Contribution, Indemnity and Legal Subrogation

South Florida is experiencing unprecedented growth in residential, commercial, and public construction. Such a booming construction industry will likely spawn disputes, many involving tort claims evolving from defective work, charges of professional malpractice, and allegations of breached contractual covenants, all with the resultant arguments between owners, sureties, design professionals, and contractors, as to the extent and proper allocation of liability. As a result, contribution, indemnity and subrogation will be hotly litigated issues, with the rights of each party to any of these claims being dependent on contractual, statutory and equitable principles.

This article illustrates that pleading a proper claim is essential, if not always easy. Clarifying the distinctions among contribution, indemnity and equitable subrogation, the author examines the complexities surrounding these causes of action, further differentiating the claims under these theories by latency of the defects involved.

Contribution.

Contribution is a discharge of common liability by a party on its behalf and on behalf of other joint tortfeasors. Contribution entails joint or several liability.

In Florida, the Uniform Contribution Among Tortfeasors Act, Florida Statutes Chapter 768.31, governs actions for contribution. The cause of action for contribution requires neither a contractual relationship between the parties, nor permits the same as the basis of the action; the statute is the exclusive remedy. However, the statute does require a presence of common liability for damages and that the party seeking contribution make a payment in excess of its pro rata share of common liability. The right to contribution vests only once a party settles the entire tort liability.

Common liability refers to “a joint causing of damage or injury and not to actual likelihood of success in a tort action”, or to a “common commission of a tort”. Moreover, a party seeking contribution has a burden of proving that common liability exists between the parties, and that the settlement it entered into was reasonable. An important caveat exists as there is no right to a claim of contribution where a party shares liability with another party who enjoys a form of immunity.

The existence of common liability is well illustrated by Salley v. Charles R. Perry Construction, Inc., where a building owner’s assignee, Florida Farm Bureau Federation, sued Salley, the architect, for negligent design and selection of glass for the windows. The court held that the architect sufficiently alleged common liability with the contractor, by claiming that the contractor negligently substituted a different type of glass, and that the contractor was negligent in installing the glass. In fact, the court stated, common liability resulted because the two parties “were engaged in the common enterprise of designing and constructing a single building, with duties to Farm Bureau that were intertwined in both time and substance.” Therefore, because the architect and the contractor were engaged in a common effort to erect a building, and the contractor substituted defective glass for specified glass, contractor and architect had common liability such that the architect had a right of contribution against a contractor.

These types of actions are fairly common in the construction industry, as the involvement of various parties and frequent litigation inevitably lead to claims for contribution.

Indemnity.

The concept of indemnity is founded on a breach of duty owed to a party seeking indemnity, or on an express or implied contract between the parties. Indemnity shifts the entire burden of payment from one party to another, based on the underlying relationship between the parties, and the duty created thereby.

A party properly pleads common law indemnity by alleging that: (1) it is wholly without fault; (2) it is liable to the injured party only because of vicarious, constructive, derivative or technical liability; and (3) that the indemnitor is at fault.

The entry of a judgment against an indemnitee is a prerequisite to indemnitee’s cause of action for indemnification. Courts, however, permit a defendant in the underlying action to file a third-party complaint prior to the conclusion of the underlying case. Filing of a third-party complaint allows all interested parties to resolve their claims in a single action.[17]

The main characteristic that distinguishes indemnity from contribution is the blamelessness of the indemnitee; an indemnitee must only be “vicariously, constructively, derivatively, or technically liable for the wrongful acts” of the indemnitor. Consequently, an indemnitor must compensate an indemnitee for all damages incurred by indemnitee, including costs and attorneys’ fees.

Equitable Subrogation.

Unlike contribution and indemnity, courts apply the doctrine of equitable subrogation to prevent unjust enrichment. Equitable subrogation affords relief in situations in which one pays a debt or discharges an obligation which should have been paid by another. Courts allow equitable subrogation where “one person has satisfied the obligations of another and equity compels that the person discharging the debt stand in the shoes of the person whose claim has been discharged, thereby succeeding to the rights and priorities of the original creditor.”

