Inside this Issue

A1 - Indemnification Unenforceable against Design Firm by Construction Contractor
A2 - Individual was not an “Agent” entitled to Indemnification
A3 - Economic Loss Doctrine Bars Suit by Developer against a Subcontractor

Article 1

Indemnification Unenforceable against Design Firm by Construction Contractor

See similar articles: Indemnification clause | work itself

A county retained an engineer to design a wastewater treatment plant, and under separate contract the county hired a construction contractor to build the plant. Part of the design called for two pumps. After construction, the pumps failed, and the concrete floor in one of the tanks heaved and ruptured, rendering the tank nonoperational. The county sued both the engineer and the contractor. The engineer filed a cross claim against the contractor to enforce the indemnification clause whereby it alleged the contractor was obligated to indemnify the engineer for the alleged damages. Court held no indemnity was owed because the clause very clearly stated that indemnity was only for personal injury and destruction of property other than the work itself. A plain reading of the clause precluded coverage for loss of use of tangible property resulting from damage to the work. County of Saratoga v. Delaware Engineering, D.P. C, 189 A.D.3d 1926 (NY 2020).

The indemnity clause in question provided the following:

“[Contractor] shall indemnify and hold harmless Engineer … from and against all claims … caused by, arising out of or resulting from the performance of the work, provided that any such claim, cost, loss or damage: (i) is attributable to bodily injury, sickness, disease or death to or injury to or destruction of tangible property (other than the work itself), including the loss of use resulting therefrom, and (ii) is caused in whole or in part by any negligent act or omission of Contractor.”

In analyzing the facts and the law, the appellate court held that the Contractor’s motion to dismiss the indemnification claim should have been granted by the trial court. The reasons for that holding said the court are, “Here, plaintiffs assert claims for damage to the tank, specifically the rupturing and heaving of its concrete floor; however, such claims clearly arise from the work itself, as [Engineer] designed the tanks and [Contractor] installed the same as part of their respective agreements with the County.”

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 23, No. 2 (April 2021).

Article 2

Individual was not an “Agent” entitled to Indemnification

See similar articles: Agent | duty to defend | Indemnification clause | Wegmans

A laborer was injured when he fell from scaffolding that collapsed while he was performing masonry work. He sued a number of entities and individuals involved in the project for Wegmans Food Markets. Aeroteck, Inc. is one entity that was sued based on its having staffed the project work with a construction foreman, as agreed upon in a staffing agreement with Wegmans. By separate contract, Wegmans hired MP Masonry, the employer of the injured worker. MP’s contract contained an indemnification clause requiring MP to indemnify Wegmans and “its agents, employees and representatives….” Aerotek filed a cross claim against MP to enforce the indemnification obligation based on the argument that MP was an “agent” of Wegmans. The court dismissed the indemnity claim – concluding that the word “agent” is too ambiguous to conclude that Aerotek was an intended indemnitee, and that if the parties had intended the foreman and Aeroteck to be Indemnitees of MP they could have done so “in unmistakable terms.” Fireman’s Insurance Co of Washington, D.C. v. ACE American Insurance Company, 465 F. Supp. 3d 254 (Western District, D.C., NY 2020).

The indemnification clause in this case provided the following:

“To the fullest extent permitted by law, [MP Masonry] shall defend, indemnify and hold harmless [Wegmans] and its agents, employees and representatives from and against all liabilities, claims, damages, loss and expenses, including, but not limited to, claims of personal injury to [MP Masonry's] employees, agents, subcontractors or third parties ... arising out of or resulting directly or indirectly from the performance of the Work....”

In analyzing this indemnity clause, the Federal District Court explained that New York courts are particularly strict when it comes to contractual indemnification. It is not enough, says the court, that an indemnification clause “might be reasonably read to cover an individual; it must be unambiguous that the individual is covered.” “That standard is demanding, and it is particularly difficult to meet if the parties employ language like ‘employees’ or ‘agent’ to refer to potential Indemnitees.”

The court further states, “The risk of an overly broad reading is present here, as words like “agents,” “employees,” and “representatives” are ambiguous and can readily be interpreted in a manner not intended by the parties. Indeed, one New York court has noted that the word “agent” is often a “referentially treacherous term” that fails to clearly manifest the parties’ intentions. [citation omitted]. The question here is whether, despite the inherent ambiguity of the terms themselves, the masonry contract as a whole states in “unmistakable terms” that Mr. Story is a covered indemnitee. The Court answers that question in the negative.”

In reaching that conclusion the court stated, “If the parties had intended to extend indemnification to the employees of other contractors, they could have simply used those phrases rather than the amorphous terms they did employ.” “In short, if Wegmans and MP Masonry had intended to extend indemnification to [the foreman], they could have done so ‘in unmistakable terms….’”

Risk Management Comment: In reviewing and negotiating indemnification clauses, our office typically strikes out the words “agents and representatives” for reasons like those explained by the court in this decision. Moreover, there are courts in some states that have enforced indemnification of a party such as construction manager that the courts found to be “agents.” If the owner intends a specific party to be indemnified as an “agent” we ask them to specifically identify that party or individual rather than rely on the ambiguous term “agent.”

Article 3

Economic Loss Doctrine Bars Suit by Developer against a Subcontractor

See similar articles: Economic Loss Doctrine

The economic loss rule required the court to dismiss a negligent suit by a commercial property owner/developer against a subcontractor. Court explained that parties generally do not owe each other a duty of care to prevent economic loss. The owner contracted with a general contractor to construct apartments for college students. After construction, the floor trusses began sagging, and allegedly caused about $8 million in damages to repair. The court determined that the owner possessed a bargained-for means of recovery against the general contractor, and is barred from seeing to recover in tort (negligence) for its economic loss from the subcontracted manufacturer of the trusses with whom it had no privity of contract. The decision does a nice job of explaining the history and purpose of the economic loss doctrine. Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., 376 N.C. 54, 852 S.E. 2d 98, (2020)

At the trail court level, the judge applied the economic loss rule and granted summary judgment against the plaintiff’s negligence claim. The North Carolina Supreme Court sustained that decision for the reasons explained here. The trial judge stated, “Because [Plaintiff] has not alleged or forecast evidence showing the breach of any separate or distinct extra-contractual duty imposed by law, … [Plaintiff] may not maintain a negligence claim against [defendant].” In analyzing the issues, the appellate court stated, “Applying the economic loss rule, North Carolina courts have long refused to recognize claims for breach of contract disguise as the type of negligence claim that Crescent asserted against Trussway in the case before us.” “The economic loss rule bars recovery in tort by a plaintiff ‘against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or lack of skill.’”

Citing the Supreme Court decision applying the economic loss rule in the case of East River S.S. Corp. v. Transamerica Delaval, Inc., the court stated that the Supreme Court emphasized that “the purpose of the economic loss is to prevent “contract law from drowning in a sea of tort.” The U.S. Supreme court in that case held that “a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself.” The state court states that “The economic loss rule has since gained near universal acceptance, and nearly all other state and federal jurisdictions have applied the rule to commercial transactions.”

To get out from the under application of the rule in this case, the plaintiff argued that the rule only applied to situations where the parties were in contract with each other. But the court found that lack of privity of contract “is immaterial to the application of the economic loss rule.” In this case, the plaintiff could look for recovery from the general contractor with whom it was under contract. As the owner/developer, it had “full knowledge of an power to control the acquisition and engagement of subcontractors for the various roles within the greater construction scheme.”

The court held that the economic loss rule prevented it from affording the plaintiff who was a “sophisticated, commercial developer", the tort remedy it sought.

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ConstructionRisk Report (April 2021)