ConstructionRisk Report (July 2024)

Inside this Issue

• A1 - Demand for an Indemnitor to Defend and Indemnify is not Premature Where Underlying Dispute Has not been decided
• A2 - Prevailing Party Attorneys Fees Improperly Awarded to Subcontractor

Article 1

Demand for an Indemnitor to Defend and Indemnify is not Premature Where Underlying Dispute Has not been decided

See similar articles: Indemnification clause | indemnity

A car driver drove over a downed telecommunications line owned by Cox Company, resulting in claimed damages to the individual and his car. The driver filed suit against Cox and Cable Man, Inc., a company under contract to Cox to provide maintenance and repair of lines. Cox sent a demand to Cable Company to provide indemnification and defense as required by a contractual indemnity clause in their contract. Cable Man refused to indemnify.  Cox then filed a cross claim against Cable Man asserting that it was required to indemnify and defend.  In response, Cable Man filed what is known as “Exception of Prematurity”, arguing that the indemnity claim was premature until a finding of liability in the underlying claim was rendered.    The trial court denied the exception – meaning Cable Man would have to immediately defend and indemnity.  That decision was reversed by an intermediate appellate court, but the final level appellate court reversed and held that indemnity obligations begin immediately and are not premature when demanded before parties have suffered final judgment on the underlying action. Bennett v. DEMCO Energy Services, LLC, 2024 WL 2097634, 2023-01358 (La 2024).

The Agreement between Cox and Cable Man contained an indemnity provision which sets forth an obligation assumed by Cable Man in connection with the work assigned by Cox, in which Cable Man contractually agreed it will indemnify, hold harmless, release and defend Cox and its related companies from “any and all claims, demands, suits, actions....” related to Cable Man’s “performance or failure of performance of any Work or its obligations under this Agreement...”

The appellate court held that a claim for indemnity raised during the pendency of the litigation and before a finding of liability is not premature. “Not only does our finding comport with principles of judicial economy and efficiency, the relevant Code of Civil Procedure articles pertaining to third party practice dictate this result.” The court stated: “we now clarify that such a claim for indemnity is not prohibited before a liability adjudication.  The court further explained its holding as follows:

 “Practical aspects of third-party practice dictate that a claim for indemnity asserted before a finding of liability is not premature. The fact that the indemnity claim in this matter arises out of a cross-claim rather than a third-party claim does not change our analysis. The principles are the same: to avoid wasting judicial resources on a “circuity of proceeding[s]” and to promote judicial economy, asserting a claim for indemnity prior to a finding of liability is not premature.”

***

“The right to collect on an indemnity agreement is determined upon judgment or finding of liability or loss, but there is no prohibition on asserting a claim for indemnity in the same proceeding.  Again, to require a party to file a separate indemnification action after a finding of liability runs afoul of our well-established principles of judicial efficiency.”

Comment:  Most courts explain that when a party agrees to indemnify and defend a client, it basically acts like an insurer.  Just as an insurer that has agreed in the insurance policy to a duty to defend and indemnity the insured must begin defending the insured when an action is filed – so must an Indemnitor promptly begin defending its Indemnitee pursuant to the terms of its contractually agreed upon indemnity agreement when the Indemittee makes a “tender” or demand for it to do so.

 

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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 26, No. 6 (July 2024).

Copyright 2024, ConstructionRisk, LLC

Article 2

Prevailing Party Attorneys Fees Improperly Awarded to Subcontractor

See similar articles: Attorneys Fees | prevailing party | unsigned contract enforced

In a contract dispute between a project owner and a construction subcontractor, the trial court awarded prevailing party attorneys fees to a subcontractor pursuant to contractual prevailing party attorneys fees clause, because it determined that the subcontractor prevailed on a significant issue, even though it lost on several other issues in the trail.  This was reversed on appeal, with the appellate court holding the trial court abused its broad discretion in determining that the defendants were the prevailing party because the subcontractor only partially prevailed on one count of the complaint while losing several other counts.  Lemartec Corp. v. East Coast Metal Structures Corp, 2024 WL 2178312, 49 FL.L. Weekly Fed D 1028 (2024). Comment: Because of the confusion concerning which party should be considered prevailing, ConstructionRisk, LLC recommends either deleting the prevailing party clause from contracts or, if it cannot be deleted, at least define it objectively with wording similar to the following:

“Prevailing party is the party who recovers greater than 67% of its total claims in the action or who is required to pay no more than 33% of the other party’s total claims in the action when considered in the totality of claims and counterclaims, if any. In claims for monetary damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.”

