Heads I Win, Tales You Lose. Court Finds Indemnity Provision Went Too Far

Garret Murai | California Construction Law Blog

We all love David and Goliath stories. The underdog winning against the far stronger (and dastardly) opponent. Think Rocky Balboa versus Ivan Drago, the Star Wars Rebellion versus the Galatic Empire, Indiana Jones versus a good chunk of the Third Reich. And now, we have Margaret Williams.

The Story of Margaret Williams and her LLC

The story, told in Long Beach Unified School District v. Margaret Williams, LLC, Case No. B290069 (December 9, 2019), is about Margaret Williams. Ms. Williams (we’ll just call her “Margaret” going forward because it just  sounds better when telling a story) worked for nearly ten years full-time for the Long Beach Unified School District, toiling day in and day out doing construction management and environmental compliance work, including work involving the clean up of  material at a school construction site contaminated with arsenic.

Although she worked full-time for the District for nearly ten years, she wasn’t an employee. Rather, she was a contractor. And, on top of it all, as a condition of working for the District, the District required that she form a company in order to contract with the District. According to Margaret, “In order to work with the District, I was directed . . . to form a corporation or partnership. This was the only way I could work for the District: I could not enter into a contract with the District as an individual.” So, in 2006, she formed a company, simply called Margaret Williams, LLC.

In 2013, the District’s general contractor for a new school illegally brought contaminated material onto the project site. Margaret directed Link Corporation, the District’s construction supervisor at the site, to remove the contaminated materials. Link, however, ignored her. Through the following year, Margaret tried to resolve the problem by discussing it with two District administrators, one of whom, told her to oversee the cleanup at the site.

According to Margaret, District employees overseeing the site “deliberately interfered” with her efforts to prevent the mishandling of contaminated material. She wrote a letter to District administrators telling them that her ability oversee the cleanup of the site was “completely neutralized,” that her access to her District email account and a facility server had been disabled, and that no one would explain these events. Again, according to Margaret, “[M]y ability to do my  job has been completely eliminated by these actions, the ability to run my business impacted. I cannot even contact my own company staff without getting on the server and accessing my emails. I have worked in the District for almost 10 years and everything is on that computer . . .”

When Margaret sent a report to the Department of Toxic Substances and Control asking for their help to ensure the District properly clean up the site she received a letter from the District terminating its contract  with Margaret’s company based on its employee’s failure to return to work. Shortly thereafter, Williams was rushed to the hospital due to sudden illness and diagnosed with arsenic poisoning. But, of course, since this is a legal blog, you know that’s not the kicker.

Margaret and her company later sued the District under Government Code section 12653 which permits employees, contractors and/or agents to sue if discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of his her employment. Her company’s contract with the District, however, contained an indemnity provision requiring her company to indemnity and hold the District entirely harmless from all liability arising out of:

  1. Death or bodily injury to a person;
  2. Injury to, loss or theft of property;
  3. Any failure or alleged failure to comply with any provision of law [note: that’s a whopper of a provision]; or
  4. Any other loss, damage expense due to any of the foregoing suffered by Margaret’s company, anyone employed by Margaret’s company or District, or in any way connected with the Project.

The District, relying on the indemnity provision, filed a cross-complaint against Margaret Williams, LLC alleging that her company had breached its contract by failing to indemnify the District from the company’s own claim and the claim of its employee, Margaret.

In response, Margaret Williams, LLC filed an anti-SLAPP motion asking the trial court to strike the District’s cross-complaint in its entirety, basically, on the ground that the cross-complaint was an end-run around to prevent Margaret and her company from suing the District for retaliatory termination. In its opposition, the District argued that it’s cross-complaint was not based on Margaret and her company’s underlying complaint, but rather, on the Margaret William, LLC’s refusal to defend and indemnify the District at it had agreed to in in its contract.

The trial court was having none it. At the hearing on the anti-SLAPP motion, the Court stated, “[I]f I read it correctly it essentially says regardless of how plaintiff prevails or fails to prevail on the main complaint, that no monies will be paid because she has agreed to indemnify everyone in the case.” The trial court granted the motion finding that the cross-complaint arose from protected activity and that the District had failed to demonstrate a probability of prevailing.

The District appealed. It also appealed an order from the trial court denying its application to include nine additional pages to its opposition brief.

