First Department Upholds Contractual Indemnification Claim

The First Department has reversed a trial court ruling dismissing a third-party action where an architect claimed that a contractual indemnification clause in its agreement with the sponsor of a condominium development was of no consequence.

In Board of Managers of Hester Gardens v. Well-Come Holdings, LLC, 128 A.D.3d 601, 10 N.Y.S.3d 72 (1st Dep’t 2015), the First Department considered a lower court dismissal of a third-party complaint brought by the sponsor of a condominium development (the “Sponsor”) against, among others, the architect retained by the Sponsor to design the development and inspect the on-going construction (the “Architect”). The Sponsor had already been sued by the Board of Managers of the development (the “Board”) for numerous alleged defects in the design and construction of the development. As is typically the case, many of the claims of the Board sounded in negligence and fraud due to the alleged failure of the development to conform to the statements and plans published in the offering documents and other advertising materials. The Architect was also sued by the Board, but successfully obtained dismissal of the claims against it because there was no contract between itself and the Board (or any of the individual unit owners).

After the Architect was dismissed from the main action for lack of privity, the Sponsor brought a third-party action against the Architect (and others) alleging that, under the relevant contract, the Architect was liable to indemnify the Sponsor for the Architect’s own “intentional acts, errors and omissions” and breaches of the contract. The Architect moved, pre-answer, to dismiss the third-party complaint, alleging, among other things that, due to the nature of the primary claims against the Sponsor, i.e, negligence and fraud, the third-party action actually sought indemnification from the Architect for the Sponsor’s own bad acts.

In its opinion, the First Department reversed the lower court, holding that the Sponsor was entitled to pursue claims against the Architect in the third-party action to the extent that those claims arose out of the Architect’s own “negligent design and/or inspection of work.”

In this case, the Architect had a duty under its own contract with the Sponsor to design the development and then inspect the on-going construction and inform the Sponsor if it was being built pursuant to the plans and drawings previously created by the Architect. The Sponsor neither designed, nor actually constructed, the development. Rather, as is typical in the industry, the Sponsor engaged experts to design and build the project.

Notwithstanding that, the Architect argued, and the lower court agreed, that the Court should look only to the types of claims brought by the Board against the Sponsor in the main action, and not what the Architect did (or did not do), to determine whether the indemnification claim could stand. Under that theory, the mere fact that the allegations against the Sponsor were in the nature of fraud and negligence were sufficient to establish that Sponsor was allegedly seeking full indemnification against its own actions. Inasmuch as agreements to fully indemnify persons against their own negligence are generally unenforceable in New York (McKinney’s General Obligations Law, § 5-322.1), the Sponsor’s indemnification claim against the Architect was required (according to the lower court) to be dismissed.

As the First Department recognized, however, if the Development did not correspond to the drawings and statements made in the relevant Offering Plan, the Sponsor could seek indemnification from the Architect to the extent that the Sponsor’s own damages were caused by the Architect’s ”negligent design and/or inspection of work.” It did not matter how the claims against the Sponsor were denominated. (Indeed, in this case the Board had also brought fraud and negligence claims directly against the Architect, clearly indicated that it believed that the Architect bore some fault for the state of the development.) Rather, the true inquiry was whether or not the Sponsor could properly claim that the Architect had acted negligently in designing or inspecting the work at the development. If so, then the indemnification claim could be maintained inasmuch as it sought partial indemnification solely as to the Architect’s own negligence. Brooks v Judlau Contr., Inc., 11 N.Y.3d 204, 210, 869 N.Y.S.2d 366, 369 (2008).

Absent the instant decision by the First Department, indemnification claims by sponsors/developers against their professionals and service providers would largely have been unsustainable due to the nature of fraud and negligence claims typically brought against them by unhappy buyers. The First Department’s decision puts the focus of the inquiry back where it belongs: on the nature of the claims that the indemnified party may properly bring against the indemnifying party, and not solely on the claims asserted against the indemnified party.