The court of appeal in reversing the trial judgment held that the defendants (project owner) prevailed on significant issues of the litigation entitling them to prevailing party fees.  The project owner hired a contractor to design and construct a project. The contractor sent letters of intent (LOIs) to a subcontractor and subsequently sent subcontracts to be executed.  The Subcontractor never executed the subcontracts but it proceeded to perform the work described therein.  The Sub failed to supply and install stairs in one of the buildings as required by the pulping building subcontract.

After taking over the project from the contractor the owner assumed the subcontracts with the Subcontractor.  When the sub refused to negotiate a proposed credit for the stairs that were not installed, the Owner defaulted the sub and hired a new contractor to perform that work for additional costs.  The Subcontractor then sued Defendants for the remainder of the unpaid balance of fees that the Owner was withholding.  The complaint also disputed the validity of the unexecuted subcontracts and argued that the LOI should apply instead.

The primary dispute in the litigation according to the trial judge was whether the subcontracts governed.  The judge concluded that they did govern despite the lack of signatures.  “On the counterclaim, the trial judge found Subcontractor was properly defaulted and breached the pulping building subcontract by failing to install the stairs, and awarded Project Owner $42,414 for the reasonable value of the stairs. The trial judge also found Project Owner was entitled to offset the $42,414 against the $71,897.70 awarded to Subcontractor pursuant to the cross-default provisions, leaving Subcontractor with a total award of $29,483.70 (or $36,304.51 after interest).”

The case explains the judgments rendered on each of the five counts.  It seems that the defendants won more of the counts than did the subcontractor.  But after the judgment was rendered the sub moved the court to award attorneys fees pursuant to the contractual prevailing party fee clause.  The trial judge granted the subcontractor’s attorneys fees request because the Sub “achieved some of the benefit it [s]ought in bringing suit by recovering a money judgment for work it completed on the Project,” and Contractor and Project Owner “failed on their affirmative defenses to entirely avoid payment to [Subcontractor] altogether.”

On appeal, the court stated:

“Defendants maintain that by concluding Subcontractor was the prevailing party because it achieved “some of the benefit it [s]ought in bringing suit by recovering a money judgment,” the successor judge improperly applied the “net judgment rule” and ignored the fact that Defendants prevailed on all but one of the counts. Moreover, the successor judge ignored the significant issues identified by the trial judge in the merits judgment and failed to appreciate the significance of the rulings therein, including the significance of the setoffs. We agree.”

Under Florida case law, the fact that a claimant obtains a net judgment is a significant factor in determining who is the prevailing party. It is not, however, always the deciding factor.  The trial judge has discretion to consider the equities and determine which party in fact prevailed on the significant issues.

In this particular case, the Subcontractor failed to prevail on four out of five of its counts and it only partially prevailed on Count 4 of the complaint.  For the reasons explained in the decision, the appellate court concluded that the trial judge abused his discretion in awarding attorneys fees to the Subcontractor instead of to the Defendants.

Comment:  The term “prevailing party” when used in a contractually created prevailing party attorneys fees clause can be ambiguous and difficult to interpret.  I have been involved in several cases where the parties had a prevailing party clause in their contract and this create problems that caused us to settle the matters on less favorable terms than we may have achieved if we could have had the dispute resolved through arbitration or litigation.

Consider, for example, that you are defending a multimillion dollar claim where you and your counsel believe all but a few hundred thousand dollars can be defended.  If the matter goes to trial and you lose $200,000 on that multimillion dollar claim, the party that won that small amount might be deemed to be the “prevailing party.”  If they were represented by a large law firm and paid large expert witness fees, you might be contractually obligated to compensate that party for over a million dollars in fees.  You have no insurance for those fees because they are not actual damages. They are only resulting from your contractual liability.

Professional liability carriers generally advise their insured design professional to strike these clauses out of contracts when they are being negotiated.

 

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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 26, No. 6 (July 2024).

Copyright 2024, ConstructionRisk, LLC