A big-box retailer sufficiently pled third-party indemnification claims against the construction company alleged to have provided defective work or materials, a federal judge has held.
The owners of a warehouse filed suit in the Eastern District of Virginia for damages related to cracked concrete flooring. The construction company argued that the third-party claims were insufficient and should be dismissed because they had not yet accrued.
But Virginia law exempts third-party claims from the accrual rules typically applicable to indemnification actions, U.S. District Judge Roderick C. Young said in Summit Investments II, et al., v. Sam’s East Inc. (VLW 024-3-311), noting that the warehouse owners’ allegations that the retailer breached its lease didn’t bar the third-party claim.
“Such allegations may well be true,” the judge said. “However, that does not excuse TRW from its independent contractual obligation to indemnify Sam’s East against losses resulting ‘in whole or in part’ from TRW’s work.”
Cracked flooring
Summit Investments II and Summit Investments V own an industrial warehouse in Prince George. Prior to entering a lease with Sam’s East, Summit’s warehouse was new and had never been occupied.
When Sam’s took possession of the warehouse under a lease, the concrete and expansion joints hadn’t yet been filled as necessary to allow for expansion and contraction of the floor’s concrete. Sam’s obtained a proposal from TRW Enterprises to seal the concrete with epoxy.
Sam’s accepted TRW’s proposal and entered into a master services agreement, or MSA. Shortly after TRW finished working, Sam’s representatives expressed concern over the conditions of the floor and eventually forwarded their concerns to Summit.
Summit responded that the floor damage resulted from work performed by Sam’s and its contractors and demanded that Sam’s promptly address the structural conditions at the premises. Summit also claimed that TRW used an improper epoxy that led to floor cracking.
Despite performing some mitigation, Sam’s never proposed how to return the floors to their original condition. Summit sued Sam’s for breach of contract and indemnification and requested a declaratory judgment clarifying obligations under the lease.
Sam’s then filed a third-party complaint under Rule 14 of Federal Civil Procedure against TRW for contractual and equitable indemnification, contribution and breach of contract.
TRW moved to dismiss.
Breach of contract
Young found that Sam’s sufficiently alleged the undisputed existence of the MSA, which established certain legally enforceable obligations on behalf of both Sam’s and TRW, and that TRW breached the MSA.
“To be sure, the Third-Party Complaint itself does not explicitly allege that TRW’s work contained defects in workmanship and/or materials (i.e. that TRW breached its obligations under the MSA),” the judge noted.
But the complaint attached and incorporated Summit’s complaint, which “alleges that the Floor Joint work constituted ‘negligent or willful misconduct,’ insofar as the materials used and work completed ‘significantly damaged’ the floors of the Premises,” Young said.
Along with documents that further fleshed out its allegations, Sam’s allegations indicated that TRW’s work breached the MSA because such work contained defects in workmanship and/or materials.
Third-party practice
Here, Sam’s sufficiently averred that, if it were liable to Summitt, any damages incurred would ultimately derive from TRW’s breach of the MSA.
“Such ‘if, then’ allegations are typical of — and sufficient to support — third-party complaints,’” the judge pointed out.
TRW’s objections to the styling of the allegations were unavailing and ignored the purpose of third-party practice.
“Indeed, third-party claims are specifically viable where a proposed third-party plaintiff ‘says, in effect, “If I am liable to plaintiff, then my liability is only technical or secondary or partial, and the third party defendant is derivatively liable and must reimburse me for all or part … of anything I must pay plaintiff,”’” Young said, citing Watergate Landmark Condo. Unit Owners’ Ass’n v. Wiss, Janey, Elstner Assocs., Inc.
TRW’s argument that a judgment in favor of Summit against Sam’s wouldn’t be based on a finding that TRW committed breach misconstrued the allegations.
“Summit would be unable to establish that any damages resulted from Sam’s East purported breach (i.e., failing to obtain prior approval for the work) if TRW’s work was proper and did not damage the premises,” Young wrote. “It is thus incorrect to say that any judgment against Sam’s East would be based strictly on a finding that Sam’s East breached the Lease by failing to obtain prior approval from Summit.”
Indemnification
According to TRW, the MSA didn’t provide for contractual indemnification under these circumstances.
The MSA obligated TRW to protect, defend and indemnify Sam’s “against any and all lawsuits, claims, demands, actions, liabilities, losses, [and] damages’ asserted against it, ‘arising out of any actual or alleged . . . damage to any property, or other damage or loss, resulting in whole or in part from the Services or this Agreement.”
“These allegations reveal that Summit’s lawsuit against Sam’s East plainly ‘aris[es] out of … actual or alleged … damage to any property, or any other damage or loss … resulting in whole or in part from the Services or the [MSA].’”
Thus, Young said the third-party complaint fell squarely within the scope of the MSA’s indemnification provisions.
TRW’s contention that the indemnification provisions of the MSA were inapplicable because any indemnification claim has yet to accrue also failed.
“Under § 8.01-249(5) of the Virginia Code, a right of action for indemnification accrues ‘when the … indemnitee has paid or discharged’ its obligation,” Young said. “Accordingly, a claim for indemnification ‘does not accrue until the indemnitee has suffered a loss.’”
The judge said TRW’s argument ignored a specific carve-out contained in § 8.01-249(5) for third-party claims pled under § 8.01.281(A), which allows third-party claimants to assert facts and theories of recovery against alternative parties if they arose from the same occurrence.
Looking to Graham v. Cmty. Mgmt. Corp., Young said that provision allows a defendant to “‘bring a [third-party] claim for indemnification or contribution before [it] is held liable or required to pay a claim,’ i.e., before such a claim would typically have accrued.”
“Read together, these provisions clearly exempt third-party claims from the accrual rules typically applicable to indemnification actions,” the judge concluded.
