Contractual duty to defend in a construction subcontract redefined by California Supreme Court
July, 2008
By
Ronald L. Richman
Subcontractors: An indemnity provision in your subcontract may obligate you to defend the general contractor/builder/developer in a construction defect lawsuit even if your work is eventually determined to be without fault.
The California Supreme Court in Crawford v. Weather Shield Mfg. Inc. 2008 WL 2789215 (7/21/08) held that a subcontractor was obligated to pay the attorneys' fees and expenses that the developer/builder incurred in a construction defect case arising out of the subcontractor's scope of work even though the subcontractor's work was eventually found to be without fault.
Background
The developer/builder entered into a subcontract with Weather Shield to manufacture and supply wood framed windows for a residential construction project. The subcontract provided that the subcontractor would: (1) "indemnify and save [the developer] harmless against all claims for damages... loss,... and/or theft...growing out of the execution of [the developer's] work,"; and (2) "at [its] own expense to defend any suit or action brought against [the developer] founded upon the claim of such damage[,]... loss or theft."
The homeowners sued the developer/builder, Weather Shield, and other subcontractors for construction defects, including the improper design, manufacture, and installation of the windows manufactured and supplied by Weather Shield. The developer/builder, in turn, sued Weather Shield, seeking to recover the amount that it paid to the homeowners in settlement as well as its attorneys' fees and expenses incurred in defending the claims arising out of the window manufacture and installation.
Duty to defend
The California Supreme Court held that although Weather Shield owed no duty to reimburse the developer/builder for payments made in settlement since Weather Shield's work was determined to be without fault, Weather Shield nevertheless had a contractual duty to defend the developer/builder against the claims arising out of the window manufacture and installation.
The California Supreme Court relied on well-established statutes governing indemnity agreements. California Civil Code section 2772 provides, in most simple terms, that an indemnity agreement obligates one party to protect another. Section 2778(4) provides that the indemnity obligation is triggered upon the request of the party seeking to be indemnified. In other words, once a lawsuit or other proceeding is filed, the party that agreed to indemnify the other must, upon request, pay the other party's attorneys' fees and costs incurred in all claims that fall within the scope of the indemnity agreement.
Further, the Supreme Court found that the broad provisions of the contractual indemnity agreement were not conditioned on the outcome of the litigation. Instead, the contractual indemnity provision obligated the subcontractor, at the outset of the litigation, to defend the developer before a final determination was made as to whether the subcontractor's work was at fault.
The only saving grace is that the duty to defend is limited to those claims that fall within the scope of the indemnity agreement.
What now?
Beware of the scope of any indemnity contract that you sign. Should you have any questions regarding an indemnity provision in your contract or wish to discuss this new case, please give us a call.
Ron Richman is the Shareholder-In-Charge of the San Francisco Office of Bullivant Houser Bailey PC. Mr. Richman's practice covers construction, real estate, general business, and commercial litigation issues. Please e-mail him at ron.richman@bullivant.com or visit www.bullivant.com for more information.