Lachenmeier, Enloe & Rall - December, 2002 Publication

Recovering Attorney Fees in Common-Law Indemnity Claims
December, 2002

     Typically, when your insured general contractor builds a home, the contract with the homeowner provides for an award of attorney fees to the winner in any dispute related to the construction. When the general contractor is later sued for alleged construction defects, the subcontractors are brought in by defense counsel as third-party defendants, under theories of indemnity and contribution. Many times, there is no written contract between the general and the various subcontractors, let alone any attorney fee provision. Since attorney fees can be substantial in these cases, your insured or, more to the point, your employer, is often placed in the unenviable position of alternately defending the homeowner’s claims and prosecuting third-party claims, all the while incurring not only defense attorney fees but also the homeowners’ attorney fees. Can your insured general pass on the homeowner’s attorney fees to the subcontractors?

     Somewhat surprisingly, there are no Oregon cases directly addressing this issue. In general, however, a party making a common law indemnity claim must prove that it “reasonably incurred costs in defending or satisfying” a claim made by another and that, as between it and the party against whom indemnity is sought, “the costs incurred ought to be borne by the latter.” Martin v. Cahill, 90 Or App 332, 336 (1988).

     Although recoverable costs include attorney fees incurred by the one seeking indemnity in defending the claim by the plaintiff (See e.g. U.S. Fire Ins. Co. v. Chrysler Motors Corp., 264 Or 362 (1973); Smith Radio v. Challenger Equipment, 270 Or 322 (1974)) there is no Oregon case deciding whether the underlying plaintiff’s attorney fees are included in such costs. An argument against recovery of such attorney fees could be made based upon the fact that the attorney fee provision appears in the agreement between the homeowners and the general contractor, not involving the subcontractors. A worker’s compensation case, Flying Scotsman, Inc. v. Leach, 53 Or App 14 (1981), seems to lend support to that argument. The issue in that case was whether an employer whose employee was injured and recovered benefits was entitled to indemnity from the negligent third party for its increased insurance premiums. The court rejected the claim, noting that, “For a party to have a right to indemnity from another, they must have ‘a common duty … mutually owed to a third party.’ Because the defendants are not liable to plaintiff’s insurer for the increased premium, plaintiff is not entitled to indemnification from defendants.” Id., 53 Or App at 16.

     This opinion seems to indicate that the party from whom indemnity is sought must also be liable to the plaintiff for the specific type of damages for which indemnity is sought, in this case, attorney fees. On the other hand, the purpose of indemnity is to shift the burden of paying damages to the culpable party. Indemnification, by definition, means holding the indemnitee (the person seeking indemnity) harmless. An indemnitee cannot be held harmless if it has to pay an award of attorney fees incurred as a result of the indemnitor’s actions.

     This is the approach taken in at least two jurisdictions addressing this issue. In a case directly on point, Kenney v. Oak Builders, Inc., 235 So2d 386 (La 1970), the general contractor built a residence for the plaintiffs pursuant to a contract containing an attorney fee clause. The plaintiffs recovered damages and attorney fees and the general sued the subcontractors for indemnity. The contracts with the subcontractors did not contain any provision for attorney fees. The court concluded, nonetheless, that the subcontractors’ breach of their agreements with the general was the true cause of the general’s liability to the plaintiffs. Because the general had a right to rely on proper performance by the subcontractors, the court awarded full indemnity, including the attorney fees awarded to plaintiffs.

     Similar reasoning was employed by the Oklahoma Supreme Court in United General Ins. Co. v. Crane Carrier Co., 695 P2d 1334 (Ok 1984). The plaintiffs had sued Crane for alleged negligent workmanship. Crane brought a third-party claim for indemnity against Newport seeking indemnity for damages and attorney fees awarded to the plaintiffs. The Court held these fees recoverable “under the general rules of indemnity that where a person who, without fault on his own part, has been compelled to pay damages occasioned by the primary negligence of another is entitled to indemnity from the latter, whether an express indemnity contract between the parties is in existence or not.” Id., 695 P2d at 1339.

     In the absence of direct Oregon authority, it seems the better reasoning that a party entitled to indemnity should be entitled to full indemnity, including attorney fees recovered by plaintiffs. Keep in mind, however, that any entitlement to such fees may be limited to fees incurred after the subcontractor or subcontractors are put on notice of the claims. Since these cases rarely go to trial, this may be of primary significance in mediation and settlement negotiations.

Civil Trials in Oregon: An Endangered Species?

Speaking of rarely going to trial, Oregon Supreme Court Chief Justice Wallace Carson, faced with a significant ($8 million) funding reduction for Oregon court operations, recently announced that court services will likely be significantly curtailed in the near future. Among the cost saving measures: closing courts on Fridays; reducing staff pay by 10%; and “delayed” and “no action” processing of certain case types. Cases will be prioritized, with violent felonies and juvenile permanency matters (such as termination of parental rights) at the top of the priority list and small claims and nonviolent misdemeanors at the bottom. Civil litigation is 11th on the 18 category list. Processing of non-priority cases will be pared back and taken in order of priority as funds are available. These changes are to be effective March 1, 2003, with implementation being delayed in case a January 28, 2003 vote on a tax measure replaces some of the funding.

As a practical matter, the cases that you deal with will likely not be going to trial within the year from filing that has been the goal in the past. In fact, there may be very few civil cases tried at all during the first few months of 2003. The state’s 2003-2004 revenue forecast is also gloomy, so the future may not be much brighter. This should not dramatically affect cases that are subject to court-annexed arbitration, except to the extent that the losing side may not be able to get a jury trial if it appeals. Also, these cut-backs may encourage litigants to participate in more alternative dispute resolution, such as mediation, private arbitrations and even privately hired judges.

If you have any questions, please feel free to contact the author, Tim Heinson, by phone at (503) 768-9600, or by email at tim@lerlaw.com.