Jason Ebe | Snell & Wilmer
In a recent Arizona case, the trial court held that an owner could sue a subcontractor directly for recovery of the owner’s consequential delay damages based on the subcontract’s express indemnity clause, notwithstanding that recovery of those same damages against the prime contractor were barred by the language of the prime contract.
In this case, a mechanical subcontractor on a high-rise project sued the general contractor, owner, and design professionals asserting delay and impact damages. The owner brought a counterclaim against the subcontractor seeking recovery of the owner’s direct and consequential delay damages. The prime contract included a mutual waiver of consequential damages as between the owner and the general contractor and a cap on liquidated damages. The subcontract contained a similar mutual waiver of consequential damages between the general contractor and the subcontractor, but expressly carved out the subcontractor’s indemnity obligations from the waiver. The subcontract further allowed the general contractor to pass through to the subcontractor the owner’s liquidated damages and the general contractor’s delay damages. The subcontract indemnity provision stated in pertinent part: “To the fullest extent permitted by law, Subcontractor agrees to indemnify … Owner … from and against all … damages, losses … and expenses … arising out of, or resulting from the performance, or failure of performance, of Subcontractor’s Work and obligations as provided in the Contract Documents ….”
The subcontractor moved for summary judgment on the owner’s counterclaim, raising multiple arguments, primarily that the subcontract indemnity clause covered only third-party claims against the owner and not the owner’s first-party damages, losses and expenses. The trial court, citing law of Arizona and other states, ruled that the subcontract indemnity language did encompass owner claims for first-party damages, losses and expenses. See Skousen v. W.C. Olsen Investment Co., 149 Ariz. 251, 253 (1986); Yan Ming Marin Transp. Corp. v. Okamoto Freighters Ltd., 259 F.3d 1086, 1092 (9th Cir. 2001); Hot Rods, LLC v. Northrop Grumman Sys. Corp., 196 Cal. Rptr. 3d 53, 65 (2015).
The subcontractor further argued that the parties could not possibly have intended the subcontractor to have unlimited consequential liability to the owner where the owner waived consequential damages and capped liquidated damages against the prime contractor. The subcontractor urged the court to interpret the subcontract indemnity provision in a manner so as to avoid what the subcontractor dubbed “absurd” results. The court acknowledged the logic of the subcontractor’s arguments. However, the court held “the problem is the way the Subcontract is written. [Subcontractor] agreed to an indemnity right for the owner. At the same time, [Subcontractor] did not include any language that limited that indemnity right to liquidated damages and did not include a provision where the owner waived consequential damages. [Subcontractor] could have avoided this situation by writing a better contract.” Ultimately the court denied the subcontractor’s motion for summary judgment, and the parties’ dispute is unresolved pending trial.
Takeaways
Several important takeaways are evident. From a general perspective, this court held, as most courts would be expected to hold, that parties are bound by the language they negotiate in their contracts, even if the consequences may seem illogical or absurd to one party. So, be careful what you negotiate, and consider seeking clarity to mitigate against competing arguments as to interpretation. From a specific perspective, in an indemnity clause, if the parties agree to allow, or alternatively to bar, the indemnitee’s recovery of first-party damages, losses and expenses, the parties should consider expressly and clearly set forth their agreement and understanding in the indemnity clause.
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