The California Supreme Court's recent ruling in Crawford v. Weather Shield Mfr., Inc., is a victory for California developers and any other California businesses that reach arm's length agreements to transfer defense-risk indemnity in the event of litigation.
The Crawford decision affirmed an appellate court's finding that under the typical defense and indemnity provisions in the subcontract agreement, a subcontractor's duty to defend a developer arises immediately upon tender of a claim, even if it is later determined that the subcontractor was not negligent. This decision will not only preserve the intent of parties to the defense and indemnity agreement but it will also help keep the focus in construction defect cases where it belongs: on the parties that performed the work at issue.
The Crawford case arose from a typical construction defect action, in which a group of homeowners brought suit against a developer and a number of subcontractors. After a trial in which the window manufacturer was absolved of negligence liability, the trial court found that although the window manufacturer did not owe indemnity to the developer, the subcontractor was nevertheless obligated to pay for the developer's attorneys' fees expended in defense of the case because the subcontract required the subcontractor to do so.
Crawford was appealed to the fourth appellate circuit, which upheld the lower court's rulings on both the indemnity and duty-to-defend issues. Newmeyer & Dillion filed an amicus brief in the California Supreme Court case on behalf of several homebuilders.
In upholding both the trial court and appellate court, the Supreme Court conducted an exhaustive review of the history of contractual duties in California. The Court found a repeated distinction between a party's duty to indemnify and a duty to defend. While a subcontractor's duty to indemnify is intimately tied to its culpability, a contractual promise to defend "clearly connotes an obligation of active responsibility, from the outset, for the promisee's defense against such claims."
The Supreme Court also rejected Weather Shield's interpretation of Civil Code section 2778, which sets forth general rules of indemnity-contract interpretation. In concluding that the defense duty which appears in subdivision 4 of section 2778 "arises immediately upon a proper tender of defense by the indemnitee, and thus before the litigation to be defended has determined whether indemnity is actually owed" – the Court held that the duty to defend "cannot depend on the outcome of that litigation," but rather commences upon tender.
The Crawford ruling provides further support for builders forced to defend themselves in lawsuits arising out of trade contractor errors, particularly where the subcontracts contain appropriate contractual defense indemnification language. A developer need not wait for the conclusion of protracted litigation to establish a subcontractor's affirmative duty to immediately defend the developer, regardless of eventual liability or fault. In fact, the Court in footnote 12 went to great lengths to explain exactly how a builder might establish the duty by filing a motion for summary judgment, and to advise the trial court on how to determine damages against a subcontractor that breaches its duty to defend in bad faith.
Since not all contractual indemnity provisions may be the same, it is prudent to conduct a review of such language in light of the Crawford ruling.
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