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Construction PracticesNEWSLETTERSUMMER 2007[ Highlighting notable court decisions and trends ]Indemnitees Need Not TenderDefense to Recover Attorney’sFees Under Indemnity AgreementCity of Watsonville v. Corrigan ((2007)149 Cal.App.4th 1542) addresseswhether an indemnitee is required totender its defense to the indemnitorbefore it is entitled to recover defensecosts. The court ultimately holds thatno tender is required.The assumption that an indemniteemust tender its defense to the indemnitoras a prerequisite to the recoveryof attorney’s fees and costs is basedprimarily on Calif. Civ. Code § 2778,which sets forth rules that guide theconstruction of indemnity contracts and“are as much a part (of an indemnityagreement) as those set out therein,unless a contrary intention appears.”(Gribaldo, Jacobs, Jones & Ass.’s v.Agrippina Versicherunges A.G. (1970)3 Cal.3d 434, 442.) In relevant part, §2778 provides that:[3] [I]ndemnity … embraces thecosts of defense …;[4] The person indemnifying isbound, on request of the personindemnified, to defend actions orproceedings brought against thelatter in respect to the mattersembraced by the indemnity, butthe person indemnified has theright to conduct such defenses, ifhe chooses to do so;[5] If, after request, the person indemnifyingneglects to defend theperson indemnified, a recoveryagainst the latter … is conclusivein his favor against the former;[6] If the person indemnifying… is not allowed to control (theperson indemnified’s) defense,judgment against the latter isonly presumptive evidenceagainst the former …Based upon these provisions, and inparticular upon subsection 4, the Corriganindemnitors argued that wherean indemnitee chooses to defendan action without first tendering itsdefense, it effectively waives theright to recover from the indemnitorits attorney’s fees and costs incurredthereby. Indemnitors supplementedtheir argument by analogy to insurancelaw, in which no duty to defendarises until tender of defense.After discussing the inherent differencebetween the duties of an insurerand a typical (non-insurer) indemnitor,Corrigan concludes that principlesapplied in interpreting indemnityagreements within insurance policiesare not applicable to interpretation ofnon-insurance indemnity agreements,because insurers are routinely heldto stricter standards than parties tonon-insurance contracts. Accordingly,insurance law principles do not informinterpretation of non-insurance indemnityagreements.Thus, the indemnity agreement itself,supplemented only by the provisions of§ 2778, govern interpretation of indemnityagreements. The Corrigan courtstated: “Nothing in (§ 2778) obligatesthe indemnitee to tender defense tothe indemnitor; and the election to conductits own defense (for any reason)does not supplant the interpretativerule in subdivision [3] that indemnification‘embraces’ the costs of theindemnitee’s defense.” The languageof the indemnity agreement does notspecifically require the indemniteeto tender its defense – or otherwiseobtain the indemnitor’s permission toincur fees and costs, as in Gribaldo (3Cal.3d at p. 434) – as a prerequisite torecovery, an indemnitee may chooseto conduct its own defense and stillrecover attorney’s fees and costs forIn This Edition1 Indemnitees Need Not TenderDefense to Recover Attorney’sFees Under Indemnity Agreement2 Draft Clause Carefully to AvoidRecovery of Attorney’s Fees inTort2 Killer Bonds Forms and ContractProvisions—A Series3 Liability for Nothing: TheControlling Employer Doctrinematters within the ambit of the indemnityagreement.An important exception in which defensefees and costs may not be recoverableis where a defense is offered bythe indemnitor. To be recoverable, attorney’sfees and costs must be “reasonable”;an indemnitee’s “unreasonable”refusal to accept the indemnitor’s offerof defense precludes recovery of duplicativeattorney’s fees. (See Buchalterv. Levin (1967) 525 Cal.App.2d 367,371.) Additionally, although tender is notrequired, it is advisable for an indemniteeto provide notice to the indemnitor ofthe claim(s) embraced by the indemnityagreement, as failure to provide noticeto the indemnitor changes the burden ofproof and imposes upon the indemniteethe necessity of again litigating and establishingall the actionable facts. (Evav. Andersen (1913) 166 C 420, 425.)Submitted by Jennifer Lucasjennifer.lucas@sdma.comATTORNEY ADVERTISINGcontinued


