WINTER 2000

INDEMNITY OBLIGATIONS

In distinguishing the 1997 Continental Heller case, the Fourth Appellate District recently held that "negligence on the part of. . . subcontractors was necessary to trigger the indemnity obligation as provided by the subcontracts." (Heppler v. J.M. Peters, 1999 Daily Journal D.A.R. 8008). The practical effect of this ruling is that indemnity provisions must be closely analyzed for specific language to determine whether negligence must be found (Heppler) or not (Continental Heller).

The plaintiffs in Heppler were homeowners suing the project developer, J.M. Peters, for construction defects. Peters’ cross-complained against numerous subcontractors for, among other things, express indemnity. The plaintiffs’ settlement with Peters included an assignment of Peters’ indemnification rights against non-settling subcontractors. The case went to trial with the trial court ruling that "fault (negligence plus causation) by the subcontractors was a prerequisite to indemnity based on its inter-pretation of the subcontracts." The jury returned defense verdicts for three of four subcontractors, having found only one subcontractor negligent. Plaintiffs appealed, arguing that the Court’s ruling that the indemnity provisions at issue did not apply unless plaintiffs proved the subcontractors were at fault was incorrect.

Focusing on the subcontract language that called for the subcontractor to indemnify the developer "against all claims. . . growing out of the execution of the work," the Court of Appeal affirmed the trial court’s ruling on the indemnity issue. This indemnity language "does not evidence a mutual understanding of the parties that the subcontractor would indemnify Peters even if its work was not negligent." In support of its holding, the court focused not only on the "specificity of the contract language," but also on the public policy considerations relevant to the imposition of essentially strict liability on a subcontractor.

Perhaps more important was the Court of Appeal distinguishing the Continental Heller case holding which "did not require that the loss be caused by a subcontractor’s fault." The Heppler court distinguished Continental Heller by finding:

(1) the contractual indemnity language "shall apply to any acts or omissions, willful misconduct or negligent conduct whether active or passive, on the part of the subcontractors," specified that the subcontractor’s conduct was of no consequence to an indemnity analysis;

(2) the subcontractor could better protect against loss arising out of its performance because it "selected and installed" the faulty valve; and

(3) unlike in Heppler which involved numerous subcontractors, Continental Heller involved only one subcontractor which was in a better position to control its work. Also of note was the Heppler court’s distinction with the Continental Heller "commercial" relationship between contractor and subcontractor with that of the "typical developer-subcontractor relationship" in Heppler which could "impose ruinous liability on a small time subcontractor."

In conclusion, indemnity provisions must be reviewed to determine whether negligence on the part of a subcontractor is necessary to trigger an indemnity obligation.

SUBCONTRACTORS AND STRICT LIABILITY
Casey v. Overhead Door Corp.
(1999) 74 Cal.App.4th 112

The California Court of Appeal (Fourth District) recently held that a subcontractor who designed and manufactured a product for a mass-produced housing development could not be held strictly liable for construction defects. Casey v. Overhead Door Corp. (1999) 74 Cal.App.4th 112. Since 1969, courts have allowed owners of mass-produced homes to bring actions in strict liability against developers of a given project. Kriegler v. Eichler Homes Inc. (1969) 269 Cal.App.2d 224. However, the courts have been reluctant to allow owners to bring strict liability actions against the subcontractors or the material suppliers of a given project. La Jolla Village Homeowners’ Asn. v. Superior Court (1989) 212 Cal.App.3d 1131, 1144-1146.

In Casey, the homeowners brought an action in strict liability for product defects against Overhead Door Corp. (hereinafter "Overhead"), a subcontractor which contracted with the developer to produce and supply various window products for the project.

An exception to the established law of not allowing homeowners to bring strict liability actions against subcontractors or suppliers of materials exists when the plaintiff can show that the subcontractor was essentially the developer of a project or part of a joint venture having a financial interest in and control of the project. In Casey, plaintiffs did not contend that Overhead was acting as a developer or had an interest in the project above the costs it charged for its products. Rather, the plaintiffs argued that the court should have allowed the action based on strict liability because Overhead was the manufacturer of the window components. The plaintiffs argued that just because Overhead was a subcontractor in the development, it should not be shielded from strict product liability actions based on defective products it produced.

The Casey Court rejected plaintiffs' contention that an exception to the established rule is appropriate when the subcontractor is the materials manufacturer rather than the a service or labor supplier. The court reiterated its long held position that the distinction on when it is acceptable to allow actions in strict liability revolves around whether the subcontractor was acting as a developer and not whether the subcontractor manufactured a given product.

The Casey Court concluded that based on the principle of risk distribution, the developer alone should be held strictly liable. Accordingly, the court held that a subcontractor is not liable to plaintiffs in an action for strict liability even if the subcontractor could be characterized as a manufacturer of materials.