The Appeal

On appeal, the 2nd District Court of Appeal explained a two-step process in analyzing anti-SLAPP motions. The first, explained the Court is that a defendant, here Margaret, must take two related showings. First, “[c]omparing its statements and conduct against the statute, it must demonstrate activity qualifying for protection.” And, second, “comparing that protected activity agains the complaint, it must also demonstrate that the activity supplies one or more elements of a plaintiff’s claims.” “Protected activity,” explained the Court, “includes the filing and prosecution of lawsuits” as well as “conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.”

Here, held the Court of Appeal, the District’s cross-claims for defense and indemnity would have no basis without Margaret and her company’s underlying complaint:

The District’s own position is that its cross-claims arose from Williams LLC’s refusal to defend and indemnify the District in the Underlying Action. This refusal was protected conduct in furtherance of petitioning connection with an issue of public interest. A refusal to fund the defense of one’s own litigation – and the defense of a co-plaintiff’s claims arising from the same facts – is out in furtherance fo the litigation. Further, the Underlying Action is connected with an issue of public interest. Its allegations concern an environmental hazard at a construction site for a public school, violations of the state’s requirements for remedying that hazard, and a public school district’s punishment of resistance to those violations.

The second step in analyzing anti-SLAPP motions explained the Court of Appeal, is that the plaintiff, here the District, must demonstrate a probability of prevailing on each claim arising from protected activity. In analyzing a plaintiff’s burden, explained the Court, the court applies a “summary-judgment-like procedure,” “does not weigh evidence or resolve conflicting factual claims,” and “should consider whether the defendant’s evidence in support of an affirmative defense is sufficient, and if so, whether the plaintiff has introduced contrary evidence, which, if accepted, would negate the defense.”

Here, held the Court of Appeal, Williams LLC raised an affirmative defense in its anti-SLAPP motion that the District could not prevail on its cross-claims because the indemnity provision is unconscionable and that the District had failed to negate that defense. Discussing the “substantive unconscionability” of the District’s indemnity provision, the Court stated:

Here, the indemnity provision drafted by the District . . . purports to preclude any possibility of Williams LLC obtaining meaningful recovery on a broad category of meritorious claims. The provision requires Williams LLC to indemnify the District for all liability for specified types fo damage sustained by Williams LLC itself as a result of the District’s conduct . . .

Further, explained the Court of Appeal, the District’s indemnity provision was “procedural unconscionable” because it was a contract of adhesion offered on a “take it, or leave it, basis,” Margaret only formed her company at the demand of the District who would not enter into a contract with her as an individual, and the indemnity provision itself came with a “surprise” in that it required each party to bear their own attorney’s fees and costs yet at the same time required Margaret’s company to defend the District thereby nullifying that very same provision.

Conclusion

We all love indemnity clauses when we can dictate their terms. However, Margaret Williams, LLC, while based on some pretty unique facts, provides an example of when indemnity provisions can go too far.

Roofing Project Specifications—The Details Required For Quality Roofing Insurers Rarely Pay For Or Mention in Estimates

Chip Merlin | Property Insurance Coverage Law Blog | December 4, 2019

Insurance estimators, appraisers, and adjusters of roofing claims should read the attached partial specifications of a commercial roofing project. There has been some discussion of what a “reasonable” cost should be, but I think most would require that the scope of a commercial roofing job involving insurance be one that is going to result in a “quality” job. So, how do you determine what a quality commercial roofing job would be? I suggest you would look at specifications that the construction industry has come up with to prevent non-quality work from occurring.

Where do you find the specifications for quality construction? The Construction Specifications Institute.

The Construction Specifications Institute is a national non-profit technical organization dedicated to the improvement of specifications and building practices in the construction industry through service, education, and research. Founded in 1948, CSI provides a forum for architects, engineers, designers, specification writers, contractors, manufacturer’s representatives, suppliers, and all others in the construction industry. Membership is open to all who are involved in the built environment.

Historically, the CSI helped ensure quality construction through standards of materials and methods of construction. I would encourage anybody who is in the insurance restoration business, as a restoration contractor or an individual who is somehow responsible for determining the scope of methods and materials to be used in a particular restoration project, to become intimately familiar with using the reference materials available from the CSI. I would also suggest that you contemplate obtaining certification from the Construction Specifications Institute as well.

Thought For The Day

Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.
—George Washington

Arbitrator: Produce Those Construction Documents . . . And Me: You Have No Authority!