[ ] Summer 2007 Construction Sedgwick, Detert, Moran & Arnold LLPDraft Clause Carefully toAvoid Recovery of Attorney’sFees in Tortparty.” Although unilateral fees clauseswill be treated as reciprocal in contract,reciprocity will not apply in tort.applies only to actions to “enforce thecontract” for “breach of contract” or“default” under the contract.A defendant who is bound by a contractualattorney’s fees provision oftentimesfaces a considerable risk that he orshe may get left “picking up the tab”for plaintiff’s attorney’s fees, even if theplaintiff recovers only a nominal sum attrial. That defendant may have minimalexposure and what appears to be apalpable chance to settle the lawsuitwithout the expense of trial. Many of ushave been faced with a scenario whereplaintiff’s attorney’s fees potentiallyexceed the value of the claim and theplaintiff has incentive to “roll the dice,”with the hope of recovering his or herattorney’s fees, rather than negotiating areasonable settlement. When the claimsagainst the defendant are not limited tocontract but include breach of commonlaw duties, the outcome may be ladenwith uncertainty because the standardsgoverning liability in tort are not alwaysclearly defined. The careful drafting ofattorney’s fees clauses to avoid fee recoveryon the tort causes of action canhelp eliminate added risk and level theplaying field for settlement.Two “rules of thumb” apply to circumventthe fee recovery:1. Keep the subject matter of theattorney’s fees clause narrowly tailoredto the contract. Clauses that providefor the recovery of attorney’s fees inan action to “enforce the contract” orin the event of “breach of” or “defaultunder” the contract will be narrowlyconstrued to avoid recovery. Avoidphrases such as “arising out of” or“related to” the agreement, which willbroaden the fee clause and make itapplicable to noncontract claims.2. Draft the attorney’s fees clause sothat it is unilateral in your client’s favor,rather than in favor of the “prevailingLimit the Focus of the Clause toContract ClaimsCalif. Civ. Code § 1717 governs theaward of contractual attorney’s fees andcosts to the party who prevails in “anyaction on a contract.” The court in Hsuv. Abbara ((1995) 9 Cal.4th 863, 873-874) noted that § 1717 was amendedin 1987 to replace the term “prevailingparty” with the term “party prevailingon the contract,” to emphasize that aparty’s success on a noncontract claimwas irrelevant to the determination ofthe prevailing party.With § 1717 as a reference point, thedrafter may avoid having the attorney’sfees clause spill over to the tort causesof action if it is drafted narrowly toapply only to the contract claims. Forexample, in 1979, the court in ReynoldsMetals Co. v. Alpherson, 25 Cal.3d 124,129, held that a clause in a promissorynote that provided for the recovery ofattorney’s fees in the event of a “default”would apply to the claims on the promissorynote but not the tort claims.In contrast, more recent courts haveconcluded that broadly worded feeclauses that provide for recovery by theprevailing party in any action “arisingout of” or “related to” the contract permitan award of attorneys’ fees in tort under§ 1021 of the California Code of CivilProcedure. (See Xuereb v. Marcus &Draft attorney’s fees clauses so that it is unilateral in your or yourclient’s favor. Although the unilateral fee clauses will be treated asreciprocal in contract, reciprocity will not apply in tort.Millichap, Inc. (1992) 3 Cal.App.4th1338, 1341-1343; Palmer v. Shawback(1993) 17 Cal.App.4th 296; Lerner v.Ward (1993) 13 Cal.App.4th 155 andWilshire Blvd. Bldg. v. W.R. Grace &Co. 990 F.2d 487 (9th Cir. 1993).)Take advantage of the limitationsafforded by § 1717 and draft the attorney’sfee clause to clearly state that itGive Your Client a UnilateralRight to Attorney’s FeesAlthough § 1717 operates to transforma unilateral attorney’s fees clause into“reciprocal” right on contract claims,unilateral fee clauses still retain utilityin tort. Moallem v. Coldwell BankerCommercial Group (1994) 25 Cal.App.4th 1827, confirms that the “reciprocity”afforded by § 1717 applies incontract only, and it breathes life intounilateral fee clauses. Plaintiff Moallemwas the assignee of an owner who hadentered into a brokerage agreementwith Coldwell Banker. Coldwell successfullydefended against plaintiff’sbreach of contract claim arising out ofthe owner’s forfeiture of a warehouseproperty. But Coldwell had sublet theproperty in violation of the owner’slease. The trial court entered judgmentagainst Coldwell in plaintiff’s favor onhis negligence and breach of fiduciaryduty causes of action.The brokerage agreement betweenColdwell and the owner containeda unilateral attorney’s fees clausein Coldwell’s favor that provided: “Ifbroker is required to institute legalaction against owner relating to thisschedule or any agreement of whichit is a part, broker shall be entitled toreasonable attorneys’ fees and costs.”Both parties moved for attorneys’fees under Civ. Code § 1717. Thetrial court determined that there wasno “prevailing party on the contract”and denied both parties’ requests forattorney’s fees. Coldwell appealed.On appeal, the court acknowledgedMoallem’s position that the term “relatingto” in the fee clause was broad enoughto include his tort causes of action underXuereb, supra, and its progeny. However,because the fee clause was unilateraland named Coldwell as the recipient,rather than the “prevailing party,” thecourt held that only Coldwell was entitledto recover attorneys’ fees, as no reciprocalright was afforded to plaintiff onthe tort causes of action. The outcome


