Active Negligence May Not Preclude General Contractor from Enforcing Contractual Indemnification

Some states—though generally not in the Northeast—preclude a general contractor from recovering under a contractual indemnification provision against a subcontractor if the claim is the result, in any way, of active negligence or willful misconduct on the part of the general contractor. A recent decision by an appellate court in California, Oltmans Construction co. v. Bayside Interiors, Inc. Case No. A147313 (Cal. App. 1st Dist. March 30, 2017), however, shows that courts are increasingly skeptical of such broad interpretations of anti-indemnity statutes that preclude general contractors from pursuing their bargained-for contractual indemnification rights. Under Oltmans, a general contractor will just have to show that the injury or damage was not solely caused by its active negligence, and might have been caused in part by others, to maintain a contractual indemnification claim against its subcontractor.

The case arose from a jobsite injury suffered by an employee of a sub-subcontractor on the project. The injured party sued the general contractor and the property owner. The general contractor then sued the subcontractor alleging a right to express contractual indemnity. The general contractor argued that, even if it was actively negligent, it was still entitled to be indemnified for the portion of any liability incurred as a result of the negligence of others.

The trial court rejected the general contractor’s argument, but the appellate court agreed with the general contractor and concluded that the trial court had erred in granting summary judgment to the subcontractor. The appellate court found that denying the general contractor indemnification for the portion of any liability it may incur attributable to the fault of the sub-subcontractor, the employee, or others would be inconsistent with the language of the contractual indemnity provision and the purpose of the indemnification statute. The appellate court focused on the fact that there was no evidence that the injury was caused solely by the actions of the general contractor. The general contractor was therefore entitled to pursue its indemnification claim for that portion of any liability that was not result of the general contractor’s active negligence.

Third Circuit Rules That Filing of Mechanic’s Lien Violates Bankruptcy Stay

In a decision that will impact how subcontractors deal with an insolvent general contractor, the Third Circuit in In re Linear ElectricCompany, Inc., Case No. 16-1477, ruled that a subcontractor creditor violated the automatic stay imposed by a general contractor’s bankruptcy filing when, post-bankruptcy, the subcontractor filed a mechanic’s lien against the owner of the construction project. Much like New Hampshire’s statutory system, New Jersey’s construction lien statute allows subcontractors and suppliers to lien an owner’s property to the extent of any unpaid balance that remains due and owing to the general contractor under their contract.  

In this case, the subcontractor claimed that it did not violate the stay, because it had filed its lien only against property of the owner, not property of the general contractor. The Third Circuit, however, disagreed. Because the subcontractor could only assert the lien against the owner to the extent any money remained owing to the general contractor, the Circuit found the lien violated the stay by preventing the owner from paying over the money it owed to the general contractor’s bankruptcy estate. In other words, the mechanic’s lien had effectively attached the bankrupt general contractor’s receivable, which is prohibited under Section 362 of the Bankruptcy Code.

This is another reminder for subcontractors and suppliers that they may need to exercise their lien rights earlier in the process to preserve those rights. Delay in pursuing unpaid invoices could deprive them of the benefit of a statutory lien against the project.

Gregory Moffett from Preti Flaherty's Bankruptcy, Creditor’s Rights and Business Restructuring Practice Group contributed to this blog.