Supreme Court Addressees indemnification Issue of First Impression

Construction contracts typically contain indemnification clauses which shift the financial burdens and risks between and among various parties.  Although these clauses are common, their precise meaning and effect can still raise novel legal issues.  Recently, Justice Carolyn Demarest of the Commercial Division in the Brooklyn Supreme Court rendered a decision grappling with certain issues of first impression in Board of Managers of the 125 North 10th Condo v. 125 North 10, LLC (Supreme Court Kings County Index Number 14982/2012).

Plaintiff Board of Managers brought the underlying action against the sponsors of the condominium in question.  The sponsors, in turn, brought third party claims against their construction manager, Ryder Construction, Inc.  Ryder then brought claims for contractual and common law indemnification, and declaratory relief, against fifteen subcontractors who had worked on the project.  These fifteen subcontractors moved to dismiss Ryder’s claim against them and the sponsors claim against Ryder, among other things.

Justice Demarest, in a decision dated January 26, 2016, dismissed Ryder’s claims for declaratory relief, holding that it was essentially duplicative of the claim for contractual indemnification.

The Court also dismissed the contractual indemnification claim against one of the subcontractors because its contract with Ryder did not contain an indemnification provision.  While the subcontractor had named Ryder as an “additional insured” on its insurance policy, this was not enough to establish contractual indemnification.

The other subcontractors had contracts based upon the American Institute of Architects (“AIA”) form of subcontract.  This contract form, which is designated as Document A401 by the AIA, is standard in the construction industry.

Pursuant to Section 4.6.1 of this subcontract, the subcontractor was required to indemnify and hold harmless the owner and others for claims attributable to bodily injury or damage to tangible property “other than the Work itself.” The subcontract also contained a provision in the “Insurance and Bonds” section of the agreement (Section 13.1), which more broadly required the subcontractor to defend, indemnify and hold harmless certain parties for personal injury and property damage claims, without excluding property damage claims to “the Work itself.”

Citing the above contract provisions, the subcontractors sought dismissal of the contractual indemnity claims. They argued that Section 4.6.1 did not support Ryder’s claim because it specifically excluded damages to “the Work itself” and only applied to third party property claims. The subcontractors argued that Section 13.1 was limited to claims covered by the standard CGL policy, which does not provide coverage for economic loss claims based upon faulty workmanship. Ryder argued, in response, that the indemnity claims were not limited to third party property damage claims or available insurance.

Judge Demarest quickly dispatched Ryder’s arguments that Section 4.6.1 supported their claim. Because the underlying claim challenged the propriety of Ryder’s “Work itself,” Section 4.6.1 could not support a claim for contractual indemnification.

According to the Court’s analysis, the arguments regarding Section 13.1 presented a closer question because there was no carve out for “the Work itself” and it was part of the Insurance article in the agreement. Further, according to the subcontractors, the contract should be read so as to avoid imposing a duty on a party that the party did not intend to assume. Because Section 4.6.1 clearly excluded damage to “the Work itself” from the indemnity obligation, the subcontractors argued that an indemnity for damage to the “Work itself” should not be imposed by virtue of Section 13.1.

The Court noted that neither Ryder nor the subcontractors cited a single judicial decision discussing whether the second indemnity provision applied to claims relating to damage to “the Work itself.” In deciding this case of first impression, the Court noted the apparent conflict between the first and second indemnity provisions, and reconciled them by reading the two clauses in context. Because the second indemnity clause was in the insurance provision of the contract, it did not expand the subcontractor’s indemnity obligation to include damage to “the Work itself.” It was merely intended to track the subcontractor’s obligations consistent with its GCL insurance policy. Thus, based on this reasoning, the Court granted the subcontractor’s motion to dismiss Ryder’s contractual indemnification claim for damage to “the Work itself.”

The subcontractors also moved to dismiss Ryder’s common law indemnification claim. Here, however, Ryder was more successful. Based upon the subcontractors’ alleged assumption of full responsibility for the work each performed, Ryder’s claims survived the motion based upon disputed issues of fact.

Finally, the subcontractors took the unusual procedural step of moving to dismiss the Sponsor’s claims against Ryder. The subcontractors had standing to do so pursuant to CPLR 1008. The Court found, however, that questions of fact precluded these claims for relief.

In sum, even though indemnification clauses are common in construction contracts, novel and complicated issues can still arise. Because attorneys often like a “belt and suspenders” approach to contracts, multiple indemnification clauses often are included in a single contract. This case highlights, among other things, that it is always important to coordinate those provisions, so they fairly and accurately reflect the intent of the parties.