To establish a cause of action for equitable subrogation, a party must show the following elements: (1) subrogee made payment to protect its own interest; (2) subrogee did not act as a volunteer; (3) subrogee was not primarily liable for the debt; (4) subrogee paid off the entire debt; and (5) subrogation would not work injustice to the rights of a third party. Furthermore, one must allege that the parties were not joint tortfeasors, and that they did not have common liability. The party who made the payment also must have a right or interest of its own to protect, and must not be a mere volunteer acting without an obligation.

although contribution, indemnity, and equitable subrogation provide distinct remedies, they are closely related. Parties need to ensure that they properly plead their cause of action, as otherwise they may be negatively impacted by the differing statutes of limitation.

Parties involved in construction litigation, therefore, need to remember that the main distinction between equitable subrogation and contribution lies in the fact that if another party is found liable for the entirety of the damages, the payor party may not maintain a cause of action for contribution. On the other hand, if a party does not comply with the requirements of the contribution statute, it is barred from bringing an equitable subrogation claim because “to permit the insurer to bring an action for subrogation in these circumstances would effectively eliminate the need for a contribution statute.”

Latency of Defects.

The issue of defect latency instills a further intricacy into the conceptual distinctions among these three causes of action.

The frequently discussed Florida Supreme Court case, Slavin v. Kay, facilitated comprehension of the consequences of acceptance of defective work. The Court held that a contractor does not assume liability for a patent defect upon acceptance by the owner. In the case of latent defects, the contractor remains liable for the injury caused even after the owner accepts the work. The Supreme Court reasoned that the law presumes that the owner has made a reasonably careful inspection prior to acceptance, and has a predetermined knowledge of the defects. Subsequent caselaw extended the Slavin doctrine to architects and engineers.

A contractor, architect or engineer is liable only if the court determines that the defect at issue is latent and non-discoverable by a property owner in the exercise of reasonable care. The primary determination of latency depends upon whether the defect is apparent through the use of one’s ordinary senses from a casual observation of the premises. Where an owner accepts work with knowledge that a contractor, architect or engineer has not properly performed, or where the defects were discoverable after reasonable inspection, such acceptance waives a contractor’s, architect’s, or engineer’s liability for the defect.

Although courts are reluctant to rule as a matter of law that a defect is patent in cases where a defect is not open and obvious, some have nevertheless concluded that a defect is patent under appropriate factual patterns. For example, courts have determined that the following constitute patent defects: a diagonal tie rod which extended eight inches beyond flower pot; pillars obscuring ingress and egress views from a shopping center driveway; a lack of a guard grille over the air conditioning duct; road defects incurred through repaving work[44]; a missing metal peg on climbing tower; defects in the bridge roadbed; lack of parking area and barricade to separate traffic.

Indemnification Clauses Are Not Always Enforceable

A standard clause in many construction related contracts often requires one of the parties to indemnify and hold the other harmless. This means that if something goes wrong and there is a claim or a lawsuit, one of the parties to the contract will need to be responsible – even if the claim or lawsuit is made against the other party to the contract! Persons who draft such contracts should be forewarned though that there may be statutory requirements that could render the clause void and unenforceable absent certain restrictive language.

For example, one statute in Florida invalidates any indemnification clause unless the contract contains a monetary limitation that “bears a reasonable commercial relationship” to the contract and “is part of the project specifications or bid documents, if any.” If these monetary limitations are not met, the indemnification clause will be useless and have no legal effect.

The statute also holds that the indemnification may not indemnify for acts, omissions or defaults of anybody other than the indemnitor (the one providing the benefit), its contractors, subcontracts and agents or the indemnitee (the one receiving the benefit), its directors, officers, agents or employees. As to contract language that indemnifies for acts, omissions or defaults of the person actually benefiting from the clause, such clauses may not indemnify for their own gross negligence or intentionally wrongful acts.

When are Indemnification Clauses Permitted

Regarding construction contracts with public agencies, indemnification clauses are permitted only to indemnify a party from wrongful acts of the indemnifying party in performance of the contract (as opposed to wrongful acts of other persons). Otherwise, such indemnification clauses are deemed void as against public policy.

To some extent, the cases that interpret the statute serve to limit its scope. These cases generally rule that either the person seeking indemnification did not fall within the class of those types of parties covered by the statute, or that the type of contract under which a party seeks indemnification was not covered under the statute. In each of these cases, the indemnification language in the contract at issue did not contain the required restrictive language.

When an individual plaintiff was injured due to an alleged elevator malfunction and sued the owner who in turn sued an insurance company for indemnification, the court ruled that the statute restricting application of indemnification clauses did not apply because the contract at issue was a service contract, as opposed to a construction-related contract.

