Construction Channel Cases of the Month

Cases of the Month

Significant Cases and Decisions Affecting the Construction Industry

By: David Wonderlick and Holly Hinterberger

January 2011

1. Broadly Worded Indemnity Clauses May Be Invalid. Uniwest Constr., Inc. v. Amtech Elevator Servs., 280 Va. 428, 699 S.E.2d 223 (2010).

* What the Court Considered: One employee of a subcontractor died and another was injured seriously in a scaffolding collapse during the elevator installation of a commercial renovation project. The injured employee and the estate of the deceased employee sued, among others the general contractor. The general contractor sought indemnification from the subcontractor pursuant to the terms of the subcontract. The subcontractor argued that the indemnification provision violated Virginia’s “anti-indemnity” statute, Va. Code Ann. § 11-4.1, by making the subcontractor responsible for at least portions of the general contractor’s own negligence. The general contractor maintained the anti-indemnity statute only invalidated provisions relieving the indemnitee of its sole negligence.

* What the Court Said: “Because the phrases ‘caused by’ and ‘resulting from’ are disjunctive in the [anti-indemnity] statute, it voids any indemnification provision that reaches damage caused by the negligence of the indemnitee, even if the damage does not result solely from the negligence of the indemnitee.” The Court went on to hold, however, that the indemnification provision of the prime contract – which was incorporated by reference into the subcontract, and which did not require indemnification for the general contractor’s negligence – remained applicable and required the subcontractor to indemnify the general contractor for that proportion of the losses for which the subcontractor was at fault.

* What the Opinion Means: In Virginia, many commonly used indemnification provisions in form contracts and subcontracts may be wholly invalidated if they reach too broadly.

2. Subcontractor Could Assert Waiver of Subrogation Only Where General Contractor Was Required to Maintain Insurance Policy. Haren & Laughlin Constr. Co. v. Jayhawk Fire Sprinkler Co., Inc., 330 S.W.3d 596 (Mo. Ct. App. 2011).

* What the Court Considered: Owner retained a general contractor to build a senior care facility. The general contractor hired a subcontractor to install the sprinkler system. The owner and general entered into a general contract wherein the general contractor agreed to indemnify the owner against all losses arising out of the general contractor’s work, except for any loss covered by the owner’s insurance. The subcontract incorporated the general contract by reference. The owner asserted claims for defects to the sprinkler system. The general contractor’s insurer covered the loss and then the general contractor sought to recover from the subcontractor.

* What the Court Said: In construing the subcontract, the court determined that although the subcontract incorporated the general contract, the incorporated terms are limited based upon their specified purpose. As a third-party beneficiary to the general contract, the subcontractor could enforce the provision stating that a duty to indemnify arises only for claims not paid by a party’s insurance. However, neither contract required the general contractor to hold insurance after completion of the project. The project was complete at the time of the leak so the general contractor was not required to be insured. This was based upon the specific language of the general contract, which only waived insured claims if the party was required to hold insurance.

* What the Opinion Means: In drafting contracts, a general contractor must be aware of the rights and liabilities it is agreeing to with respect to all parties. Where incorporating the general contract, a contractor is at risk for unintentionally waiving rights as to its subcontractors.

3. Assignee of Indemnitee Has Equal Rights to Recovery Under Indemnification Agreement. Searles Valley Minerals Operations, Inc. v. Ralph M. Parsons Serv. Co., 191 Cal. App. 4th 1394, 120 Cal. Rptr. 3d 487 (2011).

* What the Court Considered: An employee of a soda ash processing plant died and his estate sued multiple parties, collecting judgment. Searles, the plant owner who incurred liability, sued for indemnity under an indemnity agreement between Kerr-McGee Chemical Corporation (“Kerr-McGee”) and Ralph M. Parsons Service Company (“Parsons”), which Searles was an assignee to. Under that agreement, Kerr-McGee was entitled to indemnity and defense for claims arising out of Parsons’ actions. Kerr-McGee initially tendered the loss to Parsons, who denied the tender. Searles initially paid Kerr-McGee’s defenses and then sought recovery from Parsons under the indemnity agreement.

