Contracts to Indemnify: The Duty to Defend May Arise Independent from the Duty to Indemnify

Contracts between parties frequently contain indemnification provisions. Potential indemnitors should carefully review indemnification provisions to understand when and for what they may be held liable for. UDC-Universal Development, L.P. v. CH2M Hill (2010) 181 Cal.App.4th 10 provides an example of how misunderstanding the effect of an indemnity agreement could lead to a serious miscalculation of a party's potential liability.

In UDC v CH2M Hill an engineering consultant contracted with a developer to provide professional services for a condominium developement. The HOA to thenew development sued the developer. The developer filed a cross-complaint against the consultant and others involved in the project.

The consultant agreed to indemnify the developer for losses connected with any negligent act or omission by the consultant. The provision went on to specify that the consultant agrees to defend any action (pay for the litigation and attorney fees) brought against the developer at the developer's written request.

The consultant refused to pay the developer's defense fees and successfully established at trial that it was not negligent. Based on that finding it argued that it should not be responsible for paying the developer's costs of defense. The court disagreed and found that the duty to defend arose when the developer cross-complained against the consultant. Again, this is despite the jury's finding that the consultant was not negligent.

Even though the consultant was ultimately not responsible for general indemnification of the damages paid for by the developer, as you may already know, the costs of litigation can frequently exceed the alleged actual damages in a case.

The message of this case is that contracting parties must avoid broad indemnity language whenever possible. The potential indemnitor should search for such broad language and at the very least address the danger of it by attempting to limit the scope of indmenification by cleary linking the duty to defend to an adjudication of liability or other finding acceptable to the potential indemnitor.

If you are presented with a contractual provision whose scope of affect is uncertain that you want reviewed, please feel free to contact Bustarde Law to speak to an attorney experienced in contract review, drafting, negotiation and litigation.

Oral Contracts for Home Improvement Work Can Be Enforced

Home owners that engage the services of a contractor for home improvement work are generally protected by the requirement that a home improvement contract be in writing and contain certain specific requirements. California Business & Professions Code section 7159.

Last month, the California Court of Appeal, Second District upheld enforcement of an oral contract for home improvement services. Hinerfeld-Ward Inc. v. Lipian (2010) 188 Cal.App.4th 86.

In Hinerfeld-Ward the Lipians retained an architect to design a major remodel to a single family home. They retained a contractor that left the job because of repeated design changes and replaced that contractor with Hinerfeld. No written contract was entered.

The Lipians terminated Hinerfeld, leaving an unpaid balance to him of $200,000.00. Hinerfeld sued the Lipians who counterclaimed, stating in part that Hinerfeld violated section 7159 making the oral contract void. The Court of Appeal upheld the jury's finding of a contract that Hinerfeld substantially complied with and affirmed the trial court's award of damages in favor of Hinerfeld in addition to attorneys fees.

The Appellate Court noted that enforcement of the contract was justified: to avoid unjust enrichment to the Lipians, and because the Lipians had the benefit of their architect to look out for their interests.

The Appellate Court also upheld an award of attorneys fees based on Civil Code section 3260 et al. That, and related sections, provide for a penalty to be assessed where one wrongfully withholds amounts owed to the contractor pursuant. The Appellate Court found that the penalty contemplated under the statutory scheme also includes an award of attorneys fees under 3260.1. Consequently, $200,000.00 in attorney's fees was awarded to Hinerfeld.

The opinion is silent whether the Lipians relied on advice of counsel to withheld payment or to support a belief they ultimately could avoid payment to Hinderfeld on an assertion that the oral contract was void. However, it is a helpful example of the importance of retaining legal advice before relying upon or taking definitive action where there is a potential dispute.