Pursuant to a contractual indemnification clause, a trial court awarded damages of $810,000 in attorneys fees against an engineer in favor of a project owner, Wal-Mart Stores, Inc., on a jury verdict of $48,600 in actual property damages. Wal-Mart’s first party claim against the engineer, a general contractor, and others was for damages arising out of stress and failure within a store and parking lot on which the engineer had provided geotechnical and design services to allow the store and lot to be built on a layer of clay just below the surface. A jury found the total damages to the building were $486,000, with engineer being 10% at fault and the general contractor being 90% at fault for the damages. With regard to the parking lot, the jury found no liability on the part of the engineer, but instead found Wal-Mart 50% liable and a general contractor 50% liable, and awarded Wal-Mart $1.6 million in damages for the parking lot. In a post-trial motion, Wal-Mart sought to recover its attorneys fees incurred in the litigation on all the claims (both the ones it succeeded on and the ones it lost). The court awarded the entirety of the attorneys fees against the engineer pursuant to the indemnity provision of the contract. This was reversed on appeal, with the court holding that Wal-Mart’s recovery of attorneys fees should be limited to those claims upon which it prevailed against the engineer. Wal-Mart Stores, Inc. v. Qore, Inc., 647 F.3d 237 (5th Cir., 2011).
The indemnification clause in question provided the following:
The Testing and Inspection Firm [Qore] further agrees to indemnify and hold Wal–Mart free and harmless from any claim, demand, loss, damage, or injury (including Attorney’s fees) caused by any negligent act or omission by the Testing and Inspection Firm, its agents, servants, or employees.
An initial question to be determined by the court was whether this indemnification only applied to claims brought against Wal-Mart by third parties or whether attorney’s fees were permitted in a first-party dispute (i.e., Wal-Mart directly against the engineer) as well. The court held that the language of the indemnity clause allowed recovery in first-party actions.
Even if first party claims were to be included in the indemnification, however, the engineer argued Wal-Mart’s recovery of attorney’s fees must be limited to those incurred in prosecuting the single claim upon which Wal-Mart prevailed against the engineer, and only to the same fractional share of liability on the building repair claim. Moreover, the engineer argued that the fees were not recoverable under state law. The court agreed that the attorneys fees would not be imposed under state common law or statutory law, but explained that attorney’s fees may be awarded where provided for by contract as was the case here. The court stated:
Here, the attorney’s fee provision in the testing and inspection contract entitled Wal–Mart to reimbursement for those attorney’s fees “caused by any negligent act or omission” on the part of Qore in performing work under the contract. Qore’s duty to reimburse Wal–Mart for its reasonable attorney’s fees was limited accordingly to those fees proximately and legally “caused by” Qore’s negligence, and the matter of causation could only be addressed once the jury made findings on the issue of Qore’s negligence. Until then, Qore’s legal liability remained latent for indemnification purposes. See Hopton, 559 So.2d at 1013 (“[T]here must be legal liability before a claim of indemnity arises.”). Because Wal–Mart’s indemnification rights were derivative of Qore’s negligent acts or omissions, i.e., the fault allocated to Qore on the building repair claim, Qore is only liable for the reasonable attorney’s fees Wal–Mart incurred in enforcing those rights. All other fees were not “caused by” Qore within the meaning of the testing and inspection contract, and could not be awarded thereunder. Wal–Mart’s recovery should have been limited to those attorney’s fees incurred in proving Qore’s liability on the building repair claim.
The court concluded that because the engineer was not found liable on two of three claims submitted to the jury, and the claims were not inextricably tied to a single claim but were readily capable of partition from each other, the attorney’s fees likewise should have portioned among Wal-Mart’s successful and unsuccessful claims. The fees could have been easily segregated along two lines, “those fees incurred in proving liability relating to planning and design, and those fees dedicated to proving liability relating to construction.” The court concluded “Wal-Mart’s successful and unsuccessful claims were not so interwoven that the district court could not have differentiated among Wal-Mart’s attorney’s fees incurred in prosecuting the various claims and defendants.” For these reasons, the appellate court concluded that the trial court’s award of attorney’s fees was an abuse of the court’s discretion and vacated the award accordingly.
Comment: As noted by the court in this case, responsibility for paying attorneys fees incurred by another party can arise by express contract language despite the fact that they would not otherwise be recoverable under state common law or statutory law. When negotiating indemnification clauses in design professional contracts (and other types of contracts as well) it is important, therefore, to carefully craft the clause so that the obligation to indemnify is limited to the extent of damages caused by the design professional’s negligence, and to make the clause applicable only to damages arising out of third party claims against the Indemnitee. It is often assumed that the indemnity clause is only intended to respond to legal liability that the Indemnitee incurs as a result of third party claims, but that may be a bad assumption, as the decision in this case demonstrates that if that is the intent it needs to be clearly stated.
Design professionals should also be aware that the contractual liability exclusion in their professional liability policy states that there is no coverage for liability assumed under indemnification clauses that would not have been imposed by law (meaning either state common law or statutory law). If the only legal basis for recovery of attorneys fees from the design professional is the contractual indemnification language, there is no insurance coverage for those fees since they are not “damages” that would be awarded by the court in the absence of the contract language.
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. 14, No.2 (Feb 2012).
Copyright 2012, ConstructionRisk.com, LLC
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