For years, the construction industry, the legislature, and the courts have struggled to clearly define how much risk owners and contractors can pass down to subcontractors. As a result, indemnity provisions in construction contracts have been the subject of legislation as well as high-stakes lawsuits. The most recent example of this is the recent court of appeals decision of Oltmans Construction Co. v. Bayside Interiors, Inc. (March 30, 2017, No. A147313) __ Cal. App. 4th __ [2017 WL 1179391]. The key question in Oltmans was whether a limitation on indemnity ‟to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of that general contractor” completely bars a general contractor from recovering any indemnity if it was actively negligent or acts to apportion recovery based on the fault of each party.
In Oltmans, an employee of a second-tier subcontractor was injured after falling through a skylight opening that was allegedly not secured by the general contractor (Oltmans). After the injured worker brought suit for negligence, Oltmans cross-complained against its subcontractor and the sub-subcontractor for indemnity among other claims. The indemnification provision in the subcontract stated:
The indemnification and defense required by this Paragraph 11(a) shall apply in all described matters herein except to the extent the claims arise out of, pertain to, or relate to the active negligence or willful misconduct of the contractor parties . . ., or to the extent such obligation is inconsistent with the provisions of California Civil Code 2782.05.
The trial court interpreted this exclusion as a total bar to Oltmansʼ indemnity claims due to Oltmansʼ active negligence in not securing the skylight opening.
The court of appeal disagreed. Instead, the court of appeal determined that a plain reading of this indemnity provision prohibited Oltmans from recovering indemnity for liability incurred because of its active negligence, but did not prohibit it from recovering indemnity for the portion of liability caused by the fault of others. In reaching its conclusion, the court of appeal emphasized the importance of express language of the indemnity provision and that the extent of a partyʼs indemnity obligation must be determined from the terms of the contract. The court determined that had the parties intended to prohibit indemnification completely in the event the general contractor was actively negligent, that could have been expressly stated in the subcontract.
The court also found that the reference to Civil Code §2782.05 further supported its interpretation because the purpose of the new provision added in 2011 was to apportion liability on an equitable basis in proportion to the fault of the various parties.
Indemnity provisions always loom large for the construction industry as they carry significant obligations that can last long after the project is complete. The Oltman case is an important reminder that particular attention needs to be paid when drafting indemnity provisions. Be diligent to say what you mean and mean what you say because ultimately a court may hold your future in its hands.
Peter Ryan is an associate with Hunt Ortmann, a leader in California construction law. If you would like additional information about the subject matter of this bulletin, please contact Peter Ryan at firstname.lastname@example.org.