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An arbitration award to a homeowner against a homebuilder/contractor only determined damages and did not provide any explanation for the basis of the award – such as who was at fault or even what elements of the complaint formed the basis for the award. A court determined that the builder could not recover those damages from its subcontractor under the indemnification clause of the subcontract.

The circuit court reasoned that because there were no findings of law or fact in the arbitration award, there was no evidence that the award was attributable to property damage caused by defects in the materials supplied and installed by the subcontractor, might have been caused by the prime contractor instead. The indemnification clause was found unenforceable because it would violate the state’s anti-indemnity statute by requiring the subcontractor to indemnify the builder for the builder’s own negligence.

Comment: This is one of the problems with arbitration awards. They can create havoc with determining whether damages are subject to indemnification and whether they are subject to insurance coverage. My firm routinely strikes arbitration clauses out of contracts and prefers litigation. D.R. Horton v. Builder Firstsource-Southeast Group, LLC, 810 S.E.2d 41 (South Carolina 2018).

The contract included the following indemnification clause:

“To the fullest extent permitted by law, contractor hereby agrees to protect, defend, indemnify, and hold owner, its parent corporation, subsidiaries and affiliates, and any of their respective officers, directors, partners, employees, agents and insurers, … free and harmless from and against any and all claims, demands, causes of actions, suits, or other litigation of every kind and character (including all costs thereof and attorneys’ fees), … on account of bodily or personal injury, death, or damage to or loss of property, … in any way occurring, incident to, arising out of, or in connection with: (I) a breach of the warranties, representations, obligations, and covenants provided herein by contractor; (II) the work performed or to be performed by contractor or contractor’s personnel, agents, suppliers, or permitted subcontractors; or (III) any negligent action and/or omission of the indemnitee related in any way to the work, even when the loss is caused by the fault or negligence of the indemnitee.”

The allegations by the homeowner against the builder included the following:

“D.R. Horton failed to properly install 1) the “siding and exterior wall system;” 2) “rough opening flashing and other flashing;” 3) a moisture barrier; 4) kick-out flashing; 5) framing; 6) the slab and driveway; 7) the roof and shingles; 8) and a gas hot water heater.”

The trial court determined D.R. Horton’s indemnification agreement violates section 32-2-10. That statute provides:

Notwithstanding any other provision of law, a promise or agreement in connection with the design, planning, construction, alteration, repair or maintenance of a building … purporting to indemnify the promisee, its independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury or property damage proximately caused by or resulting from the sole negligence of the promisee, its independent contractors, agents, employees, or indemnitees is against public policy and unenforceable. Nothing contained in this section shall affect a promise or agreement whereby the promisor shall indemnify or hold harmless the promisee or the promisee’s independent contractors, agents, employees or indemnitees against liability for damages resulting from the negligence, in whole or in part, of the promisor, its agents or employees.

In reviewing the issues, the appellate court agreed with the trial court that the indemnification clause could not be enforced against the subcontractor. The court explained its reasoning as follows:

“The indemnification agreement in this case purports to require BFS to indemnify D.R. Horton for its own negligence in violation of section 32-2-10. Because the agreement violates the statute, we cannot require BFS to pay for damages caused by D.R. Horton.2 The inclusion of the illegal contractual indemnification term, along with an unreasoned award for damages only, proves fatal to D.R. Horton’s claim for indemnification. The record is devoid of any evidence presented to the arbitrator, and any attempt to devine the reasoning for the arbitrator’s award would be an exercise in speculation.”

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. 20, No. 5 (May 2018). Copyright 2018, ConstructionRisk, LLC