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California Supreme Court:
Construction Subcontractors Must Reimburse Developer for Defense Costs Even When Subcontractor is Not Actually Negligent

On July 21, 2008 the California Supreme Court issued its long awaited decision in Kirk Crawford v. Weather Shield Manufacturing, Inc. and held that under pre-2006 “Type I” indemnity clauses for residential construction projects construction subcontractors must indemnify developers for defense costs even when the subcontractor is not found to be at fault or negligent on the underlying claim.

Crawford involved a lawsuit by 220 homeowners against a developer, window manufacturer, framer and others claiming that their windows fogged up and leaked. The developer in turn sued its subcontracting window manufacturer and framer for products liability, warranty and indemnification and reimbursement of legal fees and defense costs. The developer settled with homeowners but continued its action against the window manufacturer and framer. The trial court found that the manufacturer and framer were not negligent. Indemnification of the settlement sum paid was therefore not awarded. However, the court did find that the developer was entitled to reimbursement from the window manufacturer and the framer of $131,274 in legal fees and costs incurred by the developer in defending the case.

In issuing the award for defense costs the trial court reasoned that the “Type I” indemnity clause between the developer and its subcontracting framer and the window manufacturer clearly stated that the framer and manufacturer would be liable for the legal fees and costs incurred by developer in defending the case even if these subcontractors were themselves held to be not negligent, as long as the original claims related to the relevant scope of work. Since the original claims by the homeowners did in fact focus on the windows the trial court held that the contract itself dictated the result. Thus, even though the subcontracting framer and manufacturer were not negligent, because of the “Type I” indemnity agreement they signed they were contractually obligated to reimburse the developers for $131,374 in defense fees and costs it incurred. The window manufacturer appealed. The Court of Appeal affirmed the decision of the lower court.

The California Supreme Court affirmed the decision of the Court of Appeal and held that where the indemnity agreement obliged the subcontractor “to defend any action or suit” against the developer “founded upon” any claim “growing out of the execution of the work” the subcontractor was indeed obligated to provide such a defense or indemnify the developer for its costs of defense, even if the subcontractor was ultimately found not negligent in relation to the work performed or materials supplied. The Supreme Court noted that the defense and indemnity obligations were clearly reflected in the language of the subcontract, which the parties were free to negotiate in anticipation of third party claims.

The Supreme Court analyzed the impact of California Civil Code sections 2778, governing the interpretations of contracts generally, and 2782, relating to interpretation of indemnity agreements specifically, and concluded that both statutes were in accord with its decision under the facts. While the parties could have drafted language to provide for a different result, they did not do so. Civil Code section 2782 as amended and revised applies in relevant part to residential construction contracts entered into after January 1, 2006. The contract at issue here was entered into well before 2006. There was nothing in the statutes which dissuaded the Court from its position that the relationship between the parties was clearly defined by the terms of their agreement and should be enforced as drafted.

The Court also analyzed a series of cases including Goldman v. Severin (1969) 274 Cal.App.2d 885; Heppler v. J.M. Peters Co. (1999) 73 Cal.App.4th 1265; Regan Roofing Co. v. Superior Court (1994) 24 Cal.App.4th 425; Mel Clayton Ford v. Ford Motor Co. (2004) 104 Cal.App.4th 46; City of Watsonville v. Corrigan (2007) 149 Cal.App.4th 1542. The court found these cases unpersuasive in support of a contrary conclusion. The Court specifically disapproved of Regan insofar as it stood for the proposition that under the agreement at issue therein subcontractors’ defense obligations arose only if the subcontractors became liable for indemnity. The text of the California Supreme Court decision in its entirety can be electronically viewed at http://www.courtinfo.ca.gov/opinions/documents/S141541.PDF.

The message from the Crawford v. Weather Shield case is that subcontractors should carefully scrutinize their agreements with developers and negotiate revisions where they can. Subcontractors must avoid signing agreements which include promises to defend a contractor from claims despite the subcontractor’s lack of negligence or fault. The failure to negotiate contractual terms, particularly in regard to defense and indemnity obligations can be financially devastating. Subcontractors must strive to educate themselves as to the implications of contractual language and negotiate more beneficial terms where they can. Even the change of a few words can make a great difference years later when demand is made upon the subcontractor to defend a lawsuit.

Article written by William L. Porter. Mr. Porter is a shareholder in Porter Law Group, Inc. in Sacramento and can be reached at (916)381-7868 or at bporter@porterlaw.com. To learn more about Porter Law Group, Inc. visit the firm’s website at www.porterlaw.com

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