Opinion
Nos. A06-2036, A06-2327.
Filed December 4, 2007.
Appeal from the District Court, Sherburne County, File No. C106884.
Timothy R. Murphy, Stephen M. Warner, O'Neill Murphy, L.L.P., (for respondent).
Michael J. Tomsche, Teresa A. Gumerman, Kent B. Gravelle, Tomsche, Sonnesyn Tomsche, (for appellant Keeler Stucco).
Paul E. D. Darsow, Arthur, Chapman, Kettering, Smetak Pikala, (for appellant Aaron Novak).
Considered and decided by Halbrooks, Presiding Judge; Stoneburner, Judge; and Minge, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2006).
UNPUBLISHED OPINION
In this consolidated appeal, appellant subcontractors challenge the district court's declaratory judgment that indemnity agreements contained in appellants' contracts with respondent general contractor are valid and binding, obligating appellants to defend, indemnify, and hold respondent harmless from all claims arising out of or in any way relating to appellants' work. We affirm.
FACTS
Homeowners invoked an arbitration clause in their new-home contract with respondent Howard Homes, Inc. (HHI) after an inspection revealed moisture intrusion, deficiencies, and code violations in the stucco and exterior openings of the home. Specifically, the homeowners claimed that door and window openings were not constructed as required by applicable building codes and that the stucco was not applied in a manner consistent with applicable building codes.
HHI tendered defense of the claims to appellant Aaron Novak d/b/a/ Hi-Tech Custom Builders (Novak), the subcontractor responsible for framing and window installation in the home, and appellant Keeler Stucco, Inc. (Keeler), the subcontractor responsible for the stucco. Neither Novak nor Keeler (the subcontractors) responded to the tender of defense.
HHI brought a declaratory-judgment action against the subcontractors, requesting a declaration that the identical indemnity clause contained in its contract with each subcontractor is valid and binding, obligating the subcontractors to defend and indemnify HHI from claims asserted by homeowners in their arbitration demand that relate solely to the work performed by the subcontractors.
The indemnity clause in HHI's contracts with the subcontractors provides:
[Subcontractor] shall protect, defend, hold harmless and indemnify [HHI], its employees, agents, etc. from and against any and all claims, actions, liabilities, losses and expenses allegedly or actually suffered by any person, including but not limited to, injury or death of persons or damage to property, arising out of or in any way relating to the work services or activities of myself or any of my officers, employees, or agents. This shall not be reduced, eliminated or limited by the insurance coverage I have provided as a subcontractor or [sic] [HHI].
The subcontractors moved for summary judgment, alleging that the indemnity clause is unenforceable under Minnesota law because it makes them liable for HHI's own negligence. The district court denied the subcontractors' motions for summary judgment and granted HHI's motion for declaratory judgment, holding that the indemnity clause is valid and enforceable and therefore requires the subcontractors to defend HHI for claims arising from the subcontractors' negligence. The subcontractors' appeals were consolidated by order of this court.
DECISION
On appeal from declaratory judgment, this court reviews the district court's determination of questions of law de novo. Rice Lake Contracting Corp. v. Rust Env't Infrastructure, Inc., 549 N.W.2d 96, 98 (Minn.App. 1996), review denied (Minn. Aug. 20, 1996). "Construction of a contract is a question of law for the court." Katzner v. Kelleher Constr., 535 N.W.2d 825, 828 (Minn.App. 1995).
I. Validity of indemnification provisions
Minnesota law restricts a building contractor's ability to shift liability for its own fault to subcontractors:
An indemnification agreement contained in, or executed in connection with, a building and construction contract is unenforceable except to the extent that : (1) the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor or the promisor's independent contractors, agents, employees, or delegatees. . . .
