When contracts go bad and a lawsuit percolates, it is important to know whether your attorneys fees will be covered based on provisions outlined in the contract. Relying on an indemnity provision is not enough, as illustrated by the Oregon Court of Appeals in its recent opinion in Pacificorp v. SimplexGrinnell, LP, 256 Or App 665 (2013).
Construction contracts often include a broadly worded indemnity provision and an attorney fee provision. A typical indemnity provision generally provides:
“Contractor agrees to indemnify, defend, and hold harmless Owner against and from any and all claims, demands, suits, losses, costs and damage of every kind and description, including attorney fees and/or litigation expenses, brought or made against or incurred by Owner to the extent arising out of any negligent or wrongful act of Contractor.”
Owners have sometimes used these contracts to argue that if the owner sues the contractor for construction defects, the contractor should pay for the owner’s attorney fees in the dispute. However, in the future, this will be a difficult argument to make, given the Court of Appeals’ recent opinion in Pacificorp v. SimplexGrinnell, LP, 256 Or App 665 (2013).
In Pacificorp, Pacificorp and Simplex had a contract with an indemnity provision similar to the provision above. Simplex won the case by proving that its negligence did not cause Pacificorp’s damages. Then, Simplex argued that Pacificorp should pay its attorney fees for defending the action based on the contract and an Oregon statute, ORS 20.096, which says that one-sided attorney fee provisions will be interpreted to apply both ways.
The Court of Appeals sided with Pacificorp. The court stated that indemnity provisions typically apply when a third party sues one of the contracting parties, but does not apply to a claim between the two parties to the contract. The contract did not have an attorney fee clause that specifically said the prevailing party would be able to collect attorney fees in litigation between Pacificorp and Simplex. The Court said that “the contract is between sophisticated parties and…if these business entities wanted a fee-shifting provision in the contract, …they could and presumably would have drafted one.”
In a construction contract, the Court’s view is that an indemnity provision would typically be intended to apply to a claim by a third party against the owner, when the negligence of the contractor caused the injury that formed the basis of the claim against the owner. For example, if a chandelier fell on a guest’s head and caused injury, and the guest sued the owner, the owner might look to the contractor who negligently installed the chandelier. Under an indemnity clause, the contractor might have to defend and indemnify the owner for the damage, including attorney fees. However, if the chandelier fell and damaged the floor, the owner could not sue the contractor to get its attorney fees for the cost to repair the house under the indemnity clause.
The lesson from this case is that parties should make explicit in indemnity provisions whether it applies to claims between the parties to the contract. More generally, parties entering into contracts should carefully consider the wording of indemnity provisions and attorney fee clauses. Going forward in the wake of Pacificorp, parties in litigation should be cautious about trying to rely on an indemnity provision to provide for attorney fees in claims between the contracting parties.