Implied Contractual Indemnification Claim Sustained

Parties to contracts and courts continue to grapple with the distinctions between and among contribution, contractual indemnification and common law indemnification in a commercial/construction setting. A good example is the recent case of Matzinger v. MAC II (S.D.N.Y. 17 Civ. 4813, July 17, 2018).

Plaintiffs, the Matzingers, were the owners of a residential apartment in New York City. They retained Defendant MAC II, an interior design firm, to manage and oversee the renovation of their apartment. MAC II did not perform any actual construction work. Instead, through a series of purchase orders, it hired Fanuka to act as the general contractor. MAC II also hired TecDsign to install various audio-visual equipment. After the Matzingers moved into their apartment, they discovered various construction defects and incomplete work.

Accordingly, in 2017, the Matzingers sued MAC II, Fanuka and TecDsign for breaches of contract and related claims. Fanuka and TecDsign successfully moved to have the contract claims dismissed because they had no privity with Matzinger. After other claims were dismissed, The Matzingers’ only remaining claim was breach of contract against MAC II.

MAC II commenced a third party action against Fanuka and TecDsign for contribution, common law indemnification, and contractual indemnification. Fanuka and TecDsign moved to dismiss.

The court initially summarized the law of common law indemnification. Generally, a party cannot obtain this relief unless it has been held vicariously liable without any negligence on its part or by operation of law. Thus, a party who has itself breached a contract cannot successfully assert a claim for common law indemnification. In this case, MAC II’s potential liability was based on its own breach of contract with the Matzingers. Accordingly, the court dismissed the common law indemnification claim.

The court also dismissed the claim for contribution. The rule in New York has long been that a party cannot claim contribution when, as here, potential liability is solely based on a contract claim. Board of Education of Hudson City School District v. Sargent, Webster, Crenshaw and Folley, 71 N.Y.2d 21, 523 N.Y.S.2d 475 (1987).

Only MAC II’s claim for indemnification survived Fanuka’s and TecDsign’s motion to dismiss. Although there was no indemnification clause in MAC II’s contract with either of them, the court here found that MAC II could properly assert implied contractual indemnification. New York courts have recognized that a special relationship exists between general contractors and subcontractors, and therefore a general contractor can recover from a subcontractor any damages the contractor suffered as a result of the subcontractor’s breaches of contract. The court cited two New York cases for this proposition — People’s Democratic Republic of Yemen  v Goodpasture, 782 F.2d 346, 351 (2d Cir. 1986) and Menorah Nursing Home, Inc. v Zukov, 153 A.D. 2d 13, 24, 584 N.Y.S.2d 702 (2d Dept. 1989). Here, even  though Fanuka was retained as the general contractor, not as a typical subcontractor, MAC II’s implied contractual indemnification cause of action was permitted because of the division of responsibilities between MAC II and Fanuka. The court similarly found that the principal applied to TecDsgin because it was effectively a subcontractor. Thus, MAC II’s implied contractual indemnification claim could go forward.

The Matzinger case summarizes the distinctions between contribution, common law indemnification and contractual indemnification. It also highlights that even if there is no express indemnification clause in a written agreement, a contractor is not precluded from asserting a claim against its subcontractor based on contractual indemnification.  As a matter of policy, courts generally seek to hold liable the party who actually causes the damages in question. Implied contractual indemnification achieves that result.