Monday, July 17, 2006

Crawford, Kirk, et. al. vs. Weather Shield

California Court of Appeal, Fourth Appellate District
Filed January 31, 2006

A subcontractor who promises to "defend claims growing out of [its] work" must pro­vide a defense to the developer/general contractor when the developer/general con­tractor is sued based upon such derivative claims - even if it is determined that the subcontractor did not act negligently.

This decision requires a subcontractor to provide a legal defense to a developer/ general contractor regardless of whether the trier of fact ultimately determines that the subcontractor was at fault. In fact, the court clarified that no current decision stands for a per se rule that the absence of negligence retroactively excuses a defense obligation undertaken by a subcontractor. This decision then necessarily framed the important distinction between defense and indemnity.
By this holding, the court underscores the importance of the defense and indemnity language in a subcontract agreement, and adds significance to the breadth of allega­tions in a plaintiffs complaint. Indeed, as we will discuss in further detail below, this court highlighted the importance of speci­ficity within a contract by its pronounce­ment that the intention of the parties con­trols a defense/indemnity obligation.

Bottom Line: Even in the context of in­demnity, where parties tend to (mistakenly) rely on equitable principles, this case illuminates the importance of a carefully drafted subcontract agreement. With respect to defense fees and costs (as opposed to sums paid to satisfy a settle­ment judgment), if a contract sufficiently outlines a subcontractor's responsibility to provide a defense at the outset, then fault becomes irrelevant. Undoubtedly this deci­sion will focus subcontractors, developers and their attorneys on drafting and negoti­ating subcontract agreements, understand­ing that it is these documents that ulti­mately will determine the rights and obliga­tions between the parties.

A group of approximately 200 homeowners in the Huntington Place housing develop­ment in Huntington Beach, California, brought a construction defect action against the developer of the project, as well as against the project's window manufacturer and window framer. The homeowners sued the window manufacturer on theories of strict products liability, negligence, and breach of warranty alleging that the win­dows were defectively designed and manu­factured, causing them to leak and fog.

The developer filed a cross-complaint against the window manufacturer and the window framer, seeking its attorney fees incurred in defending against the home-owners' suit, as well as indemnification (i.e., money paid to satisfy a judgment or settlement of that suit).

The homeowners eventually entered into a Sliding scale "Mary Carter" agreement with the developer, in conjunction with which all complaints and cross-complaints were dis­missed except as to the window manufac­turer and the window framer, who did not settle.

While the trial court instructed the jury not to concern itself with the developers' claim for attorneys' fees, the jury found in favor of the window manufacturer on both the homeowner negligence and breach of warranty actions, and on the developer's contractual indemnity claim. The jury, however, ruled in favor of plaintiffs and developer against the window framer, who even­tually settled with plaintiffs.

A, Developer's Claim for Defense Fees
By its interpretation of the four corners of the sub­contract agreement, the trial court concluded that the window subcontractor had agreed to defend lawsuits for claims of damage growing out of the execution of the window manufacturer's work. Therefore, he ordered the window manufacturer to pay for the developer's attorney fees attributable to the window problems experienced by the homeowners.

Because the window framer also was responsible for those problems, an allocation was needed. The developer's risk manager had allocated seventy (70) percent of the devel­oper's settlement payment to window problems. Accord­ingly, the trial court allocated seventy (70) percent of the developer's total defense costs to window problems. The trial court then split the amount equally between the window manufacturer and the window framer, and ordered the manufacturer to pay that amount to the developer.

B. The Judgment
The final result of the trial court proceedings yielded a judg­ment comprising zero liability on the part of the window manufacturer to the homeowners, and zero liability on the part of the window manufacturer to the developer for the developer's causes of action for breach of contract and ex­press indemnity, but provided a determination entitling the developer to indemnity in the amount equal to half of the attorneys fees allocated to window problems.
The window manufacturer subsequently appealed this deci­sion.

The window manufacturer basically relied on the common-law rule, which states that an indemnitor-subcontractor may not be required to indemnify an indemnitee-general contrac­tor without an ultimate finding of negligence.

In short the court held that the trial court did not rule in error, stating that the decision was consistent with the sub­contract, and the obligations it created between the parties, "considered apart from any template otherwise imposed by law."

First, the court provided some context wherein it noted the two ways that general contractors protect themselves from construction defect lawsuits: (1) insist that their subcontrac­tors maintain commercial general liability insurance, and that they be named as an additional insured; (2) insist on a sepa­rate agreement pursuant to which a subcontractor (itself) agrees to indemnify and defend claims against the developer related to the subcontractor's work. Next, the court clarified that while most litigation in this context comprised actions between insureds and contractors, this case deals only with the relationship between the subcontractor and developer.

The controlling citation was as follows: The question of whether an indemnity agreement applies to a particular case primarily turns on contractual interpretation; it is the intent of the parties which controls. Rossmoor v. Sanita­tion, Inc. v. Pylon, Inc., (1975) 13 Cal.3d. 622, 633 (citations omitted).

Here the contract provided in pertinent part: "Contractor does agree to indemnify and save harmless against all claims-growing out of the execution of the work, and at his own expense to defend any suit or action..."

The court stated that while unlike insurance contracts, indemnity agreements usually are take it or leave it, and so these agreements must be construed against the drafter. As such, an indemnity provision between a con­tractor and its subcontractor should be interpreted nar­rowly. Despite these strict rules, the court found that the contract at issue unequivocally imposed a duty upon the subcontractor to defend claims arising out of its work. The court found instructive, the contract's use of the sepa­rate words, "indemnify" and "defend," which the court pointed out, have two very different meanings. The court used the definition of indemnity provided by Civil Code section 2772, which states that indemnity occurs where one party saves another from the consequences of the conduct of another party. The obligation to defend, how­ever, is more specific, and was defined in Buss v. Sup. Ct, (1997) 16 Ca!.4th 35, 46, as the rendering of a ser­vice, [mounting and funding of defense] in order to avoid or at least minimize liability." The court explained that by the existence of these two words, one can naturally pre­sume that the "subcontract contemplated two different actions from the promisor subcontractor."

Further, the court rejected the argument that the duty to defend somehow could be contingent on a subsequent indemnity obligation, or finding of negligence. Indeed, the court found that the contract promised the rendering of a present service, and not just the reimbursement of costs; therefore, by definition it could not be contingent on a future determination.Finally the court clarified the narrow effect of its decision, and proclaimed that it does not provide that a subcontractor is responsible for a "complete defense;" but a subcontractor must only provide those defense costs, which are reasonably attrib­uted to its work.

(Courtesy of Wood, Smith, Henning & Berman)