In another case, the court held that when an engineering firm was a third party beneficiary (i.e., receiving a benefit in a contract between two other parties) it could sue for indemnification even if the contract did not otherwise comply with statutory requirements. The third-party beneficiary was not bound by the limitations in the statute.

A third case held that the statute would not apply if the party seeking indemnification was not looking to be indemnified for its own active negligence. These interpretations reinforce that parties to construction contracts must be careful to comply when seeking indemnification for another’s wrongdoing. A contractor must have clauses it can enforce, and be sure that all statutory requirements are met. The indemnification must contain a monetary limitation that bears a reasonable commercial relationship to the contract.

Applicable statutes contain limitations as to the types of parties, acts, and omissions that may be subject to indemnification clauses. For example, a statute that has undergone several revisions over the years may contain language that is confusing at first glance.

Always take care to review such clauses with an attorney knowledgeable in this area of the law. Otherwise, a contractor may suffer a painful lesson when faced with claims or litigation for which it thought it was protected under an indemnification clause.

Indemnification Clauses: Often Found, Rarely Understood

The notion of shifting liability for personal injury or damage to property from one party to another has become commonplace, especially within construction contracts. In its most basic sense, contractual indemnity has someone agreeing to hold another harmless for certain specified claims, losses or damages.[1] While governed by the terms of a given contract, such indemnification provisions may be further defined through judicial interpretation. This article examines a number of key cases, recent statutory implications and the likelihood of enforcement. Indemnity and hold harmless clauses are normally applied at all responsibility levels. The contractor is generally required to indemnify the owner, the subcontractor is then expected to indemnify the contractor and usually the owner, and even the sub-subcontractor may be asked to hold parties harmless. A good starting point in understanding the significance of these often confusing and esoteric clauses is to review how the courts have construed them.

A Florida case, an engineering firm, after settling a claim brought against it by a subcontractor’s injured employee, sought indemnification from the general contractor. The indemnity provisions at issue provided:

6.30. To the fullest extent permitted by law, CONTRACTOR shall indemnify and hold harmless OWNER and ENGINEER and their agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys’ fees arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense (a) is attributable to bodily injury, sickness, disease or death . . . and (b) is caused in whole or part by any negligent act or omission of CONTRACTOR, any Subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. (emphasis added).

6.32. The obligations of CONTRACTOR under paragraph 6.30 shall not extend to the liability of ENGINEER, his agents or employees arising out of the preparation or approval of maps, drawings, opinions, reports, surveys, Change Orders, designs or specifications.

The engineer also sued the surety which had issued a performance bond for the project. The bond contained a provision indemnifying the owner and engineer, as follows:

[Surety] shall indemnify and save harmless the said Owner and the Engineer and his agents against payments of any and all damages that may happen to persons or property. arising out of any act, neglect or omission of said principal [Contractor], his or its agents, suppliers, subcontractors or employees with relation to the work.

The Court concluded that if the engineer paid all or part of the $3.55 million to settle the claims of the subcontractor’s employee based on potential liability for negligence that was unrelated to design (the exclusion within the contract), then the engineer would be entitled to indemnity from the contractor and its surety for monies paid to the subcontractor’s employee, even if some of the fault could be attributed to the engineer. While indemnifying a party for its own negligence might seem unreasonable or unfair, such clauses are certainly enforceable as long as they clearly express this intent.

Even the Florida Supreme Court has addressed the issue. In Charles Poe Masonry, Inc. v. Spring Lock Scaffolding Rental Equip. Co., 374 So. 2d 487 (Fla. 1979), a contractor’s employee sued the lessor- manufacturer of scaffolding when he was injured in a fall from the scaffold. The lessor- manufacturer, in turn, sued the lessee-subcontractor, the contractor, and owner for indemnity. The relevant provision at issue stated:

The LESSEE assumes all responsibility for claims asserted by any person whatever growing out of the erection and maintenance, use or possession of said equipment, and agrees to hold the COMPANY harmless from all such claims.

The Court found that such general terms demonstrated nothing more than an undertaking by the lessee (subcontractor) to hold the lessor (manufacturer) harmless from any vicarious liability that resulted from the lessee’s erection, maintenance or use of the scaffold. Courts have found that general language purporting to indemnify someone for his or her own negligence is not sufficient. Therefore, an indemnification clause that includes a general provision indemnifying the indemnitee “against any and all claims” does not sufficiently express an intent to indemnify for consequences solely from the negligence of the indemnitee.

