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By:  Michael D. Wilson, Jr.
Gordon Rees, LLP

275 Battery Street
Suite 2000
San Francisco, CA 94111
(415) 986-5900

In the period since the California Supreme Court published the seminal decision in Crawford v. Weathershield  (“Crawford”) and refused to consider or reverse the California Court of Appeal Decision in UDC-Universal Development, L.P. v. CH2M Hill (“CH2M Hill”) the construction industry has been trying to come to grips with the importance and significance of these court rulings that set forth the defense and indemnity obligations owed by architects, engineers, design professionals and contractors in the State of California.  While the California Senate made an unsuccessful attempt to overturn these court decisions with Senate Bill 972, many design professionals and subcontractors involved in active litigation proceedings took a “wait and see” approach to evaluating, responding and accepting tenders of defense and indemnity issued by developers and general contractors.  This in turn lead to a new court decision that not only reaffirmed the Crawford ruling, but reminded the construction industry of the potential repercussions of not accepting a valid tender of defense under a contractual indemnity agreement.  In particular, the California Court of Appeals, Fourth Appellate District published Searles Valley Minerals Operations, Inc. v. Ralph M. Parsons Service Company, 191 Cal.App.4th 1394 (2011) (“Searles”), which held that a party’s Crawford rights – the right to defense and indemnity upon a proper tender — can be assigned and enforced by an assignee.

The Searles Decision:

In Searles, a indemnity action arose from an adverse judgment in an underlying wrongful death action by decedent Michael Todd Moore’s heirs.  In the wrongful death action, the heirs sued several defendants including Kerr-McGee Chemical Corporation (“KM”), Ralph M. Parsons Service Company (“Parsons”), and Parsons’ subcontractor, all of whom had a role in owning or manufacturing a pneumatic conveyor system at a soda ash processing plant in Trona, California.  Prior to the accident, KM had entered into a construction contract with Parsons for the design and construction of the processing plant.  Included within that agreement was an indemnity provision, in which Parsons agreed to defend and indemnify KM for any personal injury or wrongful death actions arising out of Parsons’ or its subcontractors’ negligence.  After Parsons completed construction of the processing plant, however, KM sold the property to Searles Valley Minerals Operations, Inc. (“Searles Valley”) under a purchase agreement.  Under the terms of the purchase agreement, Searles Valley agreed to indemnify KM for any accidents or injuries on the premises that resulted in KM being sued.  The purchase agreement between KM and Searles Valley also included an assignment of the construction contract between KM and Parsons.  As a result, when Moore was killed while trying to remove a door of the pneumatic conveyor system, and Moore’s heirs brought the wrongful death action, KM tendered its defense to both Parsons and Searles Valley.  While Parsons rejected KM’s tender, Searles Valley accepted the tender, and in the process incurred over $800,000 in attorneys fees and costs providing KM with a defense in the case that ultimately went to trial.  At the conclusion of the trial, the jury awarded the Moore plaintiffs approximately $6.75 Million in damages, and made a finding that neither KM nor Parsons had any fault in causing the accident.  Shortly thereafter, Searles Valley filed the indemnity action seeking to enforce the defense and indemnity obligation – as between Parsons and KM – that was acquired via assignment in its purchase agreement, in order to seek reimbursement of the defense fees and costs it incurred as a result of Parsons rejecting KM’s tender.

When litigation commenced, Parsons filed a demurrer to Searles Valley’s complaint, on the basis that KM – the party with whom Parsons had contracted with to create a defense and indemnity obligation – had suffered no harm or damages in the wrongful death action.  KM did not incur any damages as a result of the jury’s findings in the wrongful death action, and KM did not incur any out-of-pocket losses since Searles Valley paid for KM’s defense.  In turn, when the trial court ruled in Parsons’ favor and Searles Valley appealed, the key issue was whether Searles Valley could recover from Parsons, as an assignee, the defense costs and fees spent defending KM in the wrongful death action.

In reaching its decision on the key issue before it, the court in Searles noted that under California case law, most contract rights – including those rights and duties arising out of an indemnity agreement — can be assigned.  When such an assignment occurs, the assignee “stands in the shoes of the assignor,” taking all rights and remedies subject to any defenses which the obligor has against the assignor prior to the notice of the assignment.  Once a claim or right has been assigned, the assignee is the owner and has a right to sue on it.  Next the court in Searles cited to the California Supreme Court’s Crawford decision, to reiterate the rights and duties that arise out a contractual indemnity provision.  Specifically, the court stressed that in accordance with the Crawford decision and California Civil Code section 2778, a contract provision containing a promise by one party to indemnify another against claims, defenses or liability, “embraces the costs of defense” against such claims, demands or liability, insofar as such costs are reasonably incurred in good faith.  Additionally the indemnity provision triggers a duty, upon request by the indemnitee, to defend actions or proceedings brought against the indemnitee with respect to matters embraced by the indemnity provision.  The court in Searles also restated the rule established in the Crawford decision that when an indemnitor declines the indemnittee’s tender of defense, the indemnitee can take steps to provide its own defense, but can subsequently seek reimbursement of all reasonable fees and costs of putting on a defense.

Based on the facts before the court in Searles, it was undisputed that under the Crawford decision, Parsons would owe KM a defense and indemnity obligation in connection with Moore’s wrongful death action.  It was also undisputed that if KM incurred reasonable defense costs in the wrongful death action as a direct result of Parsons declining the valid tender, KM could seek reimbursement.  Yet, in this instance, not only did Searles Valley pay KM’s defense costs, but Searles Valley had obtained KM’s indemnity rights via assignment.  As such, the court in Searles ruled that a party’s Crawford rights could be assigned an enforced by an assignee.

Searles’ Impact:

The court in Searles cautioned that its ruling is limited to only those cases where contracts containing an indemnity provision do not also have a provision prohibiting an assignment, that would operate to prevent a party from trying to enforce another party’s defense and indemnity rights.  That being said, this latest ruling will no doubt have the impact of reminding developers, design professionals and contractors that the ruling in the seminal Crawford case and related CH2M Hill case set forth the current rule of law governing indemnity agreements, and the potential consequences for denying a valid tender of defense.  Thus, while you should consult with your attorney to determine if an indemnity provision either confers a right to defense and indemnity or in the alternative vests in another construction participant rights to a defense and indemnification, all future discussions should also include an analysis of the transferability of those indemnity rights and/or obligations, and how the transferability of those rights can be used as leverage during the course of a case.  Searles Valley Minerals Operations, Inc. v. Ralph M. Parsons Service Company, 191 Cal.App.4th 1394 (2011).

About the Author: 

Michael D. Wilson, Jr.

275 Battery Street
Suite 2000
San Francisco, CA 94111
(415) 986-5900

Michael Wilson, Jr. is an associate in the San Francisco office of Gordon & Rees. He has extensive experience representing clients in state court matters, as well as proceedings before the American Arbitration Association. Mr. Wilson’s practice focuses on counseling and defending owners, developers, contractors, design professionals and construction managers in a variety of construction-related matters, including contract disputes, construction defect, toxic tort, and personal injury claims including premises liability. Mr. Wilson has also represented business entities and private owners in insurance coverage matters, class action litigation, asbestos/silica litigation, and eminent domain proceedings.

For more information on the CrawfordCH2M Hill, and Searles rulings, and how these cases impact construction indemnity agreements, or for more information on any other developments in Construction Law, please feel free to contact the attorneys at Gordon & Rees LLP.

This article is re-printed with permission in ConstructionRisk.com Report, Vol. 14, No.4 (April 2012).

Copyright 2012, ConstructionRisk.com, LLC