Minn. Stat. § 337.02 (2004). The subcontractors argue the indemnity clause in the subcontracts is an unenforceable agreement to indemnify HHI for its own negligence. The indemnity clause applies only to "all claims, actions, liabilities, losses and expenses . . . arising out of or in any way relating to the work, services or activities" of the subcontractor, its officers, employees, or agents. Relying on cases involving insurance coverage, the subcontractors argue that the phrase "arising out of" is broadly construed, does not imply proximate causation, and therefore obligates the subcontractors to indemnify HHI for all claims regardless of whether there is any causal connection between the work performed by the subcontractor and the injury. But the supreme court has specifically interpreted the phrase "arising out of" in the context of an indemnity clause contained in a construction contract to require a temporal and geographical or a causal connection between a subcontractor's work and the injury giving rise to liability. See Anstine v. Lake Darling Ranch Inc., 305 Minn. 243, 249, 233 N.W.2d 723, 727 (1975) (holding that a subcontract provision requiring a subcontractor to indemnify the general contractor for liability "arising out of, resulting from or in any manner connected with, the execution of the work provided for in this Sub-Contract" does not make the subcontractor liable to indemnify the general contractor for liability for all injuries arising out of the project without regard to whether there is a temporal and geographical or a causal relationship between the subcontractor's work and the injury giving rise to liability), overruled in part on other grounds by Farmington Plumbing Heating Co. v. Fischer Sand Aggregate, Inc., 281 N.W.2d 838 (Minn. 1979), superseded by statute, 1983 Minn. Laws ch. 333, § 2 (currently codified at Minn. Stat. § 337.02 (2006)). We find no merit in the argument that the "arising out of" language in the indemnity clause in this case makes the subcontractors liable for the negligence or other wrongful acts of HHI, or makes the clause ambiguous such that it should be construed to purport to make the subcontractors liable for HHI's fault.
Nothing in the plain language of the indemnity clause purports to require the subcontractors to indemnify HHI for its own fault and HHI does not assert that the subcontractors agreed to indemnify HHI for its own fault. The district court correctly concluded that Minn. Stat. § 337.02 does not invalidate the indemnity provision at issue in this case.
We note that the district court appears to have reached its conclusion by analyzing the claims of the homeowners rather than the language of the contracts, but our disagreement with the analysis does not make the result erroneous. Cf. Katz v. Katz, 408 N.W.2d 835, 839 (Minn. 1987) (stating that the district court will not be reversed if it reached the right result for the wrong reason).
The subcontractors, like the district court, focus on the claims of the homeowners rather than on the language of the indemnity agreement to argue that HHI is seeking indemnity for its own negligence. They argue that because HHI had a contractual duty to the homeowners to supervise all of the work on the project, HHI is primarily responsible to the homeowners for any defects in the subcontractors' work and cannot shift that responsibility to the subcontractors. There is no merit in the subcontractors' argument that because HHI is liable to homeowners for the completed project it cannot recover losses caused by the faulty workmanship of the subcontractors.
The purpose of the indemnity agreement is to hold the subcontractors responsible for any losses incurred by HHI due to the fault of the subcontractors, an acceptable application of the remedy of indemnity.
[I]ndemnity may be invoked among joint tortfeasors. . .:
(a) Where the one seeking indemnity has incurred liability because of a breach of duty owed to him by the one sought to be charged.
(b) Where the one seeking indemnity has incurred liability merely because of failure, even though negligent, to discover or prevent the misconduct of the one sought to be charged.
(c) Where there is an express contract between the parties containing an explicit undertaking to reimburse for liability of the character involved.
Keefer v. Al Johnson Constr. Co., 292 Minn. 91, 98-99, 193 N.W.2d 305, 310 (1971) (quotation omitted). "The right of indemnity inures to a person who, without active fault on his part, has been compelled by reason of a legal obligation to pay damages occasioned by the initial negligence of another and for which he himself is only secondarily liable." Id. at 100, 193 N.W.2d at 310.
The subcontractors argue that because the contract between the homeowners and HHI provides that the homeowners "shall indemnify and hold harmless [HHI] from any and all risks of losses, liability and causes of action not specifically assumed by [HHI] or occasioned by [HHI's] negligence," the homeowners would have to indemnify HHI for any losses caused by the subcontractors and therefore must be asserting claims against HHI for losses caused by HHI's fault. We find no merit in this argument because HHI has assumed liability to the homeowners for losses caused by the subcontractors by warranting that the home would be constructed in compliance with building standards and free of major construction defects.
Novak argues that the district court erred in considering that the homeowners' complaints relate to work performed by the subcontractors because, under the holding of Knutson Constr. Co. v. St. Paul Fire Marine Ins. Co., a subcontractor's work merges with the general contractor's work, making the determination of whether the work complained of was performed by the general contractor or a subcontractor irrelevant. 396 N.W.2d 229, 236 (Minn. 1986). But Knutson involved the delineation between contractual business risks assumed by the general contractor and risks of tort liability to third parties assumed by the insurer under a standard comprehensive-general-liability policy. The supreme court held that whether work is performed by the general contractor or a subcontractor is irrelevant to the determination that the general contractor incurs the business risk of liability from failure to fulfill a contractual obligation that a project will be completed in a workmanlike manner. Id. at 236-37. Knutson specifically recognized that "the general contractor may have a remedy for contribution, indemnity or otherwise against subcontractors who breached contracts." Id. at 237 n. 13. Knutson does not relieve the subcontractors in this case from the indemnity obligations imposed by their contracts with HHI.
