Subcontractor Liable For Defense Costs Under Indemnity Agreement Even Though Subcontractor Ultimately Found Not Negligent
A recent California Court of Appeal decision demonstrated the importance of careful drafting for indemnity provisions in construction contracts. In UDC-Universal Development, L.P. v. CH2M Hill, a condominium developer (UDC) and and engineering firm (CH2M) were parties to a contract pursuant to which CH2M provided engineering and environmental planning services. The contract contained an indemnity clause in which CH2M agreed to indemnify UDC from any claim arising from CH2M’s negligence. The contract also required CH2M to defend UDC in any lawsuit raising a claim covered by the indemnity clause. When UDC was sued by the condominium homeowners, it tendered its defense to CH2M and ultimately sued CH2M for not accepting UDC’s tender.
CH2M argued that it was not obligated to defend UDC because the homeowners did not specifically allege that CH2M negligently performed its work and the jury did not find that CH2M was negligent. However, the Court of Appeal rejected this argument, finding that the allegations of the homeowners implicated work within CH2M’s scope of work and that CH2M’s defense obligation arose when the homeowners alleged harm resulting from that work.
One important purpose of many contracts is the allocation of risks associated with the transaction. As the UDC-Universal case demonstrates, it is important for a party to a contract to ensure that the terms of the contract accurately reflect the intended allocation of risk.