Long & Levit LLP Construction Update

Issue No. 4

Fall 1999

Does an Action Against a Subcontractor for Express Indemnity Require Proof of Subcontractor Fault?

Heppler v. J.M. Peters Co., Inc. (8/3/99) 1999 D.A.R. 8008
Continental Heller Corp. v. Amtech Mechanical Services, Inc. (1997) 53 Cal.App.4th 500

By Burton C. Allyn, IV

In recent decisions, the California Court of Appeals for the Fourth District and the Second District came to different conclusions as to whether express indemnity is recoverable against a subcontractor which was not at fault.

The Heppler case (Fourth District) arose out of construction defect litigation in San Diego County brought by homeowners and their Association (plaintiffs) against the developer (Peters). Peters agreed to pay $5.3 million to settle the litigation and assigned its indemnity rights against certain non-settling subcontractors to the Plaintiffs. Two of the subcontracts had the following indemnity language:

. . . Subcontractor agrees to defend, indemnify, and hold Contractor harmless from all claims, demands, or liability . . . arising out of or in connection with Subcontractor's performance of the work and for any breach or default of the Subcontractor in the performance of its obligations under this Agreement.

Two other subcontracts provided that the subcontractor

agrees to indemnify and save [Peters] harmless against all claims for damages to persons or to property growing out of the execution of the work, and at its own expense to defend any suit or action brought against [Peters] founded upon the claim of such damage . . .

Both clauses were on pre-printed subcontracts supplied by the developers.

In a pre-trial ruling the trial court determined Plaintiffs would have to prove negligence and causation to trigger each subcontractor indemnity obligation. The jury returned special verdicts finding three of the four subcontractors were not negligent and judgment was entered in their favor, including attorneys' fees and costs.

In affirming the trial court, the Court of Appeal narrowly construed the indemnity language finding that "had the parties intended to include an indemnity provision that would apply regardless of the subcontractor's negligence, they would have had to use specific, unequivocal contractual language to that effect". The court held that absent such language, an indemnity obligation will be construed to arise only if the subcontractor performed negligently and caused damage.

In Continental Heller (Second District) a general contractor (Continental) paid $20,000 to settle claims arising out of an explosion caused by a defective valve installed by Amtech in a meat packing plant. Continental sought indemnity from Amtech under a subcontract requiring Amtech to indemnify Continental for loss which

arises out of or is any way connected with the performance of work under this Subcontract [and] shall apply to any acts or omissions, willful misconduct, or negligent conduct, whether active or passive, on the part of the subcontractor.

Even though Amtech was found not to be at fault, the Court of Appeal upheld Amtech's liability under the indemnity clause for Continental's payment. It reasoned that Amtech's installation of the valve was an "act" which was "connected" in some "way" to the explosion and subsequent loss. "The language of the agreement leaves no doubt the parties intended Amtech should indemnify Continental irrespective of whether Continental's loss arose by reason of Amtech's negligence or for any other reason except for the sole negligence or willful misconduct of Continental".

The courts in both cases considered the commercial context in which the loss occurred. Amtech was a large, sophisticated company with bargaining power to negotiate specific terms and with control over selection and installation of the valve that failed. The Heppler court distinguished Amtech's position from the role of subcontractors in a construction project. The subcontractors in Heppler did not control the trades which preceded or followed them, were under the developer's supervision, and had little negotiating power. Additionally, in California, subcontractors are not subject to strict liability for construction defects. (LaJolla Village Homeowners Assn. v. Superior Court (1989) 212 Cal.App.3d 1131, 1143-44).

Can the Heppler opinion be read to hold that indemnity language will always be narrowly construed against the indemnitee? Clearly not in the insurance context. The phrase "arising out of the [insured subcontractor's] work" in the standard additional insured endorsement has recently been construed to apply where the named insured was not at fault for the accident. Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 32, Issue 81 "Long & Levit LLP Insurance Update". Broad construction of "arising out of" language is the general rule in interpreting insurance provisions.

The Heppler and Continental Heller cases underscore the need to carefully draft triggering conditions in indemnity clauses. If the parties intend a fault based indemnity trigger, language such as "arising out of or connected with" any "act or omission" could have the unintended consequence of affording indemnity in the absence of any negligence or causal connection to the loss.

© Long & Levit LLP
This publication is intended for general information purposes only and does not constitute nor is intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances including whether the case may have been depublished after the date of this publication.