Specific language in construction contracts often determines the outcome of construction litigation, affecting a contractor’s overall liability and ultimately, their bottom line. Like other states, Wisconsin prohibits many types of clauses within construction contracts. However, Wisconsin has not completely limited indemnification clauses.
Wisconsin’s statutory prohibitions can be confusing to those who are unfamiliar with Wisconsin construction law, including new or small construction businesses or businesses from other states performing occasional work within Wisconsin.
Two main statutes for construction contract clauses are Wis. Stat. sections 779.135 and 895.447.
Wis. Stat. section 779.135 provides:
Construction Contracts, form of contract. The following provisions in contracts for the improvement of land in this state are void:
(1) Provisions requiring any person entitled to a construction lien to waive his or her right to a construction lien or to a claim against a payment bond before he or she has been paid for the labor, services, materials, plans, or specifications that he or she performed, furnished, or procured.
(2) Provisions making the contract subject to the laws of another state or requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state.
(3) Provisions making a payment to a prime contractor from any person who does not have a contractual agreement with the subcontractor, supplier, or service provider a condition precedent to a prime contractor’s payment to a subcontractor, supplier, or service provider. This subsection does not prohibit contract provisions that may delay a payment to a subcontractor until the prime contractor receives payment from any person who does not have a contractual agreement with the subcontractor, supplier, or service provider.
Boiled down, section 779.135 is designed to:
protect contractors and others from unknowingly relinquishing their rights to construction liens;
ensure that the dispute resolution processes for Wisconsin projects are conducted within Wisconsin; and
protect subcontractors’ rights to payment from a prime contractor for a particular project.
Although many attorneys are familiar with these rules, unintended violations and costly mistakes regularly occur. For example, with respect to subsection (2), forum selection clauses and dispute resolution clauses that limit litigation and other dispute resolution to a specific state or jurisdiction are utilized almost automatically in the contractual world. This is especially true if the parties are not operating out of the same state. Additionally, these types of provisions are frequently considered “boiler-plate” provisions and are automatically added to agreements without appropriate vetting.
With respect to subsection (3), a mistake can be based on one single word within the agreement. Although this subsection prohibits “pay-if-paid” provisions (i.e., provisions that condition a prime contractor’s payment to a subcontractor to only if the prime contract gets paid by some third party), this subsection does not prohibit “pay-when-paid” provisions.
Unlike “pay-if-paid” provisions, “pay-when-paid” provisions simply delay the payment to subcontractors based on third-party payment for a reasonable time, rather than making such third-party payment to a prime contractor a complete condition precedent to a prime contractor’s payment to a subcontractor. Such “pay-when-paid” provisions are allowed under this statute.
Wisconsin further limits provisions relating to tort liability in construction contracts. However, despite the broad language and apparent applicability found in Wis. Stat. section 895.447, it does not prohibit indemnification clauses within such agreements.
Section 895.447 provides:
Certain agreements to limit or eliminate tort liability void.
(1) Any provision to limit or eliminate tort liability as a part of or in connection with any contract, covenant or agreement relating to the construction, alteration, repair or maintenance of a building, structure, or other work related to construction, including any moving, demolition or excavation, is against public policy and void.
(2) This section does not apply to any insurance contract or worker’s compensation plan.
(3) This section shall not apply to any provision of any contract, covenant or agreement entered into prior to July 1, 1978.
Although section 895.447 is nearly 50 years old, there have only been a few reported cases interpreting the statute and exactly the types of clauses it covers. Rural Mutual Ins. Co. v. Lester Buildings, LLC,1 and its predecessor, Gerdmann v. United States Fire Ins. Co.,2 reasoned that subrogation clauses (in the Rural Mutual case) and indemnification clauses (in the Gerdmann case) are not necessarily restricted by this statute.
The subrogation and indemnification clauses in these cases were used as liability-shifting provisions, as is the case in most instances, and not used to reduce the overall responsibility of the parties to third parties.
In other words, these clauses are not “limiting or eliminating tort liability.” Rather, these clauses were used to shift the liability from one party to another without reducing the overall security afforded to third parties.
These provisions, especially indemnification provisions, can be critical in reducing the overall potential liability and out-of-pocket expenses of a particular contractor.
Knowledge Makes for Stronger Client Contracts
Ultimately, attorneys dealing with construction contracts in Wisconsin need to be aware of Wisconsin’s prohibition against certain contract terms to steer clear of accidently including a void contract provision.
Further, although Wisconsin has banned contractually “limiting or eliminating tort liability” within construction contracts, contractors can still “contract around” this prohibition with the use of indemnification clauses. This allows parties to shift potential liability to other parties, such as insurance providers and even the owners of the project.
If not handled appropriately, ineffective indemnification clauses and void contractual provisions can cause serious negative impact to a contractor’s bottom line.
Finding Out More
For a further discussion on “pay-if-paid” and “pay-when-paid” provisions, see the Construction & Public Contract Law Section Bog article from James M. Dash and Bryce R. Cox, “Pay If Paid Clauses in Wisconsin: More Enforceable than You Think,” Oct. 23, 2017.
For a further discussion on indemnification provisions in the context of this statute, see the Construction & Public Contract Law Section Bog post by Scott. J. Thomsen, “Risk Transfer and Limitation Clauses in Construction Contracts after Lester Bldgs,” Aug. 3, 2020.
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section webpages to learn more about the benefits of section membership.
1 Rural Mutual Ins. Co. v. Lester Buildings, LLC, 2019 WI 70, 387 Wis. 2d 414, 929 N.W.2d 180.
2 Gerdmann v. United States Fire Ins. Co., 119 Wis. 2d 367, 350 N.W.2d 730 (Ct. App. 1984).