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Thelen Reid Brown Raysman & Steiner LLP
Indemnity
agreements are regularly used to allocate risk between parties
on construction projects. Recently, some doubt has surfaced
as to whether the language found in a typical indemnity
agreement is sufficient to require indemnity in situations
where the indemnifying party (the indemnitor) is without
fault. Three recent California Court of Appeal cases have
addressed this issue. Yet, despite substantially similar
language in each of the agreements at issue, the cases reached
different outcomes. In two cases, the courts held that the
agreements required indemnification even though the subcontractors
were not at fault. In the other case, the court ruled that
the language of the agreement was not explicit enough to
require indemnification without a finding of fault. The
collective message of these decisions is clear: Parties
should take care to ensure that the language in their indemnity
agreements properly states the scope of indemnification
intended.
A
typical indemnity agreement is designed to shift liability
to the party who is thought to be more actively or primarily
responsible for the events giving rise to the liability.
Subcontractors commonly are required to indemnify a general
contractor for any acts for which the general contractor
is less than 100 per cent responsible. But in some cases,
the subcontractor is no more at fault than the general contractor.
In these cases, the question of whether the agreement requires
indemnification becomes one of interpretation. As a result,
courts examine the language that parties use in their agreement
to determine their intent -- even if they did not actually
consider the possibility of indemnification without fault.
The
first case in the recent trilogy of opinions is Continental
Heller Corp. v. Amtech Mechanical Services, Inc., 53
Cal.App.4th 500 (1997). There, Amtech, Continental's subcontractor,
installed a valve manufactured by a third company in the
course of its work at a meat-packing plant. The valve failed
and caused an explosion that injured employees and damaged
property. The agreement required Amtech to indemnify Continental
Heller for loss "which [arose] out of or [was in] any
way connected" with Amtech's "acts or omissions"
in the performance of its work. While the court agreed that
Amtech did not install the valve negligently, it found that
Continental Heller did not need to show that Amtech was
at fault in order to claim indemnity. The court, following
the explicit language in the agreement, found that Continental
Heller was entitled to indemnity because Continental Heller's
loss was connected to Amtech's act of installing the valve.
The
Continental court also remarked on the commercial
context of the case as well as issues concerning public
policy. Both Amtech and Continental were large, sophisticated
firms that had carefully negotiated their indemnity agreement.
Thus, the court felt Amtech had ample opportunity to negotiate
the terms of its indemnity obligations. Moreover, Amtech's
subcontract was worth $1.2 million while it only was required
to indemnify Continental for $20,000. The court seems to
have relied upon these factors to support its broad interpretation
of the indemnity agreement.
In
Heppler v. J.M. Peters Co., 73 Cal.App.4th 1265 (1999),
class action plaintiffs, standing in the shoes of the developer,
sought indemnity from three subcontractors who worked on
a residential development. The indemnity agreements provided
that the subcontractors would hold the contractor harmless
from all claims "arising out of or in connection with
the Subcontractor's... performance of the Work." While
neither negligence nor fault was explicitly referenced in
the indemnity provision, the court nevertheless ruled that
fault on the part of the subcontractor was a prerequisite
for indemnity based on other clauses in the contract. It
noted that the language did not "evidence a mutual
understanding of the parties that the subcontractor would
indemnify... if it was not negligent." Although the
language in the agreement was substantially similar to that
in Continental Heller, the court explicitly distinguished
the two cases based on the language found in their respective
agreements. Significantly, it noted that the agreement in
Heppler did not contain the "any acts or omissions"
language found in the agreement in Continental Heller.
The
Heppler court also focused on the commercial context
of the indemnity agreement and the public policy concerns
it raised. In contrast to Continental, the subcontractors
signed pre-printed form agreements prepared by the more
sophisticated developer. Further, if the subcontractors
had been forced to indemnify the developer, they truly would
have been "saddled with ruinous liability" amounting
to over $5.3 million. These facts supported the court's
restrictive interpretation of the indemnity agreement at
issue.
Finally,
in Centex Golden Construction Co. v. Dale Tile Co.,
78 Cal.App.4th 992 (2000), Centex, the general contractor,
sued Dale Tile, the subcontractor, for indemnity based on
defective tile work on a commercial building. At trial,
the jury found that Dale Tile had not been negligent in
its work on the project, but the court ruled for Centex
on its indemnity claim. As in Continental Heller,
the Court of Appeal agreed that under the agreement, Centex
did not need to show fault on the part of Dale Tile to prevail.
The indemnity agreement stated that all work performed by
Dale Tile "shall be at the risk of SUBCONTRACTOR exclusively."
The court found that, even more than the language in the
agreement in Continental Heller, this expression by the
subcontractor was sufficient to provide indemnity in the
absence of fault. As in Continental Heller, the Centex
court further justified its ruling by noting the case's
commercial context and the absence of public policy concerns.
In
each of the three cases, the courts were careful to note
that "the intention of the parties is to be ascertained
from the 'clear and explicit' language of the contract,"
and that when interpreting indemnity agreements, "the
courts look first to the words of the contract to determine
the intended scope of the indemnity agreement." While
none of the agreements explicitly addressed the subject
of indemnity when the subcontractor was without fault, each
of the courts confidently stated that their interpretation
of the language in the agreements was consistent with the
"intention" of the parties.
To
be sure, parties to indemnity agreements should not have
to rely on a court's skill at creative interpretation in
order to achieve a favorable result. The lesson learned
from these decisions is that typical indemnity agreements
may be ill-equipped to deal with claims that do not arise
out of the indemnitor's fault. Thus, parties to construction
contracts should take care that their true intentions on
the issue of indemnity are manifested in clear and explicit
language.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2000 Thelen Reid Brown Raysman & Steiner LLP
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