Do Not Under Estimate The Need to Revisit The Wording of Your Indemnification Agreements
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 have reached different outcomes. In two cases, the courts held that the agreements required indemnification even though the subcontractors were not at fault. In the third case, the court ruled that the language of the agreement was not explicit enough to require indemnification without a finding of fault. The message for all contracting parties is clear- take care to ensure that the language in your indemnity agreement properly set forth 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 are often required, for instance, to indemnify a general contractor for any acts for which the general contractor is less than 100% 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 actually used in their agreement to determine their intent-even if they did not then actually consider the possibility of indemnification without fault.
The first case considered is Continental Heller Corp. v. Amtech Mechanical Services, Inc. (1997) 53 Cal.App.4th 500. Amtech, as 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 various employees and damaged property. The agreement required Amtech to indemnify Continental for loss "which [arose] out of or [was] 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 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 was entitled to indemnity because Continental's loss was connected to Amtech's act of installing the valve.
The Continental Heller court specifically noted the commercial context of the case as well public policy concerns as supportive of its broad interpretation of indemnity. Both Amtech and Continental were large, sophisticated firms who 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 was only required to indemnify Continental for $20,000.
In Heppler v. J.M. Peters Co. (1999) 73 Cal.App.4th 1265, 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 were 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.
The Heppler court distinguished the commercial and the public policy concerns found persuasive in Continental, by indicating that the subcontractors in this case 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.
Finally, in Centex Golden Construction Co. v. Dale Tile Co. (2000) 78 Cal.App.4th 992, 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 this language, as an expression by the subcontractor, sufficient to provide indemnity in the absence of fault. As in Continental Heller, the Centex court further justified it's ruling by noting the case's commercial context and the absence of any 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 will 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 discovered "intention" of the parties.
Parties to indemnity agreements should not have to rely on belated judicial interpretations of their agreement to evaluate their respective rights and obligations. 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 particular care to ensure that their true intentions on the issue of indemnity are manifested by clear and explicit language in the agreement.
For a discussion of other implications of these decisions, contact:
Ira James Harris, Esq. at 925-258-5100 or by e-mail at ira@iraharris.com.
These materials should not be considered as, or as a substitute for, legal advice and they are not intended to nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual situation. You should not take (or refrain from taking) any action based on the information you obtain from this document without first obtaining professional counsel and you should not send us confidential information without first speaking to one of our attorneys and receiving explicit authorization to do so.