* What the Court Said: Kerr-McGee did not actually incur any loss because Searles paid the defense, thus the Court was left to determine whether the indemnity agreement applied. The Court held that Kerr-McGee was entitled to its defense costs under the agreement. The Court agreed that Kerr-McGee was not entitled to recover fees that it did not actually incur. However, Searles was a proper assignee and therefore “‘[stood] in the shoes’ of the assignor.” So standing in Kerr-McGee’s shoes, Searles could assert the right to a defense and indemnity as an assignee.

* What the Opinion Means: Rights of assignment apply with equal force to indemnity agreements. An obligated party cannot escape its duty to indemnify even when denying a tender and where the indemnitee does not actually incur a loss.

4. Actual or Constructive Notice Will Not Substitute for Statutorily Required Written Notice on Virginia DOT Projects. Commonwealth v. AMEC Civil, LLC, 280 Va. 396, 699 S.E.2d 499 (2010).

* What the Court Considered: A general contractor on a $72.5 million project to construct a bypass highway and a bridge across a reservoir brought nearly $25 million in claims related to difficulties in constructing the bridge foundations and problems associated with sustained, elevated water levels in the reservoir. The owner, VDOT, argued that the contractor failed to give written notice of its claims as required by statute, Va. Code Ann. § 33.1-386. The contractor argued that VDOT had received actual notice of these claims through meeting minutes and other communications during the course of the project.

* What the Court Said: “Code § 33.1-386(A) is to be strictly construed, and is clear and unambiguous, stating that contractors ‘shall’ provide ‘written notice’ to VDOT. We hold that actual notice cannot satisfy the written notice requirement in Code § 33.1-386(A), and that written notice is required.”

* What the Opinion Means: On VDOT projects, a general contractor must provide timely and formal written notice of all claims, and cannot rely on exceptions typically applied in other jurisdictions that allow contractors to pursue claims where an owner has actual or constructive notice.

5. Member of Limited Liability Company May Incur Liability Under “Alter-Ego” or “Principal and Agent” Theories. The Weitz Co. v. MH Washington, 631 F.3d 510 (8th Cir. 2011).

* What the Court Considered: The Weitz Company served as general contractor on a townhome project pursuant to an AIA prime contract with owner MH Washington, LLC (“the LLC”). MH Washington was made up of MacKenzie House, LLC (the developer) and one other entity. MacKenzie House was the managing member of the LLC. Weitz subcontracted most of the work, but the owner had final say in the hiring of all subcontractors. Many subcontractors submitted a bids that Weitz believed were too low, however, the LLC insisted Weitz hire those low bidders to perform the work. Construction was delayed, which Weitz attributed to the low cost subcontractors the LLC insisted Weitz retain. The LLC alleged that Weitz mismanaged the project, causing the delays. The LLC delayed payment and subcontractors filed liens. The project was largely complete, except for punchlist items, which Weitz refused to do due to lack of payment.

Weitz sued MH Washington and MacKenzie House. Both entities filed a counterclaim against Weitz. All parties alleged breach of contract. Weitz then brought third-party claims against several subcontractors for breach of contract, indemnity, and contribution. The jury returned verdicts largely in Weitz’s favor and held that MacKenzie House and the LLC were jointly and severally liable.

* What the Court Said: On appeal, MacKenzie House sought reversal, arguing that it was not a party to the contract, and even though it was a member of the LLC, it should not have been held jointly and severally liable with the LLC. In determining whether MacKenzie House could be liable for the LLC’s actions, the Court looked to whether MacKenzie House so dominated and controlled the LLC such that the LLC was merely an alter ego of the parent company. Control alone is insufficient to pierce the corporate veil. Rather the control must be used in an improper manner. The Court determined that the control element was met, however, the record was insufficient to determine that the control was improper. Instead, the Court did concluded that an agency relationship existed between the entities, thereby allowing MacKenzie House to be jointly and severally liable with the LLC.

* What the Opinion Means: The formation of a separate entity does not necessarily protect a company from liability where the forming entity so controls and dominates that the new entity has “no mind of its own.” The control must be “actual, participatory and total.”

David Wonderlick is an associate in Watt, Tieder, Hoffar & Fitzgerald, L.L.P.’s McLean, Virginia office. Holly Hinterberger is an associate in Watt, Tieder, Hoffar & Fitzgerald, L.L.P.’s Seattle, Washington office. For more information, or if you have any questions, contact us at hlk@constructionchannel.net.