contract transfer liability in the case of a lawsuit?

Question

Hi everyone!

I am drafting a contract agreement between my property management company and a new contractor who will be responsible for some of the day to day runnings of the company such as working with tenants who have questions and ensuring rent is paid on time, etc. The agreement requires the contractor to have adequate liability insurance.

However, I am curious about how liability is shifted around (if at all) in a situation with a lawsuit against my PM company, if the lawsuit is regarding something that the contractor did or said.

For example, let's say this contractor is dealing with tenants and starts to harass a particular tenant for not paying rent. The tenant then takes a lawsuit against my PM company for harassment. Now, the contract agreement between my PM company and the contractor specifically says that the contractor will hold adequate liability insurance for their duties as a contractor and that they will indemnify and hold my PM company harmless in the case of a lawsuit resulting from work performed as part of their duties outlined in the agreement.

But how does this hold up in court?  The tenant doesn't know about this contract agreement and may not even know that this person was a contractor and not a direct employee of my PM company.

Does the signed agreement I have with this contractor shift the liability to them in the court room, and are they now responsible to pay damages (if the judgement is in favor of the tenant) even though they were not named in the lawsuit directly? Or does my PM company have to pay out first and then we have to go after the contractor separately to recoup the money?

Thanks for the help!

Michael Redden · Answer

@John D.

I'm only licensed in Minnesota. This is not legal advice and is only my opinion.

You have two different concerns here. First, is an indemnity clause.  This doesn't really shift any liability. It just creates an ability to make the other person pay for your damages.  The efficacy of this clause at its core is limited to their ability to pay.  That normally comes down to insurance coverage limits.  This is what we buy insurance for.  You can make them indemnify you.  But, if the company doesn't have the money or files bankruptcy (depending on the type of lawsuit) you would still be out of luck.

The other kind of clause is one where you can't be held responsible.  This is called an exculpatory clause.  The extent to which these can be used are different from state to state.  This is one of those clauses where it says something like "Owner shall not be liable for any action of tenant whether it stems from negligence, gross negligence, or any intentional act."

States vary on what you can get away with here, but so long as you don't excuse yourself from intentional acts or gross negligence then in most states its ok.

Whether or not you can get someone to sign a contract with these clauses in it is another story.

Also, this won't prevent you from being sued. The owning entity, the property manager, and the contractor will likely be sued if something goes horribly wrong.  The plaintiff's attorney will want to involve all three of your insurance companies because it is more likely to get a settlement or a larger settlement that way.  It is rare for tort damages (as opposed to contract claims) to go to court unless it truly was a catastrophic loss or the insurance company decides to not cover the loss.  So be prepared for that.  A good contract clause is great. It will do you good if you can get the others to sign it.

But often the real meat comes from having the right insurance too.

Vidit S. · Answer

@John D. Are you managing your own properties and started a PM company to do so?

Nino G. · Answer

@John D. On a completely different point, I don’t think it’s fair to ask for independent contractor to indemnify your company. Usual course of business is that PM holds E&O insurance for mistakes they could make and LL names PM on LL policy to help them defend against other types of lawsuit. if you don’t want to deal with PM risks, just hire PM company who has all the resources and systems to deal with PM risk. But to hire a small fee contractor while you keep all the profits of landlording and then demand indemnification against lawsuits from them, doesn’t strike me like a good faith and fair dealing. Please take this as constructive criticism, I don’t mean to be provocative.

Good luck

Nino G. · Answer

@John D. I am not a lawyer and this is not a legal advice.

I am very doubtful that you could enforce that contract clause. There is such a thing as vicarious liability and apparent authority . I think it will be very difficult to claim that PM company takes no responsibility over people that he contracts to interact with tenants.

There are certain responsibilities you cannot remove through contract. Make sure you have all the systems and insurances to defend them. And even if working through contractor, your PM company will need insurance of its own.

Of course, you can still put that clause in your contract, just be ready to not be able to enforce.

Just my 2 cents.

John D. · Answer

@Drew Sygit and @David Gotsill

Thank you! This is all great information and an interesting discussion!

I think the tricky part of this whole thing is that the “agent” is a third party sub contractor and so as far as I can tell, will likely not be included in the PM company E&O insurance.

Therefore we wanted our contract with our third party agent to require them to carry insurance (to protect them) while also indemnifying the PM company in the case that there is some gross negligence on the agents part (such as harassment) because PM company insurance wouldn’t cover it.

Ultimately we are trying to create a situation where everyone is protected.

Drew Sygit · Answer

How is this any different than the relatinoship between a real estate broker and the contact agents that work under them?

If the agent does something that results in a lawsuit, their broker is exposed to the liability and will be included in the lawsuit.

Then it depends on what the agent did and the judge/jury interpretation.

David Gotsill · Answer

This is not legal advice, just some ideas.

@John D. -

I think we need to clarify in what situations an indemnity from the service provider (let's call them the "Agent") to the PM would kick in.

In your initial comment, you theorize what if the PM is sued for harassment, which was in fact committed by the Agent.   There would likely be a strong argument that harassment is not within the scope of the services agreement b/w the PM and Agent, and therefore harassment is not part of the Agent's duties.  Contrast this to work that is genuinely part of Agent's duties which could also result in a suit.  Thinking about it in terms of fairness, I believe that in the first case, (and in respectful disagreement with @Nino G.), PM should be indemnified for any damages PM incurs due to Agent's harassment.  In the second case, PM probably should indemnify Agent for any damages Agent incurs due to Agent's performance of its duties.

[I am not and was never a litigator, so this is merely supposition.]  There are many ways this (the harassment scenario) could play out in court if it ever got that far.  I would think the most likely, from a conceptual standpoint, is that PM would be found liable for Agent's acts - meaning that if the tenant was successful in their claim, PM would be liable.  Then, PM would seek recourse against Agent.  In practice, whether this is grouped in one suit or separate wold vary greatly, I think.

John D. · Answer

Thank you @Nino G.! This is the first contract of this type that we are putting together, so this helps a lot! We definitely want a fair contract while ensuring that we have correct protections in place. We are also going to obtain insurance for the PM company as well, which should be another link in the chain of protection. Thank you for the help!

John D. · Answer

@Victor Lee Yes that is exactly correct! We have contracted a third party person to perform some PM duties such as interfacing with tenants and coordinating repair work on our units.

Victor Lee · Answer

Sounds like by contractor you mean, you did a contract between an external person and your PM company so they can interface with tenants on your behalf? @scottroyalsmith would be your man here!

Can a contract transfer liability in the case of a lawsuit?

Most Popular Reply