Sedgwick, Detert, Moran & Arnold LLP Construction Summer 2007 [ ]would have been different had Coldwellnot been unilaterally designated as theparty to recover attorney’s fees.Whenever your client has the opportunityto leverage a unilateral fee clause, itcan provide added protection against anopponent’s ability to recover attorney’sfees in tort.Submitted by Maria Giardinamaria.giardina@sdma.comKiller Bond Forms and ContractProvisions—A SeriesRecently, property owners and generalcontractors are rewriting the performancebond forms and contract provisionsthat they are requiring from theircontractors and subcontractors. Thesurety industry considers many of theserewrites onerous and, in some cases, alterthe standard legal responsibilities ofthe construction and surety industry. Forexample, there is a concern that the rewritescould eliminate the fact that suretyis a form of guaranty. Guaranty meansthat the bonding company should haveno liability unless the bonded contractorhas liability. There is also a concern thatthe higher tier of the contractual relationship,i.e., the owner versus the generalcontractor or the general contractorversus the subcontractor, is attemptingto place increasingly more responsibilityupon the lower-tier entity.This feature will be an ongoing seriesin Sedgwick’s Construction PracticesNewsletter setting forth examples ofnew bond and contract provisions andproviding commentary as to their meaningand impact.Bonding Company Declaration re:Bonding Capacity During BiddingProcessSample Provision:Provide the following declarationon bonding company’s stationeryand include in the submittal toowner:The undersigned declares underpenalty of perjury that contractor isable to provide 100% payment andperformance bonds. This declarationis made with the acknowledgementthat future work and commitmentsmay impact the bondingcapacity of contractor.It is unclear why a governmental entityis requiring the above statement fromthe bonding company that provides abid bond on behalf of a bidder. Indemnityagreements between the bondingcompany and the contractor typicallyprovide that the bonding company isnot bound to provide the final bonds(payment and performance) when itprovides the bid bond and that it canrefuse to provide any bonds, includingthe final bonds, for any reason or noreason at all. Arguably, this clause doesnot alter that state of affairs because itsimply says that the contractor is “able”to provide payment and performancebonds. It further says that that “bondingcapacity” could change as a result offuture work and commitments.Whether this statement could have thefurther effect of somehow binding thebonding company to issue the finalbonds if the owner awards the projectto the contractor is another question.Presumably, if the owner can make acase that the bonding company issuedthe bid bond with no intention of issuingthe final bonds, at a minimum, theowner would have some kind of claimagainst the bonding company.To Be Continued….Submitted by Marilyn Klingermarilyn.klinger@sdma.comLiability for Nothing: TheControlling Employer DoctrineIn a disappointing decision for primecontractors, the California Court ofAppeals upheld an administrative decisionthat found that a prime contractorwas liable for its subcontractor’sCal/OSHA violations on a multi-employerconstruction site. Moreover, theappellate court affirmed that the primecontractor was liable even withoutagency proof that the prime contractorhad failed to exercise reasonablediligence to discover and prevent itssubcontractor’s violation.In Overaa Construction v. CaliforniaOccupational Safety and Health AppealsBoard (Department of IndustrialRelations, Division of OccupationalSafety and Health, Real Party in Interest)(2007) 147 Cal.App.4th 235, theCalifornia Court of Appeal affirmed thetrial court’s judgment, which deniedprime contractor Overaa Construction’spetition for writ of administrativemandamus to overturn the Division’sAppeals Board. The Division penalizedOveraa as a “controlling employer”Recent changes in performance bond forms and contractprovisions may alter the standard legal responsibilities of theconstruction and surety industry.under Cal. Lab. Code § 6400, et. seq.,and Cal. Code Regs. tit. 8, § 336.10,et. seq., for violation of a Cal/OSHAsafety regulation.This Cal/OSHA penalty arose froma public works contract that Overaaentered into with the Dublin San RamonServices District. The contract requiredconstruction of improvements to awastewater treatment plant. Overaa subcontractedthe electrical work to Cra-Tek.Overaa’s contract with the Districtprovided that Overaa was responsiblefor all work safety at the site, includingsubcontractors’ work, which includedshoring for excavations. Moreover, theprime contract deemed all of Overaasubcontractors’ employees to be Overaa’semployees. Overaa designated itssuperintendent under the Cal/OSHAregulations to supervise work safety.After an inspection in 2001, a Divisioninspector issued a “citation andnotification of penalty” to Overaa only,alleging a “serious” violation of regulationdesigned to prevent excavationsfrom collapsing. He added that Overaaknew of the unprotected excavation formore than a week and took no action.continued


