By Rob Hofmann
On July 21, 2008, the California Supreme Court again pointed out the potential for devastating consequences when the terms in a boilerplate contract provision are triggered. Specifically, the Court upheld a fairly typical construction contract indemnification provision that required a subcontractor to defend the general contractor for claims and arising out of the subcontractor’s work, even though a jury absolved the contractor was subsequently absolved of any liability. This even included the general contractor’s costs of suit against the subcontractor to resolve the dispute over the scope of the indemnification provision. Crawford v Weather Shield Mfg, Inc. (2008) 44 Cal.4th 541
The Indemnity Provision
The indemnity provision at issue was contained in a construction subcontract prepared by the developer, builder, and general contractor of a large Huntington Beach residential project, J.M. Peters Co. (“JMP”), for the services of Weather Shield Mfg. Inc. (“Weather Shield”) to manufacture and supply the project with wood-framed windows. Specifically, the provision required Weather Shield to “to indemnify and save [JMP] harmless against all claims for damages … loss, … and/or theft … growing out of the execution of [Weather Shield’s] work, and … at [its] own expense defend any suit or action brought against [JMP] founded upon the claim of such damage, … loss, … or theft.” (Emphasis added.) In late 1999, the owners of 122 of the project’s finished homes sued JMP, Weather Shield, and other parties involved in the construction of the project for a variety of construction defects.
Subcontractor Weather Shield Not Liable to Homeowners But Still on the Hook
The homeowners’ suit set forth theories of negligence, strict liability, breach of warranty, and breach of contract, based on claims of “improper design, manufacture, and installation” of the windows in the homes, including those windows supplied by Weather Shield. JMP filed cross-complaints against Weather Shield and other subcontractors seeking declaratory relief that the subcontractors owed to JMP (1) the “present” duty to defend against the homeowners’ complaints, and (2) the duty to indemnify JMP for any liability arising out of the liability of the respective subcontractors. JMP and all of the other subcontractors, except Weather Shield and one other, settled with the homeowners before trial for a minimum payment of $2.25 million, with a guaranteed additional sum of $1.45 million against any recovery from the Weather Shield and the other nonsettling subcontractor.
Weather Shield sought and received a dismissal of the homeowner’s strict liability claims based on prior case law. At trial, the jury returned an approximately $1 million verdict against the other nonsettling subcontractor, but found in favor of Weather Shield.
Developer Still Demands to be Indemnified and Defense Costs
Despite the jury’s determination of no liability on the part of Weather Shield, JMP continued to pursue both its (i) indemnity claim for amounts paid to the homeowners in the settlement and (ii) attorneys’ fees and expenses incurred to defend itself against the homeowner’s lawsuit. The trial court concluded that the jury’s favorable verdict absolved Weather Shield of any indemnity liability to JMP. However, the trial court held that the subcontract provision required Weather Shield to pay for “JMP’s legal defense against the homeowners’ claims, insofar as those claims concerned the windows supplied by Weather Shield, regardless of whether Weather Shield was ultimately found negligent.” This amounted to a damages award against Weather Shield in the amount of $131,274. Weather Shield appealed.
The minority of the divided Court of Appeals argued there are strong policy grounds “against allowing the builder or developer with superior bargaining power to impose contractual defense obligations on a nonnegligent subcontractor.” The appellate majority, however, agreed with the trial court that Weather Shield’s duty to defend arose immediately upon the filing of claims based on its work and “could not depend upon the outcome of issues to be litigated in the very action Weather Shield was obliged to defend.”
Duty to Defend Distinct from Duty to Indemnify
The Supreme Court relied heavily on Civil Code section 2778 which, absent a more specific statute, provides the obligations “deemed included in every indemnity agreement.” The statute both “specifies that a basic contractual indemnity against particular claims, demands or liabilities embraces the costs of defense against such claims, demands, or liabilities [duty to indemnify] … (and) … separately specifies the indemnitor’s duty actually to defend [duty to defend].” Thus, absent the parties’ express agreement to the contrary, “a contractual indemnitor has the obligation, upon proper tender by the indemnitee, to accept and assume the indemnitee’s defense against claims encompassed by the indemnity provision” irrespective of the determination of the indemnitor’s ultimate liability. “Here, the subcontract at issue not only failed to limit or exclude Weather Shield’s duty to defend JMP, as otherwise provided by subdivision 4 of section 2778, it confirmed this duty. In language similar to that of the statute, the subcontract explicitly obligated Weather Shield both to indemnify JMP against certain claims [which would have only been triggered if Weather Shield was ultimately found at fault], and at its own expense to defend JMP against any suit or action … founded upon such claims [which arose before, and regardless of, any finding of fault in the litigation].” (Emphasis and parentheticals added.) This included the expenses incurred by JMP in its cross-complaint against Weather Shield.
Superior Bargaining Power Policy Concerns
Although sensitive the key policy concerns raised, e.g., large builders and developers using their superior bargaining power and self-drafted contract terms to unfairly shift the financial consequences of their own legal liability to faultless subcontractors, the Court concluded that these concerns are in large part addressed by statutes effective January of 2006 and 2008, respectively. In combination, these laws void any term in a residential construction contract “that obliges a subcontractor to indemnify certain other project participants, including the cost to defend, against construction defect claims to the extent the claims arise out of, pertain to, or relate to the negligence of other entities.” Despite the concern that these prospective-looking statutes do not protect against the provisions of contracts that still may be at issue due to the 10-year statute of limitations for construction defects, the Court declined to conclude as a matter of law that a contract provision “which expressly obliges a subcontractor to defend … against claims ‘founded upon’ the subcontractor’s negligent work, but says nothing further about the scope of duty, means only that the subcontractor must reimburse the promisee, after the fact, for the promisee’s legal indemnity ultimately owed by the subcontractor to the promisee.” The Court concluded that “an express duty ‘to defend’ another against claims ‘founded upon’ the promisor’s acts or omissions” was sufficient and, due to the language of Civil Code section 2778, did not require any additional affirmative language to impose the defense requirement.
Boilerplate Provisions Frequently Not Transferrable
Although the ramifications of this case are somewhat limited as a result of subsequent legislation, this case emphasizes the potential impact of boilerplate contract provisions. Boilerplate provisions are encountered in some form or another in almost every written agreement, but the parties rarely focus on them. Instead, such provisions are widely viewed as well vetted interchangeable parts. To the contrary, however, each such provision should be individually tailored to the specific agreement (except for the most basic cookie cutter transaction like the sale of new subdivision homes). Any attorney worth her/his her salt will review and appropriately modify each and every contract provision, including ‘the boilerplate’ with every transaction. Otherwise, a provision included to address a perceived run of the mill issue may fall well short of what a party expected, and at times have devastating consequences.
Rob Hofmann is an associate with Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.