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.

Mass Appellate Court Provides Another Reason to Ensure Indemnification Provisions Include Survival Clauses

Last week, the Massachusetts Court of Appeals ruled that a contractual indemnification clause does not necessarily survive termination, absent a survival clause keeping the obligation in force. While the Court applied Georgia law in reaching its decision, the principles that the Court applied would likely yield the same result using Massachusetts law.

In Fraco Products, Ltd. v. Bostonian Masonry Corporation, C.A. No. 12-P-933 (Mass. App. Ct., Sept. 26, 2013), an equipment manufacturer sold a piece of equipment to a masonry subcontractor on an installment payments basis. The contract included a “Transfer of Risk and Insurance” clause requiring the masonry subcontractor to indemnify the manufacturer from any losses caused by the equipment. The Transfer of Risk and Insurance clause did not state that it would survive the termination of the contract (while another section dealing with risk noted that that clause would survive termination).

After the final payment was made, there was an accident involving the equipment killing a passerby and two construction workers. The estate of one of the workers sued the manufacturer, and the manufacturer sued the subcontractor for indemnification.

The Court of Appeals dismissed the claim for contractual indemnity, stating that “Courts are to construe the language of an indemnification contract strictly against the party seeking indemnification.” The court went on to note that the “Transfer of Risks and Insurance” provision was “not followed by a survival clause.” Accordingly, since the “contract terminated by its own terms when [the subcontractor] made the final installment payment (sometime before the accident), the ‘Transfer of Risks and Insurance’ provision is not relevant here.”

This is another good reminder to contractors to make sure that their standard subcontracts include express language in their indemnification provisions that make clear that the subcontractor’s indemnification obligation survive termination.