[ ] Summer 2007 Construction Sedgwick, Detert, Moran & Arnold LLPWhen the inspection occurred, only asubcontractor Cra-Tek employee wasworking in the trench.Generally, under the Cal. Lab. Code§ 6432, Cal/OSHA violations areclassified as “serious” or “general.” A“serious” violation is defined as involvinga substantial probability that deathor serious physical harm could resultfrom the violation if an accident occurred.However, the statute expresslydeems that a “serious” violation doesnot exist if the employer can demonstratethat it did not, and could not withthe exercise of reasonable diligence,know of the presence of the violation.At the Agency hearing, despite theincentive and opportunity to do so,Overaa did not assert its reasonablediligence as an affirmative defense to“serious” violation, but only that therewas no violation and that the “serious”classification was incorrect.The Division cited Overaa as a “controllingemployer.” Generally, underCal/OSHA regulations, an employer ofthose employees who were exposed tothe hazard is an “exposing employer.”An employer who actually createdthe hazard is a “creating employer.”The employer who is responsible, bycontract or by actual practice, for safetyand health conditions on the worksite,who had the authority to ensure thatthe hazardous condition was corrected,is a “controlling employer.” An employerthat had the responsibility to actuallycorrect the hazard is a “correcting employer.”Ultimately, before the Agencyappeals board, the administrative lawjudge found Overaa in violation as a“controlling employer,” but reduced thecitation from “serious” to “general.”The Court of Appeals upheld Cal/OSHA regulations creating liabilityupon a “controlling employer” on multiemployerworksites, and it rejectedthe requirement that the agency mustprove a lack of employer diligenceas a condition to liability. However,also critically, this case did not decidewhether multiple employers may becited for the same violation. Thus,whether a “controlling employer” mayclaim such a “duplication” defense isstill uncertain and left to determinationin future cases.Submitted by Ron Pierceronald.pierce@sdma.comStephen A. Schram, editor of this newsletter,concentrates his practice in design,construction, and class actions involvingconstruction products and toxic tort (allegedexposure to fungal spores) in NorthernCalifornia. Mr. Schram’s practice includesall aspects of private or public construction,such as bids, bid challenges, contracts, constructiondispute resolution, and constructionlitigation, as well as evaluating claimsagainst design professionals and defendingagainst such claims in litigation.Mr. Schram owns and is restoring a 100year old house in San Francisco, oneinterior room per year and a major systemupgrade every few years. It’s a long project!For more information about Sedgwick’sConstruction Practices Group or thispublication, please contact:San FranciscoStephen Schram, Partner/Editorstephen.schram@sdma.comPaul Lahaderne, Partnerpaul.lahaderne@sdma.comJames Diwik, Partnerjames.diwik@sdma.comtel: 415.781.7900Los AngelesMarilyn Klinger, Partnermarilyn.klinger@sdma.comtel: 213.426.6900Orange CountyJonathan Dunn, Partnerjonathan.dunn@sdma.comtel: 949.852.8200DallasMike Pipkin, Partnermike.pipkin@sdma.comtel: 469.227.8200stephenConstruction Practices GroupAbout UsSedgwick has established a record ofsuccessfully protecting the interests ofgeneral contractors, subcontractors, sureties,project owners and developers (commercial,public and residential), designprofessionals and material suppliers. Thefirm’s construction attorneys represent clientsin matters ranging from commercialand governmental projects to private andcommercial residential construction.We handle various aspects related toconstruction – from the contracting,bonding, insuring and developmentphase; construction disputes, includingterminations for default and convenience,takeovers and completion, litigation,arbitration, DRB hearings, and mediation;and post-construction issues, includingimpact claims, mechanic’s liens and stopnotice enforcement and defense, compliancewith regulatory authorities, productmalfunction, construction site injuries,and construction defects. We work withspecialized consultants with design andconstruction expertise.Through exceptional legal skills, substantialindustry experience, and access toleading consultants, Sedgwick consistentlyprovides cost-effective and expeditiousmanagement of complex constructionlaw matters. When matters cannotbe resolved, we utilize our significant trialexperience to try and win cases.The content of this communication is forinformational purposes, and does notconstitute legal advice or create an attorney-clientrelationship between you andSedgwick. Some jurisdictions may considerthis communication “Attorney Advertising.”Any discussion of prior results does notguarantee a similar outcome.Sedgwick, Detert, Moran & Arnold LLPOne Market Plaza, Steuart Tower, 8th FloorSan Francisco, CA 94105415.781.7900© 2007 Sedgwick, Detert, Moran & Arnold LLPAUSTIN BERMUDA* CHICAGO DALLAS HOUSTON LONDON LOS ANGELES NEW YORK NEWARK ORANGE COUNTY PARIS SAN FRANCISCO ZURICH WWW.SDMA.COM*Affiliated office

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