Arizona Trial Court Rules Owner May Recover Consequential Damages from Subcontractor Despite Waiver of Main Contract | Schnell & Wilmer

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In a recent Arizona case, the trial court ruled that an owner may sue a subcontractor directly for damages resulting from the owner’s default based on the subcontract’s express indemnity clause, notwithstanding that the same damages may be recovered from the principal contractor by the subcontractor Language is excluded from the main contract.

In this case, a mechanical subcontractor on a high-rise project sued the general contractor, owner, and planners for damages for delay and impact. The owner counterclaimed the subcontractor to claim the owner’s direct and consequential damages from delays. The main contract contained a mutual waiver of consequential damages between the client and the general contractor and a limitation of the contractual penalty. The subcontractor agreement contained a similar mutual waiver of consequential damages between the general contractor and the subcontractor, but expressly excluded the subcontractor’s indemnification obligations from the waiver. The subcontracting agreement also allowed the general contractor to pass on the owner’s contractual penalty and the general contractor’s damage caused by delay to the subcontractor. The Indemnification Provision for Subcontracting reads in the relevant part: “To the fullest extent permitted by law, the subcontractor agrees to indemnify…the owner…from and against all…damages, losses…and costs… arising out of or as a result of the performance or failure of … results in performance, the work of the subcontractor and obligations as specified in the contract documents ….”

The subcontractor sought summary judgment on the owner’s counterclaim and put forward several arguments, most notably that the indemnity clause of the subcontract only covered claims by third parties against the owner and not the owner’s own damages, losses and costs. The trial court, citing Arizona and other state law, ruled that the indemnification clause for subcontracts included claims by the owner for damages, losses and expenses from first parties. See Skousen v WC Olsen Investment Co.149 Ariz. 251 , 253 (1986); Yan Ming Marin Transp. Corp. v Okamoto Freighters Ltd.259 F.3d 1086, 1092 (9th circle 2001); Hot Rods, LLC v Northrop Grumman Sys. corp, 196 cal. report 3d 53, 65 (2015).

The subcontractor further argued that the parties could not possibly have intended the subcontractor to have unlimited consequential liability towards the owner if the owner waives consequential damages and limits the penalty owed to the main contractor. The subcontractor asked the court to interpret the subcontractor’s indemnity provision to avoid what the subcontractor called “absurd” results. The court recognized the logic of the subcontractor’s reasoning. However, the court found that “the problem is the way the subcontract is written. [Subcontractor] agreed a right to damages for the owner. At the same time, [Subcontractor] contained no wording limiting this right to compensation to liquidated damages and contained no provision waiving the owner’s consequential damages. [Subcontractor] could have avoided this situation with a better contract.” Ultimately, the court denied the subcontractor’s motion for summary judgment, and the parties’ dispute remains unresolved pending trial.

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A few important takeaways are evident. From a general point of view, this court ruled, as would be expected of most courts, that the parties are bound by the language they negotiate in their contracts, even if the consequences for one party may seem illogical or absurd. So be careful what you negotiate and consider seeking clarity to counter competing interpretational arguments. From a specific perspective, in an indemnification clause, where the parties agree to allow, or alternatively prohibit, the indemnity recipient to recover damages, losses and expenses of their own party, the parties should expressly and clearly consider their agreement and understanding of the indemnity clause.

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