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In this Issue:

  • Contractor Required to Indemnify Negligent Party
  • “No-Damage-for-Delay” Clause Unenforceable where City Withheld
    Superior Knowledge about Site Conditions and Caused the Delay

Contractor Required to Indemnify Negligent Party

Pursuant to the indemnity clause of its lease agreement with a landowner (Washington Street Investments (WSI), the Goettl Air Conditioning Company (Goettl) agreed to indemnify WSI for all damages caused in whole or in part by Goettl’s negligence. When one of Goettl’s employees (Cunningham) fell through a skylight while on the roof of the building, that employee recovered workers compensation and then sued WSI for additional damages.

WSI demanded that Goettl defend it per the indemnity agreement but Goettl refused to do so. WSI and Cunningham settled the case, and WSI assigned its indemnity rights to Cunningham who then sued Goettl to recover the damages. At trial, the court granted summary judgment to Cunningham, concluding that Goettl was required by the terms of what it deemed to be a “general indemnity agreement” to indemnify WSI. This decision was reversed by the first appellate court on the basis that the court believed that the indemnity did not apply where the damages were caused by the indemnitee (WSI’s) own negligence. Specifically, the court found that WSI’s failure to conduct site inspections recommended by its engineer created a material question of fact as to whether WSI was actively negligent. Presumably, the court believed that if WSI was actively negligent, the indemnification requirement would not apply.

This decision was reversed by the Arizona Supreme Court which found that even if the indemnitee had been actively negligent, the indemnity requirement still applied. The indemnity provision in question reads as follows:

Lessor (WSI) shall not be liable to Lessee (Goettl] … for any injury … resulting from the condition of, or any defect in, the Premises. Lessee hereby agrees to indemnify and hold Lessor harmless from and defend Lessor against any and all claims … arising out of or in connection with … any accident … in or about Premises, when such injury … shall be caused in whole or in part by … any act or negligence of Lessee….

Because the indemnity clause did not specifically state what would result if the indemnitee (WSI) was itself negligent, the court found it to be a “general indemnity.” As a general rule, an indemnitee under such an agreement is only entitled to indemnitee from the consequences of other parties’ negligence as well as its own passive negligence, but is not entitled to indemnitee against its own active negligence. But where there is clear and unequivocal language demonstrating that the indemnitee is be indemnified despite its active negligence, the clause will be enforced as written.

In this case, the court found that the language was clear and unambiguous, and that Goettl was, therefore, required to indemnify WSI (and now Cunningham) for the damages.

An interesting aspect of the case was that when Goettl refused to participate in the defense, WSI settled the matter directly with Cunningham, without input or participation from Goettl. Because Goettl had ample notice by WSI of these proceedings and circumstances, the court ruled that the settlement was binding against Goettl. The rule is that so long as the indemnitor (Goettl) had reasonable notice of the action and an opportunity to assume or participate in the defense, the judgment against the indemnitee is binding against the indemnitor. Cunningham v. Goettl Air Conditioning, Inc. No. CV-97-0511-PR, 1999 Ariz. LEXIS 67, 1999 WL 312544 (Ariz. May 19, 1999).

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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“No-Damage-for-Delay” Clause Unenforceable where City Withheld Superior Knowledge about Site Conditions and Caused the Delay

A state court in California declined to enforce a “no-damage-for-delay” clause that would have deprived a construction contractor of equitable adjustment for time delays and expenses caused by the project owner, City of Los Angeles. The city had superior knowledge concerning site conditions which it withheld from the bidders. The city also impeded access to the site.

In its Invitation for Bids (IFB), the city advertised for bids for the rehabilitation of the Venice Canals. This work included excavation of material on the bottom of the canals and the disposal of that material. The city learned while the IFB was still pending that the material on the floor of the canals was contaminated with pollutants and could not be disposed of in unclassified landfills as previously anticipated. The city also learned that work at part of the site would be prohibited by federal agencies during the months of April through September due to nesting terns.

In response to what it learned about the site, the city issued a revision to the IFB stating: “The construction stages may be interchanged to suit the requirements of any permitting agency or as directed by the City.” The bidders were not expressly advised by the city, however, concerning the information that had become available to the city. In the contract that was awarded to the low bidder, G. A. MacDonald Construction Co., Inc., the terms and conditions provided that the city would not be liable for any delay damages other than for “unreasonable and unanticipated delays caused by the public agency.” This was an exception mandated by California Code, section 7102.

Work on the contractor’s critical path was delayed for four months because after the city issued the notice to proceed, the city was unable to obtain a disposal permit for the excavated materials for another four months. When the contractor filed a delay claim, the city asserted the “no-damage-delay” clause barred recovery. In deciding this matter, the California Court of Appeal concluded that the contractor was entitled to damages because the clause barring them was unenforceable pursuant to the exceptions stated in the statute.

According to the court, the city withheld superior knowledge concerning the contamination and site access. The inclusion in the addendum to the IFB to permit the city the general right to “interchange” the construction stages was not sufficient to give the bidders notice of the conditions or the impact that these conditions could have on the schedule. Because the city had caused unreasonable, unanticipated delay, the damage disclaimer was unenforceable. Howard Contracting, Inv. V. G.A. MacDonald Construction Co., Inc. , 83 Cal. Rptr. 2d 590 (Cal. App. 2 Dist. 1999).

Article Copyright  ã 1999, ConstructionRisk.com, LLC – Virginia

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Copyright 1999, ConstructionRisk.com, LLC – Virginia

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 1, No. 4 (July 1999).