California Supreme Court Changes Construction Contracts

12 Things you either didn’t know or forgot about the practice of architecture.

Each month this year, Relevance reminds us of legal aspects of the practice of architecture… the things we either forgot or never knew, but should remember.

California Supreme Court Changes Construction Contracts

Many of you deal with indemnity provisions in contracts on a regular basis. Indemnity provisions are complicated and should be approached as a minefield of potential hazards. In July of 2008, the California Supreme Court made things even more dangerous in a case titled Crawford v. Weather Shield MFG, Inc. In Crawford, the Court found a subcontractor responsible for a developer’s defense costs based on the language of its contract, despite the fact that the subcontractor was not negligent in its performance on the project. Although the case dealt with a subcontractor and developer, the decision is a troubling development for architects, who will need to be more cautious about entering into any contract with an indemnity clause or a “duty to defend” clause.

To best explain the import of the Crawford decision, imagine Owner (“O”) and Architect (“A”) have a contract in which A agrees to “defend and indemnify” O from the claims of a third party. A now has a “duty to defend” O in a lawsuit. A also has a “duty to indemnify” O from an award of damages. In contract law, “defense” and “indemnity” are each terms of art. When you agree to “defend” another party, you agree to assume their litigation expenses, including attorney’s fees and other costs of suit. By agreeing to “indemnify”, you agree to protect that party from any liability that results from a third- party action, and you will assume responsibility for paying the settlement or adverse judgment. The parties can draft the indemnity and defense provisions narrowly or broadly. This can include conditioning indemnity on a finding of negligence, or otherwise create limitations or exclusions to indemnity liability.

Until the Crawford case, it was not uncommon to treat the two duties as one—to assume that the duty to indemnify also included the costs of defense. If there was no right to indemnity, then there was no right to a defense. But the Crawford court held a subcontractor liable for the developers’ attorney fees and defense costs from the outset, even though that subcontractor did nothing wrong. Why? The indemnity provision in Crawford by its terms created two distinct obligations. The court concluded that the subcontractor’s obligation to defend was a separate obligation from its duty to indemnify. So, as drafted, the contract obligated the subcontractor to defend the developer, even though it was not obligated to indemnify the developer.

As a result of its poorly-worded contract, the non-negligent subcontractor in Crawford was found liable for $130,000—the developer’s costs of defense. To limit your exposure, it is critical that you pay close attention to the language of your contracts. One way is to ensure that your obligation “to defend” the other party is expressly conditioned on a finding of negligence or fault on your part giving rise to your obligation to indemnify. Given the often complex nature of this area of law, coupled with the impact of this Court decision, you may want to consult your attorney to review any defense and indemnity provisions to see that your interests are protected.

By: Michele L. Gamble is a Partner and Patrick Craig is an Associate with Collins, Collins, Muir & Stewart, LLP and are located in firm’s Orange County office (www.ccmslaw.com). Ms. Gamble and Mr. Craig represent design professionals in all aspects of their professional practice including mediation, arbitration, trials, appeals, contract review and negotiation. Ms. Gamble’s email address is: mgamble@ccmslaw.com; Mr. Craig’s email address is: pcraig@ccmslaw.com.

Nothing contained within this article should be considered the rendering of legal advice. Anyone that reads this article should always consult with an attorney of their choice before acting on anything contained in this or any other article on legal matters as facts and circumstances will vary from case to case.