ContrACTUAL Liability: Challenges and Considerations an Indemnitee May Face by Failing to Allow an Indemnitor to Participate in Settlement
By: Dara Lindquist
Construction defect litigation often involves a number of parties and cross and third-party claims, stemming from a host of claimed construction, design and development defects at any given site. A number of factors are considered by a party when determining whether to settle a claim in a construction defect case. One factor that is often considered by a party is whether he/she/it can seek reimbursement of money paid in a settlement from another through a claim for contractual indemnification. An example in the construction context is when a general contractor seeks contractual indemnity from a subcontractor for money paid to settle a claim arising from the subcontractor’s defective work.
A critical factor, often overlooked by the party seeking reimbursement (the indemnitee), is the indemnitte’s burden of proof in a subsequent suit against the party from whom indemnity is sought (the indemnitor). Under Florida law, the indemnitee’s burden of proof is dictated by whether the indemnitor was given notice and opportunity to review, pass upon or participate in the settlement. This article discusses the relevant law and challenges an indemnitee may face in a subsequent suit if the indemnitee fails to provide an indemnitor notice and opportunity to review, pass upon or participate in the settlement in an underlying construction defect case.
To establish a cause of action for contractual indemnity under Florida law, a plaintiff must plead and prove the existence of a valid contractual right to indemnification and the inclusion of the claim within the scope of the contractual duty. Dade County School Bd. v. Radio Station WQBA, 731 So. 2d 638, 642–43 (Fla. 1999). The terms of the agreement will dictate whether the indemnitor is obligated to reimburse the indemnitee for a particular contractual indemnity claim. Id. at 642 (Fla. 1999); First Baptist Church of Cape Coral, Florida, Inc. v Compass Constr., Inc., 115 So. 3d 978, 986 (Fla. 2013).
Construction contracts often include indemnity provisions. An example of a contractual indemnity provision in a construction contract may state as follows:
Indemnification: Subcontractor agrees to indemnity and hold the general contractor harmless from any and all claims, loss, damage, injury, liability, and expense arising or incurred in connection with the subcontractor’s negligence or work on XYZ project.
Assume a general contractor contracts with subcontractors to perform various scopes of work to complete construction of a residential condominium building. All of the subcontracts contain the indemnity provision above. After the project is completed, the general contractor is sued by condominium association for damages related to a host of alleged construction defects at the property. The association’s complaint alleges various defects in the exterior building threshold, which implicates several trades, such as, stucco, waterproofing and painting. The general contractor files a third-party complaint against the stucco and painting subcontractor, but is unable to locate and serve the waterproofing subcontractor. During pendency of the primary action, the general contractor eventually locates the waterproofing contractor and files a separate complaint for contractual indemnity. The primary action settles following mediation. The global settlement agreement between the parties indicates the settlement was intended to resolve all defect claims and makes no distinction as to the amount paid by the general contractor for each implicated scope of work. The general contractor never notified the waterproofing contractor of the mediation or gave it an opportunity to participate in the settlement in the primary action.
Determination of whether the indemnitor will be bound by the settlement agreement reached in the underlying lawsuit against the indemnitee, hinges on whether the indemnitor was given notice and opportunity to review, pass upon or participate in the settlement. GAB Bus. Servs., Inc. v. Syndicate 627, 809 F.2d 755, 760–61 (11th Cir. 1987); Camp, Dresser & McKee, Inc. v. Paul N. Howard Co., 853 So. 2d 1072, 1080 (Fla. 5th DCA 2003).
If the indemnitor was not provided notice and opportunity to review, pass upon or participate in the settlement, the indemnitee can only recover the part of the settlement that corresponds to an actual liability caused by the indemnitor’s breach of duty and upon a showing the settlement amount was reasonable. GAB, 809 F.2d at 760–61; Camp, 853 So. 2d at 1080. In contrast, only proof of potential liability and reasonableness of the settlement is required when an indemnitor was provided notice and an opportunity to object to the settlement. GAB, 809 F.2d at 760–61. “The question [of] whether an indemnitee must establish ‘actual liability’ to the plaintiff or only ‘potential liability’ based upon notice given to the indemnitor is a question for the court to decide.” Camp, 853 So. 2d at 1080.
Under the hypothetical above, the general contractor has the burden of establishing “actual liability” in the action against the waterproofing subcontractor because the general contractor never notified the waterproofing contractor of the mediation or gave it an opportunity to participate in the settlement in the primary action. This means the general contractor has the burden of justifying its payment for damages to the association, by offering against the waterproofing subcontractor in the second suit practically the same evidence as was relied on to establish the case against the general contractor by the association when the general contractor was a defendant. GAB, 809 F.2d at 761 (citing Hull & Co. v. McGetrick, 414 So. 2d 243, 245 (Fla. 1st DCA 1982)).
This is a difficult burden considering the nature of construction defect suits. For example, assume the association’s expert in the underlying suit did not attribute damages to any particular trade and opined the damages resulted from all of the trades work and a defective design. How will the general contractor establish in the second suit, the portion of the settlement that corresponds to an actual liability caused by the waterproofing subcontractor’s negligence or work? To further complicate matters, assume the general contractor’s expert in the underlying suit, attributed responsibility for the defects to the architect, and not the general contractor or its subcontractors. It is possible the waterproofing contractor could call this expert to testify at trial in the second suit to establish the general contractor’s inconsistent positions (i.e., defending against the association’s defect claims in the first case and then stepping into the association’s shoes to establish liability for the defects in the second case).
These examples highlight some of the many challenges an indemnitee may face in having to establish “actual liability” in a subsequent suit stemming from an underlying construction defect case. Therefore, it is important to ensure that notice of informal settlement discussions or mediation is provided to parties from whom one may seek indemnity. It may also be critically important craft discovery and elicit testimony in the underlying case that will assist in prosecuting a later indemnity claim, but does not hinder that party’s defense in the primary case. Finally, a party seeking indemnity in a second suit should carefully consider the language of the settlement agreement in the underlying case, as it may be advantageous for the future indemnitee (the general contractor in the above hypothetical) to identify the amount paid for each scope of work without, of course, admitting liability.