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A general contractor’s expensive lesson on indemnification


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Murray

By Laura Murray

Background
The owners of a condominium development alleged the condos had numerous defects and filed a lawsuit against the original owner and developer of the condo project.  In turn, the developer filed a third-party complaint against the general contractor, along with other parties involved in the construction of the condo project, including the architect and structural engineer.  The complaint against the general contractor was dismissed due to an arbitration clause in the contract, so the parties proceeded with arbitration.  The general contractor was concerned about the possibility of being found liable in the arbitration for the architect and the structural engineer’s malpractice, so it filed a lawsuit against them alleging, among other things, common law indemnification.  The trial court dismissed the general contractor’s complaint finding that the arbitration demand sought damages solely for the general contractor’s alleged actions, which were distinct from the damages which resulted from the alleged actions of the architect and the structural engineer.   The general contractor appealed.

Indemnification
Indemnification is a common law claim that is derived from equity, the purpose of which is to prevent an innocent party from being liable for the wrongful acts of another.  Therefore, if a party is being held vicariously liable, indemnification can make that party whole.  As a result, indemnity is often only available to parties that can demonstrate that they are not at all at fault.  Normally, in order to prevail on a claim for common law indemnification, the party seeking indemnity must show that it has been held liable for the acts of another and it is free from fault in the underlying wrongful act.  

The appeals court relied upon affidavits and sworn statements that the arbitral demand sought only damages for the general contractor’s wrongdoing, which is independent from the actions of the architect and the structural engineer.  After the general contractor filed the appeal, a relatively small arbitral award was entered against the general contractor, which the appellate court opined also supported the fact that the arbitrator determined damages based solely on the general contractor’s negligence.  Therefore, as the arbitration claims against the general contractor were only derived from the general contractor’s own negligence, the claim for indemnification against the architect and the structural engineer was improper, and the appellate court affirmed the lower court’s finding.

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