Inside this Issue

A1 - Indemnification in California Still Includes Automatic Duty to Defend – Court Relies on Crawford v. Weather Shield
A2 - Suit Dismissed with Prejudice because Failed to File Certificate of Merit
A3 - Statute of Repose Starts Running When Subsystem is Installed Rather than When Entire House Reaches Certificate of Occupancy
A4 - Dispute Clause Interpretation in Prime and Subcontract Language

Article 1

Indemnification in California Still Includes Automatic Duty to Defend – Court Relies on Crawford v. Weather Shield

Pursuant to the indemnification clause of a subcontract, the subcontractor owed its prime contractor a duty to defend against a third party negligence claim. The duty arose when the claim was made. Citing the important case precedent of Crawford v. Weather Shield, the appellate court held that summary declaration should have been granted to enforce the duty to defend because, “the duty to defend arose immediately upon the proper tender of defense of a claim embraced by the indemnity agreement.” “Where the plaintiff’s complaint alleges facts embraced by the indemnity agreement, the indemnitor has a duty to defend throughout the underlying tort action unless it can conclusively show by undisputed facts that plaintiff’s action is not covered by the agreement.” Centex Homes v. R-Help Construction Co., Inc., 32 Cal. App. 5^th 1230 (2019).

The subcontractor in this case attempted to show that the plaintiff’s personal injury action was not covered by the indemnity agreement. It maintained that the utility box, which the plaintiff claimed was improperly installed and thereby caused the injury, was not within the subcontract scope of work. The appellate court held that credible expert evidence attested that the defective utility box was within the scope of the subcontractor’s work, and it found, “None of the evidence … definitively shows the box was not within [Subcontractor’s scope of work or that [Subcontractor] did not install the box.” For these reasons the court found found that the subcontractor failed to overcome its duties under the indemnification clause of the subcontract.

The court concluded, “Under Crawford, the duty to defend arises as a matter of law from the mere allegation in the underlying tort action that plaintiff’s injuries arose out of [Subcontractor’s] work.” In this matter, the underlying tort case was resolved by settlement and the prime contractor sought recovery from the subcontractor for its legal defense costs and the damages paid. The court concluded, “In any event, it is too late to challenge the duty to defend after the underlying tort case has been resolved.” Citing a court decision involving an insurance carrier’s duty to defend, the court quoted, “When the duty [to defend], having arisen, is extinguished by having a showing that no claim can in fact be covered, ‘it is extinguished only prospectively and not retroactively.’” The court goes on to state that while it recognizes that particular decision was an insurance case, and there are some differences in treatment between insurance policies and other indemnity agreement, no authority was cited for why the principal of law should not apply to this case. In other words, a subcontractor would still be responsible for the attorneys fees under the “duty to defend” even if the underlying claim is ultimately determined to be meritless and no damages are owed under the indemnification aspect of the contract clause.

Comment: When we review design professional contracts for projects in California, we recommend adding wording to specifically state that there will be no duty to defend an Indemnitee against professional liability claims.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 21, No. 6 (July 2019).

Article 2

Suit Dismissed with Prejudice because Failed to File Certificate of Merit

A lawsuit by Texas Southern University against architects and engineers was dismissed with prejudice where the plaintiff failed to file a certificate of merit with its complaint. The trial court did not abuse its discretion if refusing to allow an extension of time for filing the certificate, or for dismissing the complaint with prejudice instead of without prejudice. Texas Southern University v. Kirskey Architects, Inc., 2019 WL 922296 (TX 2019).

Texas code requires that a plaintiff filing a lawsuit against design professionals must file a certificate of merit with its complaint. Tex. Civ. Prac. & Rem. Code §§ 150.001-.004. In this case, construction of the project in question began in 2005 and was declared substantially complete on July 31, 2007. The plaintiff learned of “various material cracks” in the building’s masonry within six months of completion.

The university hired a consulting firm to inspect the building and evaluate a repair plan. Repairs were performed but problems persisted. Another repair consultant was hired by the university to analyze the problems, and it advised that the most likely cause of the observed distress was differential movement of the structure caused by heaving of subgrade sols sue to increased moisture. The university took no action in response to that report.

A number of years later (2014), the university asked the state Office of Attorney General to file suit. That office directed the university to engage consultants to fully assess the condition and prepare estimates of costs to repair all observed defects. The university hired the same repair consultant again to evaluate the issues, and the consultant concluded it would cost about $5 million in repairs.

At the beginning of 2017, the assistant attorney general advised the university that due to other commitments it wouldn’t be able to file the lawsuit. Private counsel was retained to file the suit. That counsel discovered that none of the professionals that were involved in preparing the repair report were able to provide affidavits required by the certificate of merit statute. The reason for this is not explained by the court decision.

Counsel then sent written notice of claims to the original design professionals against whom suit was subsequently filed. The letter offered to postpone filing suit if the firms would agree that the written notice extended the ten-year statute of repose period for filing suit. None of the design professionals agreed to that, and the university subsequently filed suit before the deadline set by the statute of repose – but without the certificates of merit that were required by the certificate of merit statute.

The university argued that the certificate in this case did not have to be filed with the complaint. One argument was that the contemporaneous requirement does not apply to any case “in which the period limitation will expire within 10 days of the date of filing and, because of such time constraints, the plaintiff has alleged that an affidavit of a third-party licensed professional could not be prepared.” In such a situation, the statute states that a plaintiff “shall” be granted a thirty (30) day extension to file a certificate of merit and may obtain further extensions for good cause and as the court determines “justice requires.”

In analyzing the trial court dismissal, the appellate court noted that the university didn’t allege that the statutes of limitations or repose expired on July 31, 2017 requiring them to file suit by that date. Therefore, the ten day rule cited above didn’t apply and the 30-day extension wasn’t triggered.

