A New Wrinkle Affecting Construction Defect Battles
"Indemnity" is one of those legal words that probably make you glad you didn't go to law school (assuming you didn't). And if you ever run into it, you hire someone else to deal with it. To be clear, what I'm discussing here is common law indemnity, specifically in construction defect cases, and not in the insurance context, which is a whole other can of worms.
Common law indemnity is a very old concept dating back to jolly old England and inherited by the American courts. It was originally intended to ease the burden imposed by another common law rule, joint liability. In that instance, if the joint negligence of two parties combined to cause injury to a third, each of the two negligent parties were individually on the hook for the entire amount of the damage. If one of the negligent parties ended up paying the entire amount but wasn't the one "primarily" or "actively" at fault, it could seek indemnity from the other negligent party to recover what was paid. As you can imagine, this is a very vague standard, and individual cases often got messy. It is also an all-or-nothing proposition: At the end of the day, one of the two jointly negligent parties ends up paying the entire amount.
While joint liability and common law indemnity may have worked in olden days, the complexity of modern life made it at best unmanageable and at worst unfair, especially in construction defect cases that often involve numerous designers and subcontractors along with the general contractor. As a result, Oregon, and every other state, adopted a system of comparative fault, which allows a judge, jury or arbitrator to allocate percentages of fault among multiple negligent parties. The total damage amount is then divided proportionally among the liable parties based on their respective percentage. The law was enacted in 1971 and did not expressly abolish joint liability at the time. However, the law has since been amended a number of times, and eventually joint liability was abolished in 1995.
Finally, earlier this year, the Oregon Supreme Court ruled that the old notion of common law indemnity is not consistent with the comparative fault system and abolished indemnity between liable parties subject to comparative fault allocations.
In the case of Eclectic Investment LLC v. Jackson County, both a contractor and the county were sued by a landowner for damage to its property when an excavated slope failed in a rainstorm. While under the comparative fault scheme, both the contractor and county were found to be only marginally negligent, 4 percent and 7 percent respectively, and the owner more than 50 percent responsible, the county sought indemnity against the contractor for its defense costs and attorneys' fees. It argued that between the two, the county's involvement in permitting the excavation was only secondary or passive to the contractor's actual earth work.
The Oregon Supreme Court rejected the county's argument and reasoned that where the jury had determined the percentages of fault under comparative fault, the county was not defending a claim of joint liability with the contractor, but only its individual liability based on its own negligence. Thus, the contractor owed nothing to the county, and common law indemnity, in the context of comparative fault, served no purpose.
The full consequences of the court's ruling will likely take years to be seen, but in the short term, common law indemnity is no longer a means to "share the pain" of a lawsuit with another potentially liable party if that party's liability can be allocated under comparative fault.
Bill Ohle is an attorney in the Portland office of Schwabe, Williamson & Wyatt, and represents business and design professionals in the construction industry. Contact him at 503-796-2414 or firstname.lastname@example.org.
As published Daily Journal of Commerce, May 27, 2015