II. Subcontractors not required to provide insurance for HHI's benefit
The subcontractors correctly argue that they did not assume an obligation to insure HHI for HHI's negligence, and HHI agrees. An indemnification agreement that obligates one party to a building and construction contract to indemnify another for its own negligence or other wrongdoing may be enforceable if the promisor agrees to procure insurance for the other party's benefit. Minn. Stat. § 337.05, subd. 1 (2006). The contract must contain an express provision to indemnify the indemnitee for liability resulting from its own negligence. Nat'l Hydro Sys. v. M.A. Mortenson Co., 529 N.W.2d 690, 694 (Minn. 1995).
In a less-than-crystal-clear discussion about the enforceability of the agreements at issue in this case, the district court appears to conclude that the agreements are enforceable because the subcontracts obligated the subcontractors to procure insurance for the benefit of HHI. But there is no provision in the subcontracts requiring the subcontractors to indemnify HHI for its own fault and no provision requiring the subcontractors to provide insurance for the benefit of HHI. To the extent that the district court construed the subcontracts to require the subcontractors to provide specific insurance coverage for HHI's fault, that construction is erroneous. Any error in this conclusion, however, is harmless because HHI does not claim and the district court did not hold that the subcontractors have assumed any liability for HHI's fault.
III. Declaratory action is not premature
Keeler argues that the district court erred in "granting indemnification" when fault has not yet been determined. But the district court has not granted indemnification; it has declared the indemnification provisions in the subcontracts valid and enforceable.
Declaratory judgment affords the courts the power "to declare rights, status, and other legal relations whether or not further relief is or could be claimed." Minn. Stat. § 555.01 (2006). "The only prerequisite for a court's exercise of jurisdiction in declaratory judgment actions is the presence of a `justiciable controversy.'" Rice Lake Contracting Corp., 549 N.W.2d at 99. "[I]f a declaratory judgment claimant possesses `a bona fide legal interest which has been, or with respect to the ripening seeds of a controversy is about to be, affected in a prejudicial manner,' jurisdiction exists." Id. (quoting State v. Haveland, 223 Minn. 89, 92, 25 N.W.2d 474, 477 (1946)).
Generally, an indemnitor's obligation to indemnify arises only after the indemnitee has suffered actual loss or damage. St. Paul Fire Marine Ins. Co. v. Cent. Nat'l Ins. Co. of Omaha, 480 N.W.2d 681, 685 (Minn.App. 1992). But the obligation is dependent on the language of the indemnification agreement. See Trapp v. R-Vec Corp., 359 N.W.2d 323, 327 (Minn.App. 1984). If an indemnitor agrees to indemnify and hold harmless the indemnitee from all claims and actions as well as losses and expenses, the obligation should be assertable when a claim is made. Id. (citing Christy v. Menasha Corp., 297 Minn. 334, 339-40, 211 N.W.2d 773, 776-77 (1973), overruled in part on other grounds by Farmington Plumbing Heating Co., 281 N.W.2d 838). Because the indemnity clause at issue is this case specifically provides that the indemnitors will "defend, hold harmless and indemnify" HHI "from and against any and all claims, actions, liabilities, losses and expenses allegedly or actually suffered by any person. . ." arising out of the work of the subcontractors, HHI's declaratory-judgment action is not premature.
IV. Arbitration
Keeler argues that it cannot be bound by the arbitration action between the homeowners and HHI because it is not a party to the arbitration proceeding. But the district court has not made any ruling regarding the effect of the arbitration proceeding, so this issue is not before us in this appeal.
V. Duty to defend
At oral argument on appeal, Keeler argued that the duty to defend contained in the indemnity clause is an unlawful attempt by HHI to shift the cost of defending claims against HHI to the subcontractors, whose fault has not been determined. The district court found that the subcontractors have a duty to defend HHI against the homeowners' claims arising from the fault of the subcontractors because the indemnity provision contains a duty to defend against any claims. The lack of any cases addressing such a provision in a residential-home construction contract suggests that the provision is unusual in this context. It may have been improvident for the subcontractors to have assumed a duty to defend against claims covered by the indemnity clause, but the provision is not ambiguous, and no authority has been brought to our attention that would make the provision unlawful or invalid. We can find no basis for declaring the indemnity provision invalid merely because it contains a duty to defend.