The university argued, in the alternative, that the trial court should have granted an extension for “good cause.” The appellate court rejected this argument because it found that since the 30-day extension was never triggered, the trail court “would have lacked discretion to grant any further extension in excess of thirty days for good cause…”

Finally, with regard to whether the dismissal should have been without prejudice instead of with prejudice, the court concluded that the statutory wording stating that the dismissal by the court “may be with prejudice” does not permit courts to apply their discretion arbitrarily or unreasonably.

Because there is no statutory guidance concerning how a court should exercise its discretion, the appellate court stated it would consider various factors given the facts and circumstances of the particular case.

Based on when the university first became aware of the problems and the needed repairs, and the fact that the university filed suit within the time period by the statutes of limitations and repose, and stated with its Petition that it would supplement with certificates of merit, the court found that the university couldn't claim it was unaware of the need to file certificates of merit. For these reasons, the dismissal with prejudice was affirmed.

Article 3

Statute of Repose Starts Running When Subsystem is Installed Rather than When Entire House Reaches Certificate of Occupancy

An eight year statute of repose period was triggered by the date of substantial completion of panel installation instead of the subsequent date of substantial completion and certificate of occupancy of the whole house. A homeowner sued a company that manufactured structural insulated panels (SIPs) used in constructing his house. He claimed the panels were defective and allowed water intrusion which caused the panels to rot and result in structural damage to the house. The panel manufacturer was entitled to summary judgment based on the state’s statute of repose. The court concluded the time period ran from the date the panels were installed because they began serving their function as of that date even though the house was not completed until two years later. Lawrence v. General Panel Corp., 425 S.C. 398 (2019).

This case was before the South Carolina Supreme Court to decide a certified question form the U.S. District Court of the District of South Carolina. The statute in question provides: “No actions to recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property, may be brought more than eight years after substantial completion of the improvement.”

The issue of entitlement to summary judgment to enforce the statute of repose depended on the date of “substantial completion.” Was substantial completion the date when the panels were installed or was it two years later when the house was finished and received its certificate of occupancy? This question had been answered in an earlier court precedent (Ocean Winds). But the plaintiff argued that an amendment to the statute superseded the Ocean Winds decision.

In the Ocean Winds decision, the court considered a situation of alleged defects with window installation. It held that the statute of repose began running when installation of the windows was complete. The amendment to the statute added a sentence as follows: “For any improvement to real property, a certificate of occupancy … shall constitute proof of substantial completion of the improvement … unless the contractor and owner … establish a different date of substantial completion.”

By adding this sentence, the plaintiff argued that the state legislature intended the date of substantial completion to always be the date of issuance of the certificate of occupancy. In rejecting that argument, the court held that if the legislature had intended that result it would have more clearly stated so. The court found that the language of the statute referencing “completion of … a specified area or portion” would not be necessary if the legislature had intended the statute to run only after the entire project was completed.

Moreover, said the court, “The SIPs are structural. Their purpose is not only to provide structure upon completion of the home, but also to provide the structure necessary for the rest of the home to be constructed…. The SIP framing system must be in place to enable other subcontractors to install electrical, flooring, roofing…. As subsection 15-3-630(b) contemplated, the SIP structural system began to serve ‘the purpose for which it was intended’ long before the date that [homeowner] would have us find the statute of repose began to run.”

Article 4

Dispute Clause Interpretation in Prime and Subcontract Language

Subcontractor sought to litigate claims against a prime contractor instead of arbitrating them as called for by the disputes clause of the subcontract. It argued that the disputes clause of the incorporated by reference prime agreement specified litigation of claims. The subcontract clause stated that disputes between the prime and sub were subject to the dispute resolution procedures of the Prime Contract, if any, but if there was no specific requirement in the prime agreement for dispute resolution or “should the [Owner] not be involved in the disputes, any such controversy or claim shall be resolved by arbitration….” The court rejected the subcontractor’s argument that the owner was “involved” in the dispute merely by virtue of the third party beneficiary status the owner had under the subcontract, when the Owner was not in fact a party to the action. Arbitration of the subcontractor claim was therefore required. Austin Commercial, L.P. v. L.M.C.C. Specialty Contractors, Inc., 268 So. 3d 215 (2019).

At the trial court level, the court found the mere existence of a dispute resolution provision in the prime contract rendered the subcontract arbitration clause inapplicable. It therefore concluded the dispute could be litigated as desired by the subcontractor. In reversing that decision, the appellate court found, “The trial court’s interpretation of the Consultant Agreement’s dispute resolution provision does not give a reasonable meaning to its incorporated terms from the prime contract; namely the applicability of the prime contract's dispute resolution provision.”

The court rejected the subcontractor’s broad interpretation of what it means for the owner to be “involved” in the dispute, concluding, “[Subcontractor’s] broad interpretation of ‘involved’ invites an interpretation contrary to its plain and ordinary meaning. ‘Involve’ is defined, in pertinent part, as ‘[t]o relate to or affect’ or ‘[t]o show to be a participant; connect or implicate. American Heritage Dictionary.

When these definitions are correctly applied, the court says the owner is clearly not “drawn in as a participant” to the lawsuit because it is not a party and as such need not participate in it.

Comment: It is understandable that the subcontractor would prefer to litigate it claim against the prime contract instead of arbitrate it. We have written several articles explaining the many benefits of litigation over arbitration. In order to have obtained the right to litigate its claims against the prime, the subcontractor could have negotiated a change to the contract language to expressly provide for litigation instead of arbitration in all disputes involving only the prime a subcontractor. Having failed to do that, it should not have attempted to force arbitration of its claims in this instance.

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