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Credit Managers Should Scan for Risk from Indemnity Clauses

Dec. 1, 2016

Suppliers and other players in construction are increasingly encountering indemnity provisions within contracts. It has become more important than ever for credit managers to carefully examine such documents to limit any potential associated risk to their companies.

“The key for a credit manager is to recognize them and understand how to react,” said Sam Smith, regional finance manager-East, at Crescent Electric Supply Company in East Dubuque, IL.

Indemnity provisions are agreements in which one party agrees to protect and “hold harmless” another party from liability that arises from personal injury or property damage on the job, according to Don Gregory, the American Subcontractors Association’s (ASA) general counsel and partner with Columbus, OH-based firm Kegler, Brown, Hill & Ritter. These provisions can shift the risk of liability from a negligent party to an innocent one, and have been criticized as being unfair, he said.

Clauses that contain indemnity provisions can be difficult to spot, Smith said. For example, instead of including the term “indemnification clause,” the terms “hold harmless,” “indemnify” or “defend” may appear in a contract. Also, a clause can be buried in other contracts with which one’s company is linked. If there is language present that is similar to “This purchase order incorporates by reference all terms of subcontractor’s contract with the general contractor” or “All warranties in the general conditions are incorporated herein,” proceed with caution and request a copy of the contract for review. “Not only can you be tied to indemnification clauses, but also to terms such as liquidated damages, uncapped liability or even extended warranties,” he said.

An early defense for a credit manager is to redline any contract language as it may not even apply to one’s company, Smith said. Note that some states have anti-indemnification statutes, which provide that an indemnity provision in a construction contract that purports to indemnify and hold harmless a party from its own negligence is void as it’s against public policy and unenforceable, Gregory said. Regardless, try to limit the value of the indemnification to the value of your contract, Smith advised.

Another option is to ask vendors to agree to the indemnification clause, shifting the risk, often appropriately, to them, he said. It’s appropriate for a vendor to agree to the clause if, for instance, the indemnification clause revolves around guaranteed delivery dates.

It is important to remember that the value of the contract should not dictate the level of importance placed on reviewing its language, Smith said. If you agree to a $500 contract that contains an uncapped indemnification clause, for example, your organization might be subject to a $10,000 or higher claim.

– Nicholas Stern, editorial associate

Overall Construction Spending Up in October

Dec. 1, 2016

Construction spending in the U.S. grew slightly in October, boosted by residential outlays in the private sector and ramped up expenditures in the public sector, including for highways and education.

Overall, the U.S. Department of Commerce estimated construction spending in October was estimated at a seasonally adjusted annual rate of $1.172 trillion or 0.5% above September’s revised figure of $1.167 trillion. October’s figure is also 3.4% higher than a year prior.

Spending in the private residential sector grew 1.6% to $466 billion, as spending on both new single family and multi-family projects jumped 2.8% each, Commerce said. Nonresidential private spending declined 2.1% overall to $419 billion, with drops in most subsector outlays to areas such as lodging, office, commercial and manufacturing. Private spending for the transportation and communication subsectors both had solid gains in October.
“The bounce back in private residential supports our view for a rebound in residential investment in Q4,” noted Wells Fargo analysts.

Overall public sector spending increased 2.8% to roughly $287 billion, as educational construction jumped 4.1% from September to $72.2 billion and highway spending grew by 1.9% over September’s $89.9 billion, Commerce said.

– Nicholas Stern, associate editor

Pending Home Sales Grow Slightly in October

Nov. 30, 2016

Pending home sales as measured by the National Association of Realtors’ (NAR) Pending Home Sales Index registered the slightest of gains in October for the second month in a row. The index, a forward-looking indicator based on contract signings, registered a 0.1% increase to 110.0 from a downward revision of September’s reading of 109.9. October’s reading was 1.8% higher than a year prior.

"Most of the country last month saw at least a small increase in contract signings and, more notably, activity in all four major regions is up from a year ago," said NAR Chief Economist Lawrence Yun. "Despite limited listings and steadfast price growth that's now carried into the fall, buyer demand has remained strong because of the consistently reliable job creation in a majority of metro areas."

The seasonal drying up of new listings is coming as price growth remains at roughly three times the rate of wages, and properties continue to sell at a faster pace than a year ago, Yun noted. Housing supply has thus continued to outpace demand—40% of October sales were above list price, which is a 33% increase from a year prior. "Many of the successful shoppers in October likely had to move fast and outbid others for the few listings available in the affordable price range," he said. "Those obtaining a mortgage last month were likely the last group of buyers to lock in a rate near historically low levels now that rates have marched to around 4% since the election."

For 2017, Yun expects to see rising mortgage rates putting pressure on buyers, so sales growth will require more housing inventory and an ongoing jobs expansion.

– Nicholas Stern, associate editor

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