Defense Digest

Shifting Indemnity To Sub-Contractor For Negligence Of Owner Or General Contractor: Perry/Ruzzi Doctrine Is Alive And Well In Pennsylvania

For most construction projects, owners, architects, engineers, and general contractors generally try to shift liability risks to sub-contractors and others. Traditionally, these risks are shifted in two ways--indemnity provisions and additional insured endorsements.

This article focuses on indemnity provisions. They usually fall within three categories: (1) the limited form indemnity [the indemnitor (sub-contractor) will save and hold harmless the indemnitee (e.g., general contractor) only for the indemnitor's own negligence]; (2) the intermediate form indemnity [indemnitor will save and hold harmless the indemnitee for all liability excluding that which arises out of the indemnitee's sole negligence]; and (3) the broad form indemnity [indemnitor will save and hold harmless the indemnitee from all liabilities arising from the project regardless of which party's negligence caused the liability].

Broad form indemnity has been held unenforceable in construction contracts by many courts and state statutes on the ground that it violates public policy. In fact, as of 2003, 34 states have passed statutes invalidating broad form indemnity provisions in construction contracts as unenforceable as against public policy. States such as Pennsylvania that have not passed such laws demonstrate their opposition to these agreements by applying a "clear and unequivocal" test.

In Pennsylvania, this is known as the Perry/Ruzzi doctrine. In other words, for broad form indemnity provisions to be upheld, they must be clearly and unequivocally agreed upon before a party may transfer its liability to another party. Ruzzi v. Butler Petroleum Co., 588 A.2d 1, 7 (Pa. 1991); Perry v. Payne, 66 A. 553 (Pa. 1907). Perry/Ruzzi holds that, unless the language is clear and unambiguous, courts will opt for an interpretation that does not shoulder a sub-contractor with the fiscal responsibility for a contractor's and owner's negligence.

This doctrine was recently tested and ultimately upheld in Bernotas v. Super Fresh Food Markets, Inc. v. Goldsmith Associates and Acciavatti Associates, __A.2d (Pa. 2004). The Pennsylvania Supreme Court reversed a decision by the Superior Court and reinstated former Chester County Judge Sanchez' trial opinion.

The original suit involved a trip and fall. The plaintiff, Barbara Bernotas, tripped and fell into a hole at a Downington Super Fresh Supermarket. She claimed that she was distracted by a nearby merchandise display and tripped over a protruding pipe in a hole that was in a construction area within the store.

Super Fresh had hired general contractor, Acciavatti Associates, which, in turn, hired Goldsmith Associates to perform electrical work. These were the three defendants.

Ms. Bernotas settled her case for $200,000. Each defendant contributed one-third of the settlement amount. Super Fresh sought indemnification from Acciavatti under the terms of the Owner-General Contractor contract. A bench trial was held to resolve a contribution action. Also at issue was whether Goldsmith was required to indemnify Acciavatti.

The trial court found Super Fresh not to be solely negligent. Judge Sanchez found both Acciavatti and Goldsmith to have failed to provide a safe work area. Thus, Acciavatti was obligated to indemnify Super Fresh under the Owner-General Contractor contract. Acciavatti was required to pay two-thirds of the settlement (its share and Super Fresh's share), and Goldsmith was required to pay the remaining third.

Acciavatti appealed and claimed Goldsmith had agreed to indemnify Acciavatti pursuant to an incorporation clause in the sub-contract. Acciavatti believed Goldsmith to be responsible for the entire settlement amount. The Superior Court agreed and concluded that Goldsmith was obligated to indemnify Acciavatti.

In reaching its decision, the Superior Court determined that the sub-contract between Acciavatti and Goldsmith had incorporated terms of the Owner-General Contractor contract, which included the following incorporation clause:

The Superior Court found that this incorporation clause created a "conduit" through which the indemnity obligations embodied in the prime contract flowed down to the contract between Acciavatti and Goldsmith. The purpose of this contractual provision--commonly referred to as a "flow-through" or a "conduit clause"--is to assure that a sub-contractor is bound to the prime contractor in the same manner that the prime contractor is bound to the owner.

The Superior Court reasoned that the Owner-General Contractor contract obligated Acciavatti to indemnify Super Fresh for any damages that were not caused by Super Fresh's sole negligence. Because the sub-contract between Acciavatti and Goldsmith incorporated the terms of the prime contract without qualification, Goldsmith, therefore, had agreed to indemnify Acciavatti for any damages that were not caused by Super Fresh's sole negligence.

The Supreme Court disagreed. It first acknowledged that this pass-through theory was novel in Pennsylvania. It looked to cases in other jurisdictions, including Alaska, Washington, and Illinois. None of the cases, however, applied a conduit theory to a contractual clause requiring a party to indemnify for the acts of another party's negligence. It, therefore, essentially rejected the precedential value of any of those extra-territorial cases.

The Supreme Court then returned to Perry/Ruzzi. It reviewed the underlying policies of the Perry/Ruzzi doctrine. Although the Supreme Court acknowledged that pass-through clauses may be generally enforceable, upholding these provisions strictly in the case of indemnification clashes with Pennsylvania law, which requires broad indemnification language to be unequivocally stated in the contract.

The Supreme Court analyzed the sub-contract between Acciavatti and Goldsmith and determined that the indemnification language was equivocal. A specific indemnity provision in the sub-contract (paragraph 13) read as follows:

The Supreme Court felt that the above language could be interpreted to mean that Goldsmith would only indemnify Acciavatti in the event of negligence resulting from the performance of Goldsmith's work and Goldsmith should not be required to indemnify Acciavatti and/or Super Fresh for their negligent acts that did not arise from Goldsmith's own work.

Additionally, the Supreme Court evaluated the meaning and effect of the incorporation clause. While the language of the incorporation clause was clear and unequivocal, it allowed more liability to flow to the sub-contractor than via the sub-contract alone per paragraph 13. The Supreme Court found that this resultant ambiguity failed the "rigidly respected specificity requirement for indemnification for negligence clauses." The Supreme Court stated:

Accordingly, even though Pennsylvania does not have a statute invalidating broad form indemnity provisions in construction contracts, Perry/Ruzzi continues to serve as a formidable bar to their use. In this author's view, this case probably would have been affirmed if paragraph 13 in the sub-contract did not exist to create the tension with the conduit clause.

As a practice pointer, if you are defending a sub-contractor to whom a tender of defense and indemnity has been made, seek to find ambiguity and equivocation in the contract so that Perry/Ruzzi may be applied. If you are defending a party seeking defense and indemnity from another, ensure that your tender is predicated upon a clear and unequivocal expression of the parties' intent with respect to indemnification.

*Chris is a shareholder and works in our Philadelphia, PA office. He can be reached at (215) 575-2733 or cdougherty@mdwcg.com.