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An indemnification obligation in a sub-contracting agreement will not apply if the main contractor did not fulfill its obligations

October 18, 2021
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Under a subcontracting agreement, the subcontractor undertook to indemnify the main contractor for indirect costs of third-party payments provided that the parties cooperated to avoid third-party payments. Another construction company contended against the subcontractor that it was entitled from the main contractor to entrepreneurship fees and the indemnity agreement was considered an agreement in its favor, but the subcontractor refused to pay this on the grounds that the main contractor breached the agreement when it failed to act to avoid payments.

The Court rejected the claim and held that the indemnification obligation did not enter into effect due to breach of the agreement by the main contractor. Generally, where the wording of an agreement is clear, it is deemed to correctly reflect the parties’ intent. The same applies to an agreement in favor of a third party, in which a party has undertaken a commitment towards a third party which is not a party to the agreement - the beneficiary - and gives the beneficiary the right to demand fulfilment of the obligation. However, such right is not automatic, because any claim that the debtor may make against the creditor in connection with the obligation also stands against the beneficiary. Here, the wording of the agreement is clear and stipulates that if the third party demands that the sub-contractor pay the amount that will be held against the main contractor, it will do so. Nevertheless, the agreement does not create an automatic entitlement to payment and any defense that the sub-contractor has against the main contractor also stands against the beneficiary. Here, the main contractor breached the indemnity agreement and thus neither the main contractor not the beneficiary – the third party – are entitled to payment.