Matthew DeVries | Best Practices Construction Law | November 18, 2019

Construction disputes often involve voluminous amounts of discovery, including documents in the hand of third parties.   And if the case is subject to arbitration, it is likely that there will be a dispute about whether the arbitrator has the authority to compel production of third-party documents or witnesses for deposition.

On September 18, 2019, in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc.the Court of Appeals for the Eleventh Circuit concluded that Section 7 of the Federal Arbitration Act (“FAA”) precludes all pre-hearing discovery from non-parties.  Specifically, the court considered the enforcement of summonses sent to non-parties to appear by video conference and to produce documents.  According to the court, any non-party discovery must take place in person at the arbitration hearing.  Even if the arbitrator’s request is limited to document production, the non-party must appear at the hearing in person with the documents in hand.  This appears to now be the rule in the Second, Third, Fourth, Ninth and Eleventh Circuits.  The Eighth Circuit has held otherwise, suggesting that pre-hearing discovery is available under the FAA.

So what? As a practical matter, the majority of the circuits now hold that if a non-party receives an arbitral summons for pre-hearing discovery, this is outside the scope of the arbitrator’s power.  However, an arbitral summons may require discovery at the hearing so long as the non-party physically appears.

Don’t Waive Too Much In Your Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | October 3, 2019

In the past few years, the Virginia General Assembly has, with certain caveats, precluded pre-furnishing waiver of mechanic’s lien rights.  While this essentially outlawed the types of mechanic’s lien waiver clauses that pervaded construction contracts in Virginia, the key to the previous sentence is “pre-furnishing.” What the General Assembly left intact were the usual waivers of mechanic’s lien rights typically required to be provided to Owners and others in the payment chain in exchange for payment.

These lien waivers come in a few “flavors” from conditional to unconditional, partial to full.  Their terms usually include an acknowledgement of receipt of payment (we’ll get to this later), and a statement that the one seeking payment knows of no possible claims by lower tier subcontractors and then waives all mechanic’s lien rights against the property for work performed and included in the request for payment.  Often over my years as a Virginia construction attorney, I have noticed that these waivers are often signed without comment or review.  They are just part of the process and more often than not are not even an issue for most projects.  Of course, if they are an issue they can be a big one, and their terms can come back to bite a claimant that has not properly vetted them.

The first potential issue is waiving lien rights while acknowledging receipt prior to actual receipt of the check or wire.  Many of the waiver forms that are out there list a payment amount, or possibly simply state that the waiver is in exchange for some small payment, and then state “receipt of which is acknolwedged” or something similar.  The issue here is that receipt may not have happened yet because these lien waivers are submitted as part of the payment package in order to get paid in the first place.  In short, should you sign the waiver prior to payment, you may have acknowledged a non-event and in the event of non-payment have a written document stating that you waived your claim to a lien for that money.  What a court would do with this, I am unsure, but why risk it?  My advice, be sure your waiver is contingent on actual clearance of payment as well as receipt.

Another issue is that many of these forms waive “all claims” against the paying party up to the date of the waiver.  If you have other projects going with the same paying party, this could potentially waive your claims on those as well.  Again, this waiver is broader than necessary and puts payments at risk for other work.  Why take the chance?  Be sure your waiver is limited to the project at hand.

A third issue is that, particularly with final or unconditional waivers, the waiver may simply waive all rights for now and forever, but not accurately state what exceptions there may be (for instance outstanding claims, currently unresolved change orders, retention and the like) for payments in the future.  In theory, these could waive your rights to such claims if you do not properly state what exceptions or claims are out there.  As with the prior two, why take the chance with your money, be sure to note exceptions, should they exist and do so whether the form calls for it or not where the waiver is unconditional.

These are far from the exhaustive list of items to look out for but are illustrations of the potential pitfalls for payees with lien waiver forms.  As always, I recommend consulting with an experienced construction lawyer when presented with a waiver form.

California Supreme Court Holds “Notice-Prejudice” Rule is “Fundamental Public Policy” of California, May Override Choice of Law Provisions in Policies

Timothy Carroll and Anthony Miscioscia | White and Williams | September 3, 2019

On August 29, 2019, in Pitzer College v. Indian Harbor Insurance Company, 2019 Cal. LEXIS 6240, the California Supreme Court held that, in the insurance context, the common law “notice-prejudice” rule is a “fundamental public policy” of the State of California for purposes of choice of law analysis. Thus, even though the policy in Pitzer had a choice of law provision requiring application of New York law – which does not require an insurer to prove prejudice for late notice of claims under policies delivered outside of New York – that provision can be overridden by California’s public policy of requiring insurers to prove prejudice after late notice of a claim. The Supreme Court in Pitzer also held that the notice-prejudice rule “generally applies to consent provisions in the context of first party liability policy coverage,” but not to consent provisions in the third-party liability policy context.

