Careful Drafting, DD 12/06
Defense Digest
Pennsylvania - Insurance Coverage & Bad FaithCareful Drafting: The Difference Between Success And Failure In Contractual Indemnification Claims
By James W. Layne, Esq.*The Pennsylvania Superior Court recently addressed issues of interpretation and enforceability of indemnification clauses in Chester Upland School District v. Edward J. Meloney, Inc., et al., 2006 Pa. Super. LEXIS 1471 (Pa. Super. Ct., Jun. 15, 2006).
In Chester, the school district contracted with a contractor, an architect and others for the installation of a new HVAC chiller at one of its high schools. When the chiller proved defective, however, the school district filed suit alleging breach of contract and negligence against the architect, who, in turn, filed a cross claim against the contractor for indemnification. The school district settled its claims against the parties at trial, summarily releasing the contractor and architect from the suit. Nevertheless, the architect's indemnification claim against the contractor seeking attorney's fees and costs remained before the trial court. The trial court awarded summary judgment for the contractor on the issue, and the architect appealed.
On appeal, the Superior Court examined the language of several indemnification clauses that had been drafted by the architect and incorporated into the contract. The contract's "General Conditions" clause contained two paragraphs which provided, in relevant part, as follows:
3.18.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the . . . Architect . . . from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to . . . injury to or destruction of tangible property (other than the Work itself) including loss of use resulting there from, but only to the extent caused in whole or in part by negligent acts or omissions of the Contractor. . .
***
3.18.3 The obligations of the Contractor under the Paragraph 3.18 shall not extend to the liability of the Architect . . . arising out of (1) the preparation or approval of maps, drawings, opinions, reports, surveys, Change Orders, designs or specifications, or (2) the giving of or the failure to give direction or instructions by the Architect, the Architect's consultants, and agents and employees of any of them provided such giving or failure to give is the primary cause of the injury or damage.
The court then analyzed the language of another, broader indemnification clause contained in the contract's Supplementary General Conditions, which stated:
1.9. The Contractor shall indemnify and save harmless . . . the Architect . . . from all suits and actions of every kind, nature and description brought by anyone whatsoever against them or any of them in any manner connected with the Contract here proposed or the work there under . . .
Setting forth the above contractual provisions in its opinion, the court stated that "contractual terms are ambiguous if they are subject to more than one reasonable interpretation when applied to a particular set of facts," and that, "[a]s a general rule, agreements will be construed against the drafter when terms are ambiguous." Applying these principles, the court reasoned as follows:
. . . a reasonable interpretation of Paragraph 3.18 is that Contractor has an obligation to indemnify Architect, but that this obligation is limited by specific provisions within the paragraph. In contrast, Paragraph 1.9 of the General Supplementary Conditions contains absolutely no limitations on the Contractor's obligation to indemnify. . . Thus, depending on which indemnity provision one relies, the contract has a different meaning. We conclude that this creates an ambiguity.
Finding that an ambiguity existed between the two clauses, the court construed the ambiguity against the architect by holding that, if either clause were applicable to its claim for indemnification, it was the more restrictive General Conditions clause.
The court next addressed the issue of whether the architect was entitled to indemnification under the General Conditions clause. While the court stated that the architect could seek indemnification for attorney's fees and costs under the clause if the school district's claims against the architect were covered under its terms, the court found the school district's claims were not so covered. The court reasoned that the clause gave rise to a claim for indemnification if the claim was attributable to damage to tangible property other than the Work itself, but that there was no evidence that the chiller had been damaged, since it was defective from "day one." Further, the court found that the clause's exclusion regarding damages to tangible property constituting "the Work itself" barred the architect's claim, as it could not be argued that the chiller was not part of the work. Finally, the court reasoned that paragraph 3.18.3 also barred the architect's claim for indemnification by expressly limiting the contractor's obligation to indemnify the architect.
The holding in Chester is instructive with regard to the incorporation of indemnification clauses into contracts. While it suggests that, pursuant to a carefully crafted indemnification provision, the court may be willing to award attorneys fees and costs to a party that has not had to pay a claim for damages, it serves as a reminder that where such provisions are not carefully crafted, they will be construed against their drafter.
* James is an associate in our King of Prussia, Pennsylvania office. He can be reached at (610) 354-8281 or at jwlayne@mdwcg.com.
