Indemnification

There is nothing, either good or bad, but thinking makes it so. –Hamlet

The AIA Form 201 contains the following indemnification provision: “The contractor, shall indemnify and hold harmless, the owner, architect, architect’s consultants and agents and employees of any of them from and against claims, damages, losses and expenses, including, but not limited to, attorney’s fees arising out of or resulting from performance of the work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death or to injury to or destruction of tangible property (other than the work itself), but only to the extent caused by the negligent act or omissions of the contractor, a subcontractor or anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.”

Shakespeare’s Hamlet cautions us to consider context: some things are not as bad as they seem and others are worse than they seem. And so it is with the indemnity provision. Owners who suffer damages as a result of a subcontractor’s defective work sometimes seek to recover from the prime contractor the costs incurred to address the defective work including consequential damages. However, from a contractor’s standpoint, what appears bad is not as bad as it seems.

In Chester Upland School District v. Edward J. Meloney, Inc., 901 A.2d 1055 (Pa. Super. 2006), the court was presented with the following facts. The School District entered into a prime contract with Edward J. Meloney for a new HVAC system that included the purchase and installation of a new chiller and cooling tower. When the School District started up the chiller, it did not function properly. Despite attempts at repair, the chiller continued to malfunction. Ultimately, the School District declared Meloney in default and initiated a lawsuit against Meloney, Meloney’s subcontractor, McQuay, its surety and the architect. The architect filed a cross-claim for indemnification against Meloney pursuant to the indemnification provision contained in the contract between the School District and Meloney.

The School District, Meloney and McQuay ended up settling the lawsuit. McQuay provided a new chiller and the School District paid Meloney the unpaid balance of its contract. The School District sought no other damages. However, the architect’s cross-claim for indemnification remained and the architect sought indemnification for the attorney’s fees and other costs it incurred in having to defend the action. The trial court denied the architect’s claim and the architect appealed.

The court wrote that “the only arguable claim would be that the defective chiller constituted tangible property that had been injured or destroyed. However, there is nothing in the record to suggest that there was any occurrence that would constitute an injury to or destruction of the chiller. Rather, the parties all agree that the chiller was defective from day one and that it never worked either due to a defect in manufacturing or design that resulted in, inter alia, a misalignment of certain trays within the chiller.” The court went on to write that even if it were to find that the defective chiller constituted injured or destroyed tangible property, there would still be no claim because the indemnification provision does not allow for claims for damages to tangible property when that tangible property is “the Work” itself. Since the chiller was part of the Work, the indemnification provision did not apply. The same reasoning would apply to any attempts by an owner to seek indemnification for damages suffered as a result of defective equipment provided by a subcontractor or supplier. Any cause of action by an owner for defective performance is a breach of contract action, not an action for indemnification.

Theodore A. Adler, who is a founding partner of Reager & Adler and the director of Reager & Adler’s Litigation Group, contributed this article. Ted has been repeatedly recognized by his peers as one of the foremost construction lawyers in Pennsylvania, and as one of the premier litigators in Central Pennsylvania. He received his legal education from the Dickinson School of Law of the Pennsylvania State University, and has served as an Adjunct Associate Professor of Law at his alma mater. Ted currently directs the Construction Law, Civil Litigation, Collections and Workouts, Personal Injury and Alternative Dispute Resolution practice areas at Reager & Adler. He may be reached by calling (717) 763-1383 or via email at TAdler@ReagerAdlerPC.com.

  • Facebook
  • Twitter
  • DZone It!
  • Digg It!
  • StumbleUpon
  • Technorati
  • Del.icio.us
  • NewsVine
  • Reddit
  • Blinklist
  • Add diigo bookmark
Harrisburg Magazine Readers' Choice 2011