The Pitzer case arose from a discovery of polluted soil at Pitzer College during a dormitory construction project. Facing pressure to finish the project by the start of the next school term, Pitzer officials took steps to remediate the polluted soil at a cost of $2 million. When Pitzer notified its insurer of the remediation, and made a claim for the attendant costs, the insurer “denied coverage based on Pitzer’s failure to give notice as soon as practicable and its failure to obtain [the insurer’s] consent before commencing the remediation process.” The Supreme Court observed that Pitzer did not inform its insurer of the remediation until “three months after it completed remediation and six months after it discovered the darkened soils.” In response to the denial of coverage, Pitzer sued the insurer in California state court, the insurer removed the action to federal court and the insurer moved for summary judgment “claiming that it had no obligation to indemnify Pitzer for remediation costs because Pitzer had violated the Policy’s notice and consent provisions.”

The insurance policy in Pitzer had three relevant provisions: (1) a notice provision requiring Pitzer to provide “notice of any pollution condition” with a “written report as soon as practicable;” (2) a consent provision requiring Pitzer to obtain the insurer’s written consent “before incurring expenses, making payments, assuming obligations, and/or commencing remediation due to a pollution condition;” and (3) a choice of law provision stating that New York law governed all matters arising under the Policy. Based on the choice of law provision, the federal district court in Pitzer held that New York law applied to the policy. Under New York law, a policy delivered in New York is subject to the notice-prejudice rule; however, a policy delivered outside of New York was subject to a “strict no-prejudice rule” under New York common law, “which denies coverage where timely notice is not provided.” Since the policy in Pitzer was delivered in California, the insurer did not need to prove prejudice from the College’s late notice of its pollution claim.

The district court in Pitzer held that the insurer was entitled to summary judgment because Pitzer College’s notice was not timely and the insurer did not need to show prejudice from that late notice. “[A]lthough a state’s fundamental policy can override a choice of law provision,” the district court observed, Pitzer “failed to establish that California’s notice-prejudice rule is such a policy.” Had it done so, Pitzer may have been able to avoid dismissal of its coverage claim due to its late notice of the pollution discovery and remediation work. Thus, Pitzer appealed to the Ninth Circuit Court of Appeals on the issue of whether the notice-prejudice rule was a fundamental public policy of California. The Ninth Circuit certified the question to the California Supreme Court.

The California Supreme Court in Pitzer held that the notice-prejudice rule was a fundamental public policy of California for several reasons, including that the rule “protects insureds against inequitable results that are generated by insurers’ superior bargaining power.” The notice-prejudice rule, the Supreme Court added, “is based on the rationale that the essential part of the contract is insurance coverage, not the procedure for determining liability, and that the notice requirement serves to protect insurers from prejudice, . . . not . . . to shield them from their contractual obligations through ‘a technical escape-hatch.’” (internal citations and quotations omitted). The Supreme Court left it for the Ninth Circuit Court of Appeals to determine, based on its holding that the notice-prejudice rule is California’s public policy, “whether California has a materially greater interest than New York in determining the coverage issue, such that the contract’s choice of law would be unenforceable because it is contrary to our fundamental public policy.”

Building on that holding, the Supreme Court also concluded that, with respect to the policy’s consent provision, “failure to obtain consent in the first party context is not inherently prejudicial” to insurers, and “the usual logic of the notice-prejudice rule should control. . . .” The Supreme Court found “no reason to believe imposing this rule on first party insurers will prove so unmanageable for those suffering actual prejudice to justify a contrary conclusion.” Thus, the court held, “California’s notice-prejudice rule is applicable to a consent provision in a first party policy where coverage does not depend on the existence of a third party claim or potential claim.” The California Supreme Court distinguished consent provisions in third-party liability policy context, “sometimes called ‘no voluntary payment’ provisions,” which “are designed to ensure that responsible insurers that promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim.” In the third-party liability policy context, the Supreme Court observed, “the insurer’s right to control the defense and settlement of claims is paramount,” and California courts “generally refuse[ ] to find the notice-prejudice rule applicable to consent provisions in third-party policies.”