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In the typical construction project, the design professionals, project manager and prime contractors are in direct contract with the owner — and not with each other. When disputes arise and the owner sues for breach, all the players are brought to the table to respond for the damages they caused. Where an owner does not sue all the involved parties, the practice has been for the parties sued to join the others by equitable indemnity cross-complaints. In June, the Fourth District Court of Appeal held in BFGC Architects Planners v. Forcum/ Mackey Construction, 119 Cal.App.4th 848, that there is no legal basis for such equitable indemnity claims. In BFGC, the Porterville Unified School District in Central California paid $6.1 million to settle claims and requests for change orders made by its prime contractor, S.C. Anderson. It then sued BFGC, an architectural firm that had prepared drawings and supervised construction, alleging breach of contract and professional negligence. BFGC cross-complained against Anderson, the prime contractor that had handled construction, and Forcum/Mackey Construction Inc., which had done site work under a direct contract with the school district. BFGC alleged that each contractor had breached its duties in performing its contract with the district, which BFGC characterized as negligence, and it sought damages, implied equitable indemnity, apportionment of fault/contribution and declaratory relief for indemnity. Each of the contractor cross-defendants demurred; the trial court and court of appeal ordered the demurrers sustained without leave to amend. The contractors attacked BFGC’s negligence theory arguing that in seeking only economic damages the claim was defective. See Aas v. Superior Court, 24 Cal.4th 627 (2000). BFGC conceded the point but nonetheless contended it could pursue its equitable indemnity claims. The court of appeal disagreed. It observed that the body of law regarding equitable indemnity “has not fully gelled but is still evolving” and acknowledged that a threshold requirement for equitable indemnity, that there be co-tortfeasors, has been treated “expansively” to encompass concurrent or successive acts. Nevertheless, the court found no basis for an equitable indemnity claim. An indemnity claim must be predicated on a party’s potential tort liability. The court of appeal concluded that neither of the two contractors targeted by BFGC could have been found liable in tort to the school district, and neither owed a contractual duty to BFGC. The contractors’ potential liability to the school district was solely contractual. The Aasdecision forbids recasting a breach of contract action as a tort claim. Since the contractors owed no duties to BFGC, in contract or in tort, and owed only contractual liability to the district, the indemnity claim failed as a matter of law. The First District Court of Appeal considered similar issues in Ratcliff Architects v. Vanir Construction Management, 88 Cal.App.4th 595 (2001), a decision the Fourth District did not mention. In Ratcliffan architect attempted to bring an indemnity claim against a construction manager in contract with the owner, and the court held that a manager owes no duty to a project architect. In Ratcliff, however, the effect of this holding was diluted by the construction manager’s good faith settlement with the owner, which served to bar any indemnity claims. BFGCholds that indemnity cross-complaints between and among parties in contract with the owner but not each other may be defeated by demurrer. This holding suggests several things: 1. When an owner has sued one but not all of the entities in contract with it, as occurred in BFGC, the exposure of the defendant will theoretically not be increased by denying it the right to sue others. The owner must still prove causation. If an owner sues a contractor but not a design professional, then the contractor would be liable only for damages it caused, not for those caused by the design professional. What the BFGCdecision costs the contractor is the opportunity to extract participation in settlement. 2. General contractors could presumably use the holding in BFGCto demur to owners’ complaints, where the owner has sued for breach of contract and negligence, arguing that a breach of contract claim against them should not be “recast” as a negligence claim. However, a decision to do so would be dangerous, since most liability insurance policies exclude contractual liability from coverage. In fact, insurers themselves may elect to use the BFGCdecision to attempt to deny coverage for claims. 3. In deciding BFGC, the Fourth District did not have to consider the right of owners to sue contractors for strict liability in certain contexts. It is an open question what the court of appeal might have done had the contractors in BFGCfaced a strict liability claim. In addition, after the Aasdecision, the Legislature enacted Civil Code �� 895, et. seq., which define the duties builders, contractors, materialmen, design professionals and others owe for “original construction” of “dwelling units.” It is unlikely the holding of BFGCwould be extended to such claims. 4. The BFGCdecision gives a strategic advantage to owners. An owner can deal with the design professionals and contractors separately, knowing that none of them has the power to compel the others to join in settlement negotiations or a subsequent suit. In much the way a prosecutor might try to turn criminal codefendants against each other, the owner can try to get a pre-litigation settlement from one party and obtain at least implicit support for the owner’s action against others who do not settle. More often than not, an owner will benefit in construction litigation by obtaining the design professional’s support. Ironically, contrary to the result in BFGC, design professionals may be the principal beneficiaries of the decision. For years, in construction litigation the equitable indemnity cross-complaints have flown among defendants and cross-defendants. Indeed, some “standing orders” prepared by special masters have deemed indemnity cross-complaints to have been filed and served by all parties. The BFGCdecision reminds us of the strategic underpinning of the indemnity law and how tenuous “conventional wisdom” can be. At a minimum, the decision certainly invites new approaches to handling a construction dispute. Michael Matthews is co-chair of the construction law practice group at Rogers, Joseph, O’Donnell & Phillips in San Francisco. He is also a member of the professional liability, employment and complex commercial litigation practice groups.. • Practice Center articles inform readers on developments in substantive law, practice issues or law firm management. Contact News Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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