Division One of the Arizona Court of Appeals recently issued a decision addressing contractual indemnification provisions in Amberwood Development, Inc., et al. v. Swann’s Grading, Inc., 2017 WL 712269. Given that Amberwood Development is an unpublished memorandum decision (and not an opinion), it will have no precedential effect on any subsequent Arizona cases. It is, nevertheless, worth reviewing because it touches on two key aspects of indemnification provisions—(1) what acts or omissions are covered; and (2) whose acts or omissions are covered. In Amberwood Development, the court ultimately found that the subcontractor, Swann’s Grading, Inc. (“Swann’s”), was obligated to indemnify the general contractor, Amberwood Development, Inc. (“Amberwood”), for: (1) Swann’s non-negligent actions; and (2) all claims “arising out of or connected to Swann’s work,” regardless of who caused them.
The dispute in Amberwood Development arose from the construction of a housing development in Chandler, Arizona. In its role as the general contractor, Amberwood subcontracted with Swann’s to furnish rough and final grading work on the project. The parties’ subcontract contained the following indemnification provision:
INDEMNITY: Subcontractor agrees to and does hereby hold Contractor harmless from any and all claims, actions, damage, costs or Attorney’s fees arising out of the acts or omissions of Subcontractor, its employees, agents or suppliers with regard to the performance or omission of any of Subcontractor’s duties and obligations under this contract. The indemnity extends to any claims asserted by any subsequent property owner alleging improper or defective workmanship or materials in any work or material done or provided by Subcontractor.
To the fullest extent permitted by law, Subcontractor shall defend and indemnify and hold harmless, Contractor and their agents and employees from claims, demands, costs, attorney fees, causes of action and liabilities of every kind whatsoever arising out of or in connection with Subcontractor’s work performed for Contractor. This defense and indemnity shall extend to claims occurring after this agreement is terminated as well as while it is in force. The defense and indemnity shall apply regardless of any active and/or passive negligent act or omission of the Contractor, Architect, or their agents or employees, but Subcontractor shall not be obligated to indemnify any party for claims arising out of the sole negligence or willful misconduct of the Contractor or its agent or employees. The defense and indemnity set forth in the section shall not be limited by any insurance requirements, or by any provision of the Agreement. All work done at a site or in preparing or delivering materials or equipment to the site shall be at the sole risk of Subcontractor until the work is accepted by Contractor.
After the project was complete, eighteen homeowners sued Amberwood for various construction defects. Amberwood, in turn, asserted third-party indemnity claims against its subcontractors, including Swann’s. The homeowners’ causes of action were ultimately bifurcated—ten homeowners pursued their claims in arbitration, and the balance proceeded in Superior Court. The arbitration resulted in a $1,750,000.00 award against Amberwood, and Amberwood subsequently settled with the the remaining eight homeowners for $723,900.00. Amberwood then settled its third-party indemnity claims against all its subcontractors except Swann’s in exchange for $479,400.00.
Prior to the trial of Amberwood’s claim against Swann’s, the parties filed cross-motions for summary judgment on the scope of Swann’s indemnity obligations. In granting Amberwood’s motion, the trial court found that “Swann’s was obligated to defend and indemnify Amberwood for claims related to Swann’s work and that, to recover on the indemnity claim, Amberwood would have to show that its settlements were ‘reasonable and prudent and that the allocated amount arose out of or was in connection with Swann’s work.'” The parties subsequently stipulated that Amberwood’s settlements with the homeowners were reasonable.
At trial, Amberwood presented expert testimony that 81% of the arbitration award and 70% of the litigation settlements “were at least partially attributable to Swann’s work.” Swann’s expert, on the other hand, opined “that Swann’s did not cause any of the damages for which Amberwood sought indemnification.” The trial court ultimately found that Swann’s was obligated to indemnify Amberwood for 72% of the arbitration award and 70.6% of the litigation settlements. Swann’s was granted an offset for the full $479,400.00 that Amberwood received in settlement from its other subcontractors. Finally, Amberwood was awarded the following fees and costs against Swann’s: (1) defense costs of $179,570.63; (2) attorneys’ fees of $121,074.92; and (3) court costs of $14,559.25.
After entry of final judgment, Swann’s moved to amend the judgment or, alternatively, for a new trial. The motion was denied and Swann’s timely appealed the trial court’s decision on multiple grounds—two of which related to Swann’s indemnification obligations.
Swann’s principal argument on appeal was “that Amberwood could only recover if it showed under the indemnity provision that Swann’s was negligent in performing its work.” But the Arizona Court of Appeals rejected this argument to limit the scope of the subject provision to negligent acts. The court first noted that Swann’s was relying solely on two distinguishable out-of-state cases—one from California that involved a materially different indemnification provision; and one from Nevada where indemnity jurisprudence differs materially from Arizona.
The court, instead, found that the decision in Cont’l Heller Corp. v. Amtech Mech. Servs., Inc., 61 Cal. Rptr. 2d 668 (Cal. Ct. App. 1997) was on point. In Cont’l Heller, “the California Court of Appeals determined that subcontract language requiring indemnification for losses that ‘arise out of or [are] in any way connected with the performance of work under this Subcontract’ did not require the indemnitee to show the subcontractor was either negligent or at fault.” Rather, the California court held that such language left no doubt that the subcontractor’s indemnification obligations were triggered by its “‘negligence or for any other reason except for the sole negligence or willful misconduct of [the indemnity].'” The Arizona Court of Appeals found that Swann’s subcontract contained similarly straightforward language, insofar as it required indemnification of any claim “‘arising out of or in connection with [Swann’s] work performed for [Amberwood]…regardless of any active and/or passive negligent act or omission of [Amberwood]’ and only excepts claims arising out of Amberwood’s sole negligence or willful misconduct.” As a result, the Court of Appeals found that the trial court correctly determined that Amberwood did not have to show that Swann’s was negligent to recover.
Swann’s next argued that it was only required to indemnify Amberwood for damages directly caused by Swann’s acts or omissions. But the Court of Appeals also summarily rejected this attempt to limit the scope of the subject indemnification provision to Swann’s acts or omissions. The court noted again that “Swann’s subcontract required it to indemnify Amberwood for any claims arising out of or connected to Swann’s work, not merely those caused by Swann’s negligent acts or omissions.” (Emphasis added). The court, therefore, refused to “impose a causation requirement the parties did not include in their contract.” Accordingly, because Amberwood offered expert testimony at trial that substantial portions of the arbitration award and litigation settlements “were at least partially attributable to Swann’s work,” the trial court’s judgment was affirmed.
As an unpublished memorandum decision, Amberwood Development will have no precedential effect on any subsequent Arizona cases. It is, however, worth reading because it addresses the scope of a fairly standard indemnification provision—in terms of both what and whose acts are covered. It also serves as a reminder that, in certain circumstances, Arizona courts will be more likely to enforce indemnification provisions as written.