THE SCOPE OF A RELEASE IN A SETTLEMENT AND CONTRACTUAL INDEMNIFICATION

imagesCALGH4ZOPilot Construction Services, Inc. v. Babe’s Plumbing, Inc., 111 So.3d 955 (Fla. 2d 2013) is a case that touches on two relevant issues. The first issue pertains to the scope of a release in a settlement agreement. The second issue pertains to contractual indemnification—an issue of importance to all in construction.

 

I. Scope of Release

 

In Pilot Construction, a private college hired a general contractor to renovate a residence hall. After completion, the college discovered deficiencies in bathrooms and showers that resulted in leaks and water damage. The college sued the general contractor for breach of contract and breach of express warranty. The college also sued the plumber (subcontractor) for breach of express warranty due to plumbing deficiencies that caused water damage.

 

The plumber settled directly with the college and a settlement and release agreement was executed. The college, however, continued to pursue claims against the general contractor including defects and damage that arose out of the plumber’s work. The general contractor then settled with the college, but instead of this dispute being dismissed, the general contractor pursued cross-claims against the plumber for indemnity, breach of warranty, and equitable subrogation.

 

The issue on summary judgment was whether the general contractor could pursue claims (such as indemnity) against the plumber when the plumber settled with the college and was released by the college. The trial court found that the general contractor could not pursue such claims and entered summary judgment in favor of the plumber.

 

On appeal, the Second District analyzed the scope of the release which provided in two portions:

 

First Portion: “Nothing within this Release is intended to be nor shall it be construed as any kind of waiver, limitation, or compromise to any claim or defense New College has or may have against any party or entity other than Babe’s Plumbing, Inc.” Pilot Construction, 111 So.3d at 958.

 

Clearly, the college wanted this reservation in the settlement so that it could continue to pursue claims against the general contractor inclusive of damage that arose out of the subcontractor’s work.

 

Second Portion: The settlement also included a release of the plumber for everything (known and unknown damages) in connection with the plumber’s work at the college.

 

Clearly, the plumber wanted this provision so that it would be released by the college (owner) for its scope of work at the project.

 

So, what was the problem? The Second District found that the release to the plumber actually conflicted with the reservation language since the settlement was not limiting claims against other parties, especially as it relates to the subcontractor’s scope of work. Based on the conflicting portions, the court held as follows:

 

  1. the general contractor could pursue its claims against the plumber because it was not an intended-third-party beneficiary of the college and plumber’s settlement as demonstrated by the fact that the settlement allowed the college to pursue damages (arising from the plumber’s work) against the general contractor;
  2. the fact that the plumber settled with the college does not release the plumber from the general contractor’s claim for indemnification since the general contractor could still be liable to the college for the plumber’s scope of work; and
  3. nothing in the release would prevent the general contractor from pursuing a breach of warranty claim against the plumber.

 

As the court explained, “Because the language of the release does not apply to bar Pilot’s [general contractor] claims against Babe’s [plumber], the trial court erred in granting summary judgment….” Pilot Construction, 111 So.3d at 959.

 

This decision is important to any party participating in a multi-party construction defect case. If a subcontractor is getting sued directly by the owner, its best bet is to effectuate a settlement directly with the owner and general contractor whereby the owner and general contractor both release the subcontractor relating to the project. Due to the subcontractor’s indemnification obligations and requirement to identify the general contractor as an additional insured, it will ideally want a release ending it and its insurance carrier’s involvement in the dispute. Or, if that is not possible, make certain that the settlement does not have reservation language that allows the owner to pursue any defects and damage arising from the subcontractor’s scope of work against the general contractor. Better language would reflect that the owner is not pursuing any defects or damage arising from the subcontractor’s scope of work against the general contractor pursuant to this settlement (i.e., a release of the general contractor relating to the subcontractor’s scope of work). The general contractor may still be able to pursue claims against the subcontractor; but, if the owner is releasing the general contractor for the subcontractor’s work, such claims could be tenuous since the owner cannot pursue such damage against the general contractor. (Although, the general contractor’s insurer could still pursue an additional insured claim to recoup defense costs associated with defending the general contractor.)

 

If a subcontractor is being sued by the general contractor only, some of the same rationale applies. The general contractor can settle directly with the subcontractor; however, it assumes the risk associated with the subcontractor’s work since the owner is still pursuing claims against the general contractor arising from the subcontractor’s work. This isn’t always a bad thing based on the dollar amount of the settlement and the ultimate settlement with the owner. In other scenarios, the general contractor only wants to settle with a subcontractor if it can contemporaneously settle with the owner so that it is getting a release from the owner for the subcontractor’s scope of work. An owner will likely not want to do this, nor should it, if damages cannot necessarily be isolated to that subcontractor’s scope of work (such as a water intrusion dispute where multiple scopes contribute to water intrusion and damage). Other times, the general contractor will not settle with subcontractors independent of a global settlement with the owner in perhaps an effort to minimize its contribution to the settlement.

 

Ultimately, there are numerous strategies that come into play when negotiating settlements and releases based on the party. There really is no one-size-fits-all model as it is dependent on the nature of the dispute.  It is important to understand what is being released, what is not being released, and the scope of the release when entering into a settlement so that any risks can be appreciated.

 

II. Contractual Indemnification – Florida Statute s. 725.06

 

The plumber in Pilot Construction also argued that Florida Statute s. 725.06 barred the general contractor’s claims because the general contractor was seeking indemnification for its OWN negligence. The Second District dismissed this argument because the general contractor was only seeking indemnification for the subcontractor’s negligence:

 

“Section 725.06 would only bar Pilot’s claims for indemnification if Pilot’s claims were based on Pilot’s own negligence. A plain reading of Pilot’s claims against Babe’s shows that Pilot’s suit against Babe’s was based on Babe’s failures to correctly install shower pans and drains in the residence hall bathrooms. “
Pilot, 111 So.3d at 959.

 

The Second District’s ruling is interesting because it does not discuss the contractual indemnification language in the contract. Section 725.06 is a statute that essentially says that the first party cannot require the second party to indemnify it for its own negligence unless there is a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” See Fla. Stat. s. 725.06. Without compliance with this section, the indemnification provision is unenforceable. This is why it is always good practice to include a monetary limitation and identify it is part of the bid documents because most indemnifications are drafted in broad form that would require the second party to indemnify the first party for any and all damage caused wholly or partly by the second party. However, the Second District appears to focus less on the indemnification language in the subcontract and more on the actual claims that were asserted by the general contractor. Thus, if there is a concern with the enforceability of the indemnification provision, this case could support an argument for the general contractor that because the contractual indemnification claim being asserted is confined to the subcontractor’s (or second party) own negligence, the claim should be entitled to proceed.

 

For more information on contractual indemnification please see: http://www.floridaconstructionlegalupdates.com/buttoning-up-contractual-indemnification-language/

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.