Examples of how Indemnification Clauses Played Out in Court
In Winn Dixie Stores v. D & J Constr., 633 So. 2d 65 (Fla. 4th DCA 1994), Winn Dixie sought contractual indemnity from D&J for injuries sustained by the contractor’s employee. The employee had fallen in a puddle caused by a roof leak, something not part of the contractor’s work. The indemnity agreement covered

any claim or loss arising in any manner out of the presence or activity of D & J [the contractor] or any of our servants, agents or employees or representatives or out of the presence of such equipment when such persons or equipment are on your premises for the purposes of performing services . . . notwithstanding such accident or damage may have been caused in whole or in part or negligence of you [Winn Dixie] or any of your servants, agents or employees.

Based upon the above language, the Court found that Winn Dixie was entitled to indemnity from the contractor even though the contractor was not at fault, simply because the contractor was on the owner’s premises when the accident occurred.

Since 1972, Florida has had statutorily provided criteria for an indemnification clause in a construction contract.[2] In George’s Crane Serv., Inc. v. Signal Serv. Indus., Inc., 819 So. 2d 233 (Fla. 4th DCA 2002), the Court found that an indemnification agreement which did not meet the criteria of Fla. Stat. 725.06(2)(1999). Specifically, there was no “specific consideration” for the indemnification that was “provided for” in the contract. The Court had earlier concluded that a construction contract which allocated a percentage of the contract,i.e., 1% of the contract price for the contractor’s indemnification obligation satisfied the statutory requirement that indemnification be supported by specific consideration. However, these cases addressed the prior versions of the statute which required either a monetary limitation or specific consideration from the person indemnified.[3]

The current version of the indemnification statute provides that a construction contract which permits one party to indemnify another party for the other party’s own negligence shall be void and unenforceable unless:

(1) there is a monetary limitation on the extent of the indemnification that bears a reasonably commercial relationship to the contract [note: the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with the owner shall not be less than $1 million per occurrence, unless otherwise agreed to by the parties]; and

(2) is part of the project specifications or bid documents.[4]

As well, the current version of the statute provides that a contract which requires one party to indemnify a public agency for that agency’s negligence is void, illegal and unenforceable. Perhaps the fact that most public contracts are not negotiable, while private contracts are, is the reason for this distinction. Also unenforceable are claims or damages resulting from gross negligence or willful, wanton or intentional misconduct of the indemnitee, its officers, directors, agents or employees or for any statutory violation or punitive damages (unless the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor or its agents, employees or those working under it).

What to keep in mind

When entering into a contract with an indemnification provision, several issues should be kept in mind, namely:

who is indemnifying whom;
does the contract clearly express an intent to indemnify a party against its own negligence;
do the terms of the agreement determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim;
what is being indemnified, i.e., personal injury, property damage, attorneys’ fees and costs of defense, economic loss;
is there a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is such monetary limitation part of the project specifications or bid documents, if any;
is there a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage (contractual liability insurance).

With such clauses becoming standard issue in construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard. A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Because indemnification is both a sword and a shield, be sure the clause you agree on is one you also truly understand.

The Differences Between Hold Harmless, Indemnification and Duty to Defend

They’re usually lumped together. Full of legalese, often impossible to decipher and generally presented on a take it or leave it basis, these hold harmless, indemnification and duty to defend provisions are regularly found in most construction contracts. Most contractors just accept them, hoping for the best and not giving them a second thought. The problem is that each one of these provisions has serious implications.

Though often found together, they each have a very different meaning. A “hold harmless” clause is the provision which, if drafted correctly, has the effect of releasing one from liability. “Indemnification” shifts liability from one party to another. And a “duty to defend” means just that and is a separate and distinct obligation from any duty to indemnify or a duty to hold harmless. This duty to defend requires one to provide a defense and pay the legal expenses associated with such defense – no small obligation, especially when you consider this duty is triggered whatever the merits of the claim may be. The duty to hold harmless and the duty to indemnify only arise if the outcome of a claim is adverse to the indemnitee – the one receiving the benefit of the hold harmless or indemnity.

Because construction disputes so often involve multiple parties and complex issues, the potential costs associated with each of these provisions can be very significant. For example, the cost of a legal defense can quickly outpace the cost of the actual underlying claim. When confronted with any of these clauses, step back. Read them carefully to be sure what you’re getting into. It may be a lot more than you think.