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RECENT NEWS POG's successful appeal of MacLean case now basis for explanation of indemnity in Washington Practice Series A very significant case involving issues of indemnity for construction claims was published on July 3, 2006, by Division 1, Court of Appeals, dramatically impacting declarant/developer and subcontractor recovery. The case is entitled MacLean Townhomes, L.L.C. v. America 1st Roofing & Builders Inc., --- P.3d ----, 2006 WL 1806591 (Wn.App. Div. 1), and is a “pay and chase“ recovery action by the declarant/developer against the subcontractors for Washington Condominium Act (RCW 64.34 et seq.) claims. Partners Mark O’Donnell and Lori McKown represented the declarant/developer with assistance from associate David Chawes, who researched and drafted the appellate briefs. Although most of the subcontractors settled, there were two holdouts: Janes Bros. Waterproofing and P.J. Interprize. They filed a series of motions ultimately leading to their dismissal at the trial court level. With what has become a standard subcontractor summary judgment motion, the first motion argued that the subcontract’s indemnity provision applied ONLY to the declarant/developer’s negligence or tort claims, and not a breach of contract claim. The trial court granted the motion in favor of the subcontractors and dismissed the indemnity claim. Subsequently, the subcontractors filed a second motion arguing for dismissal of the remaining contract claims since the only relief sought by the declarant/developer was for indemnity damages of the settlement paid to the homeowners association (even though pled as a separate theory of breach of contract damages). The trial court found that there were “no damages separate and apart from the indemnity claims,” and granted the subcontractors’ motion for summary judgment dismissal of the remaining breach of contract claims. We appealed both of these trial court rulings. The issues raised were whether the indemnity agreement was limited to ONLY tort claims (recall a fundamental rule of Washington construction law that there is no cause of action for “negligent construction”), and whether the damages claimed under breach of contract versus indemnity were distinct. Argument was heard on May 1, and a decision was published and entered on July 3, 2006. The Court of Appeals unanimously rejected the subcontractors’ arguments and overturned the trial court’s ruling. Citing longstanding principles of contract interpretation, the Court held that the references to limitations on negligence claims in the agreement applied ONLY to tort actions per the indemnity statute (RCW 4.24.115) requiring such limitations, and did not bar the declarant/developer’s indemnity claims. The Court found the subcontract’s indemnity language of “all claims ... arising from, resulting from or connected with” was broad and did not exclude contractual indemnity claims. After oral argument, but before the ruling was issued, Janes Bros. Waterproofing settled out. Although the Court noted it did not specifically address the issues of whether the declarant/developer may pursue damages related to contract claims that are separate from the subcontractor’s duties to defend and indemnify based on Washington law, we submit they are and that indemnity damages are much broader and include breach of contract damages. Additionally, the Court noted it need not reach a decision on whether the economic loss doctrine has any effect as a defense to the declarant/developer’s claims. However, footnote 6 in the decision discussing this issue is a good indication that such an argument will be rejected. Although there is a chance of an appeal, the reasoning of the Court of Appeals in this unanimous and quick opinion is consistent with well-grounded Washington contract, indemnity, and construction law. We do not anticipate that the decision would be overruled if review is sought and accepted by the Supreme Court. The opinion clarifies the very important issue of the effect and viability of indemnity claims in Washington construction defect cases. Indemnity agreements are a powerful weapon for a developer, general contractor, or even subcontractor who has subbed out some or all of its work. The indemnity language in the subject agreement was typical of what is found in most contracts between general contractors and subcontractors. Such language should allow for the recovery of broad damages from claims “arising out of, resulting from or connected with” the subcontractor’s work. Proof of that standard is likely much lower than proving a breach of contract claim. Damages recoverable should include attorneys’ fees, experts’ fees paid to the HOA, the amount of settlement with the HOA, perhaps interest on that amount, overhead costs, plus the fees and costs of pursing the recovery action against the subcontractor. As in any ruling, this decision helps in some cases but will hurt in others. The pendulum swings favorably back to the declarant/developer in recovery cases. As that old prophecy goes, “be careful what you wish for.” We strongly suggest that insurers and their defense counsel determine the extent to which this ruling applies in any given claim and try to resolve those claims, as the writing is on the wall. A copy of the opinion is at the link below, or email Lori McKown (lmckown@pregodonnell.com) or Mark (modonnell@pregodonnell.com) to request a copy. Also, should you wish to discuss the issues or implications of this case, please feel free to call Mark, Lori, or our partner Bennett Hansen at (206) 287-1775. We will continue to update you on cases of significance. As always, we thank you for your continued support of Preg O’Donnell & Gillett. Published Opinion |